Construction Law*


construction_law
  1. Introduction
    1. In India, we have Construction Law, developing at a very slow pace. Rarely, it shows clarity and more often, it is confused. We have hardly any practice of inviting Techno-legal expert to address and explain the salient features of the Construction Law to the courts adjudicating intricate technical matters. With huge Construction Industry, we have underdeveloped and often seriously ill judicial climate. Our Construction law is unpredictable and inconsistent besides being fragile.
  2. What is Construction Law?
    1. Elsewhere the term “Construction Law” is almost universally understood to cover all aspects of law, that may affect the Construction Industry and operations of contracts with which it is concerned. Efficient, workable and competent Construction Contract should be governed by stout and clear ratios of Construction Law, which should resolve the disputes in the industry. It is definitely and outcome of interactions between the Lawyers and Engineers, and therefore the hybrid professionals from Engineering fraternity conversant with law or Techno-legal professionals have to take charge.
  3. The Hang-over
    1. We have inherited one of the finest legal systems and particularly, the Indian Contract Act, 1872 has stood test of time. The more you study, the more you hold it in awe for it is fair, brilliant, brief and thorough. It is a product of civilised and brilliant academicians with conviction and keenness for justice. The Act, 1872 was traditionally interpreted to facilitate administration of Sovereign power as party to contract. The reading and application of this brilliant Act was orthodox and unsuited to modern democratic mind and the society demanding the equality. When time to develop the Construction Law came, Neither the Indian Contract Act require any major amendment or some supplementary enactments. All it required was change in Mind-set-shift from Sovereign focus to equity and justice.
    2. ‘Construction Contracts’ are notoriously adhesive. They stipulate to include even exclusion of legal process. There has been mandate of Law. Freedom to draft a contract does not mean freedom to stipulate what should be law. Courts treated “Terms of Contract” as governing Law between parties.
  4. The Beginning
    1. It has started happening, particularly in last 20 years, we have seen Construction Law making great strides though erratically. We are not too far behind the International standard of Construction Law. In this respect, some of recent judgements of Supreme Court have contributed tremendously to throw away the label of Construction Law, to be “one sided”. Though often our courts go back to old ways, it is natural transition from State biased pronouncements to justice.
    2. I want to discuss here that drafter of the contract cannot any more feel confident that his draft of contract will be final and binding law of the contract. We lived through decades when Courts endorsed terms of contract as sacrosanct and developed a doctrine of “wide open eyes acceptance”. The contact of adhesion in construction shall hereafter be frowned at, for terms being unfair, stuffed with exclusion clauses, disowning legal liabilities. There are number of terms in Construction Contract, which need be re-examined in light of this clear law emphatically pronounced by Apex Court. It is for this, the blog examines the whole journey of almost 100 years of this law.
    3. In another case it reflected :
      “Arbitrator is expected to act and make his award in accordance with the general law of the land but subject to an agreement, provided the agreement is valid and legal. It further declared –
      “Once the matter goes to the arbitration, the discretion of the Arbitrator is not in any manner stifled by the terms of contract………….., if he finds the claim to be justified”.
    4. This “provided” is the essence of justice. The creature of contract “theory,” meaning he cannot interpret even legality of terms virtually hypnotised process of justice.
  5. The Past
    1. In 2 cases; both Privy council cases then had stated….
      “An Arbitrator is not a conciliator and cannot ignore the law and misapply in order to do what he thinks just and reasonable”.
    2. “If Contractor agreed that Govt. Was not to be liable for a loss and that is an express term of contract, Contract must be tied down to it. If he chose to contract in absolute term that was his affair.”

      The question is: Can a party seek immunity from liability of Breach through a term in contact? Is Government above consequence of Breach ignoring section 73 of Indian Contract Act ?
    3. The decision following Continental Construction Co. Ltd., v. State of M.P.AIR 1988 SC 1166 may be cleared that the contract contained claims for extra in event of price escalation whereby and, therefore, the observation “the Arbitrator is not a Conciliator and cannot ignore the law to misapply in order to do what he thinks right and reasonable” and clearly ignoring the law meant overruling the express term of contract. In short, the Contractor was bound by the agreed terms irrespective of the terms being unfair or unconscionable. Heaps of such terms in Govt. Contract approved by courts prompted on a renowned author; my “GURU : Dr. Kirty Dave” to publish a paper “It is fair to be unfair” and unique features of construction contract.
    4. The quot as can be seen from the Associated Engineering Co. Vs. Govt. Of Andhra Pradesh AIR 1992 SCC 232 has been very popular to enforce unfair terms of contract without evaluation of the terms in context of Section 23 of Indian Contract Act. It mentions that “Arbitrator cannot act arbitrarily, irrationally, capriciously or independently of the contract”. This is consistently being interpreted as total dependency on terms of contract. It further says “it deliberate departure from contract amounts to, not only to manifest disregard of his authority or a misconduct on its part to it, may tantamount to a malafide action”. These words almost frighten most of the Arbitral Tribunal into complete and blind folder loyalty to terms of the contract. Not many world dare to appear irrational, capricious or having malafide intention to depart from terms of contract.
    5. The quot as can be seen from the Associated Engineering Co. Vs. Govt. Of Andhra Pradesh AIR 1992 SCC 232 has been very popular to enforce unfair terms of contract without evaluation of the terms in context of Section 23 of Indian Contract Act. It mentions that “Arbitrator cannot act arbitrarily, irrationally, capriciously or independently of the contract”. This is consistently being interpreted as total dependency on terms of contract. It further says “it deliberate departure from contract amounts to, not only to manifest disregard action”. These words almost frighten most of the Arbitral Tribunal into complete and blind folded loyalty to terms of the contract. Not many would dare to appear irrational, capricious or having malafide intention to depart from terms of contract.
    6. It was never very clear to our court, in matter of contract and particularly construction contract as to what law parties should abide by. The question we struggle for consistent clarity over decades was – “Is Contract bound by expressed Terms and or Conditions of contract even if these were against the intent of public policy or patently unconscionable?”
    7. Since then, we have travelled to and fro with interpretation by different decision of Apex court as to what could be choice between law and assumed binding force of terms of contract. Predominantly for Indian courts for long Terms seem to have taken more prominence as valid contract. We did not try to look for unconscionability or unfairness of terms of contract.
  6. Ideal too Far
    1. How far the favoured doctrine of “Acceptance with wide open eyes” is an expression of justice. Ideal of any civilized society should be Section 138 of German Civil Code. This states –
      Legal transaction contrary to public policy; usury

      1. A legal transaction which is contrary to public policy is oid.
      2. In particular, a legal transaction is void by which a person, by exploiting the predicament, inexperience, lack of sound judgement or considerable weakness of will of another, causes himself or a third party, in exchange for an act of performance, to be promised or granted pecuniary advantages which are clearly disproportionate to the performance.
        This ideal justice is little too far off.
    2. Reformation – Not sustained
      1. Earlier in (1984) 2 SCC 680 Tarapore & Co. Vs. Cochin Shipyard Ltd. Cochin & Another spelt out a beautiful principal, indicating the application of Section 56 of the contract.

        “If the agreed fact situation, on the basis of which the agreement is entered into, ceases to exist the agreement to that extent becomes otiose.”

        The court, in the process allowed ‘escalation’. However the just and fair law of Tarapore & Co. was not followed, being frightened to reject Terms of contract even if they were patently illegal.

        If the rates, initially agreed by the Contract become irrelevant due to subsequent price escalation, the Contractor’s claim for compensation for the excess expenditure incurred due to price rise cannot be turned down on the ground of absence of price escalation shown in the contract. This is an absolute principle of equity and justice. This amounted to payment of escalation in price, if it is evidenced by subsequent facts – consequences of distortion of Bid parameters.

      2. Let us see how even in last 25 years, we ignored good law. In AIR 1987 SC 1359 State of Karnataka v Thippa Reddy, Law laid down.

        “Even assuming that the term of the relevant clause afford scope for being construed as empowering the officer of the State to decide upon the question of breach as well as the quantum of damages, the adjudication by the officer of State Govt. Regarding the breach of the contract cannot be sustained under law because a party to the agreement cannot be an arbiter in his own cause”.

        Interest of justice and equity require that where a party to a contract disputes the committing of any beach of conditions, the adjudication should be by an independent person or body and not by the other party to the contract. This clear principle of law universally acclaimed, is not seen consistently being applied. This principal is sabotaged to endorse (ancient) belief of Terms to be the law. Between 1987 and 2011, hundreds of Awards were declared “Capricious, arbitrary and patently illegal”, because (Illegal and Void) terms were not followed.

      3. Apex court in 2003 (5) SCC 705 ONGC Vs. Saw Pipe clarified significance of Section 28 of Arbitration and Conciliation Act, 1996. It sorted out the confusion by harmonizing Section 28(1) (a) and 28 (3) (iii). Section 28 (1) (a) mandates that all Arbitrations other than international commercial arbitrations must decide the dispute in accordance with substantive law in India and decide in terms of contract. This posed the question of harmonising two different elements viz. Substantive law and terms of contract. “Law” cannot be dictated by terms of contract. Terms have to meet requirement of Law. This is Public Policy of India. The court rightly reiterated with clarity Section 34(b) (ii) that the Arbitrator’s award cannot be in conflict with the public policy of India. This provision of law finally settles the controversy and the court rightly defined Public Policy to include all substantive law of India. Public policy of India is placed above terms of contract.

        In P.M. Paul vs. Union of India AIR 1989 SC 1034 Arbitrator ignored prohibitive terms against escalation. It was approved by law. However, it is exception to rule that “Terms” are sacrosanct. Even if there was no terms for escalation due to rise in price, the Arbitrator can come to a conclusion for payment of compensation, if there was enough evidence of rise in price due to lapse of time attributable to Employer and there was joint reference. This is again based on the equity rather than the term of contract, providing positive entitlement for change in circumstances, in which the bid was submitted.

      4. Few years back, when steel prices sky – rocketed and Govt. Collected lion share of undue enrichment (Section 70 of Indian Contract Act), inertia about our perception of contract law, made Contractors lose over Rs. 20,000 Crores – Tarapore (1984) was not followed.

        Reason: “There is no term to give justice in contract”
        The issue is do we have “The Tarapore Law” in place? Or is it given up.

    3. Section 23 of Indian Contract act – Ignored
      1. This section is the essence of interpreting contract whether it is wholly or partly void. It is void portion i.e. terms against law cannot be enforced. This mandate of law is almost never brought in focus for last 130 years in interpreting construction contract. If consideration / objects are unlawful i.e. if it is forbidden by law i.e. opposed to public policy. This certainly can be concluded that any term of contract (which is consideration) is unfair, unconscionable and unjust and cannot be held valid and enforceable.
    4. UK enacted Unfair Terms of Contract Act – 1977
      1. If Section 23 of Indian Contract Act is well used as tool of reformation, we do not need to have an Act on Unfair Terms. The unfair terms of contract Act of 1977, U.K. in Section 3, sub-section 2(a) prohibits any terms that excluded or restricts the liability of the owner in respect of the breach when he himself commits any breach of contract. In Section 2(b), it goes further to say that the clause is in nullity whereby the whole or any part of his contractual obligation may not compel him to perform at all. The Section 2(b) is recognised as “illusory consideration of contract” and thereby such contract is void to extend of such a terms whereby, the Employer reserves the right to reduce the scope of the work partly or even wholly without liability to pay the compensation for “interest of expectation” arising out of the contract.
    5. Hope for Future
      1. It is hoped century old inertia is bound to be shatter by ripples to be generated by J.G. Engineering Pvt. Ltd. Vs. Union of Indian 2011 (5) SCC 758 in respect of unfair terms, where the contract provides for excepted matter without adjudication by the third party on the question of breach Parties can provide for agreed quantum of relief but the role of the judge cannot be usurped through a term by one of the parties to be adjudicated upon disputed question of breach.
      2. The law examined firstly, if Agreement was wholly legal. It noticed some “Terms” – patently illegal i.e. against law. If this law is not tampered with or watered-down shows clearly how a contract should be interpreted. If it has to be in conformity with law. The issues decided by the Hon. Supreme Court related to whether decision on certain terms can be considered “excepted matter” and left to one of the parties to be interpreted. The Judgement answer the important question – Whether the “breach” could be decided by one of the parties and, therefore, whether it could have natural entitlement to damages specified? It also cleared certain wrong practice of levying Liquidated Damages after making the Contractor to believe by conduct that the Govt. May not levy and Liquidated Damages.

        J.G. Engineers Pvt. Ltd. 2011 (5) SCC 758 has placed our Construction Law at International Standard.

    6. Some Issues of Construction Law
      1. In context of J.G. Engg, it is noted with clarity that the court’s additional clarification that having granted an extension of time, Liquidated Damages in retrospection would be bad in law. We need fine tuning on how courts would consider the phrases: “Without prejudice to rights to levy Liquidated Damages”, “provisional ‘Extension of Time’ is granted. Can Employer then levy Liquidated Damages after Contract is performed due to ‘Provisional Extension’ as ‘Extension defacto”? Is Employer ‘Estoped’ for retrospective levy of Liquidated Damages? Would such ‘tricks’ amount to fraud or cheating if such actions are taken by Employer?
      2. Similarly, without adjudication of breach of performance, the encashment of Bank Guarantees is authorised. The contracting fraternity pray and wishes that the law delivered through Thippa Reddy (1987) – J.G. Engineers (2011) is allowed to evolve logically to mean all contracts – including contract for Bank Guarantees need be reviewed.
      3. In Construction Law “Illusory Consideration” is yet to be discussed and so the adjudication of “Breach of Performance” in respect of Bank Bonds. Mischief of “Provisional Extension” need be curbed by principal of ‘Estoppel’. “Reference by choice of Government” cannot be accepted as fair Terms if it involves decision on ‘Compensation’ to be collected by Government / Employer without adjudication.
      4. I pray that this judgement should be used as basis for analysing and enforcing the terms of contract in light of clear public policy where one of the parties cannot be judge in his own cause nor gives his draft of terms when ‘accepted’, legislative power to be qualified as “Law”./li>
      5. We need to have a debate on clear understanding on status of bank Guarantee which is being treated as a Promissory Note. Here Breach of contract by performance is left to be decided by Employer. It is treated like an LC. Courts are not inclined to wait for encashment till adjudication on breach. The breach of performance guarantee is treated at par with Mobilisation advance guarantee.
      6. In case of appointment of an Arbitrator doctrine of “conflict of interest” is hardly appreciated. In fact the Supreme Court has stressed that the agreement between parties on named arbitrator should be respected even if one of the parties suspects neutrality. This area need to be reviewed as contracting firms outside India cannot appreciate this fiction of neutrality.

        In short, we need to scrap traditional Government Contracts which do not do pride to present day India.

    7. Let Good Law Stay
      1. In last few years, Associated Construction vs. Pawanhans Helicopters (Pvt.) Ltd. 2008(2) ALR 473 (SC), J.G. Engineers vs. Union of India (2011) 5 SCC 758, K.N. Sathyapalan Vs. State of Kerala 2007 Arb. W.L.J. 1(S.C.), McDermott International Inc. Vs. Burn Standard Co. Ltd. 2006(2) ALR 498 (SC) and others make us feel confident that our courts have been more sensitive to put the “Contracts of Adhesion” in Construction Industry in proper perspective. The earlier doctrine of “contract signed with wide open eyes” or on dotted lines is no more valid although you cannot and should not ignore validity or otherwise of an Agreement
      2. On 30.11.2006 K.N. Sathyapalan vs. State of Kerala excellent law was laid down in respect of entitlement of contract on certain grounds. However similar claims in similar context were not allowed by Supreme Court on 11.12.2006, (Ramnath International Construction Company Vs. Union of India). Good Laws die for want of proper-co-ordination “J.G.” is a spontaneous truth should not be reviewed without compelling reasons and academic discussion. It should be in interest of construction law to encourage the process reformations. The fraternity of Engineering attorney and Technology Consultant should land support by academic evaluation of the magnitude and direction of forces acting on this frame.
      3. In case of “No Claim Certificate”, courts have shown appreciable clarity through number of cases including Associated Construction Co. Vs. Pawan Hans Helicopters (2008(2) ALR 473 (SC) and K.N. Satyapalan vs. State of Kerala (2007 Arb. W.L.J 1(S.C.), etc. If such certificate, alleged to have been obtained by coercion (Section 15 of the Indian Contract), and proved it makes the contract voidable. Such clarity and consistency is not seen on “terms of contract” for examining the same as an enforceable or unconscionable.
    8. Reformation is not difficult
      1. Given will to do justice and willingness to give up sovereign mood perpetrated through autocratic approach we have models to follow for future contract we do not destroy the fabric of justice through inserting COPA (Conditions of Particular Application). COPA virtually creates metamorphosis for justice.
      2. The task of reforming Construction Contracts has become easier with World Bank bringing the international forms of contract including FIDIC and the courts landing encouraging support to declare atrocious and unconscionable terms as exculpatory. It is time to challenge the validity of bulk of provisions in State and Central PWD contracts, Railways, MES and public undertaking contracts.
    9. Need for Training
      1. Engineers and Judges should not feel shy or touchy to admit need for special training in construction law. While McDermott International Inc. Vs. Burn Standard Co. Ltd. 2006 (2) ALR 498 (SC) is laudable not many Courts or engineering departments can appreciate scientific computation of compensable delay without mechanisms of “Time Impact Analysis” (TIA). This popular judgement (McDermott) is likely to be misused as computation of losses in the manner suggested requires acquaintance with delay analysis. It is time seniors in our fraternity accept concept of continuing education through appropriate training courses conducted by engineering and law colleges. As with American Arbitration Association emphasis for refreshers course attendance should be mandatory to remain on panel of Arbitrator of recognised institution.