Disputes and Claims in Engineering
Contracts - Causes and Remedial
Measures
Dr. S Nagabhushana Rao
Director, ESCI
DISPUTE
“An assertion of a right by one party and a
repudiation thereof by another”
Reasons for Dispute –
•
Gap in Interpretation and understanding the
Contract
•
Breach of Contract
•
“Force Majeure” - Causes beyond the Control
of Owner / Contractor
•
Quantum Merit – Compensation for the work
done
VALID CONTRACT
As per Section 10 of Indian Contract Act:
- All agreements are contracts if they are
made by the free consent of parties
competent
to
contract,
for
a
lawful
consideration and with a lawful object and
are not hereby expressly declared to be
void.
INTERPRETATION
Is method by which the sense or meaning of word is
understood.
Authentic Interpretation
“Customary” or “Usual” interpretation
“Close”, “Strict” or Literal interpretation
“Extensive” or “Liberal” interpretation
INTERPRETATION WITHOUT PROPER MEANING LEADS
TO DISPUTES
BREACH OF CONTRACT
Is failure to perform an obligation
arising out of the contract.
• Total Breach
• Partial Breach
• Anticipatory Breach
COMMONEST BREACHES OF
CONTRACT
• Abandonment or total failure
complete either to start with
midway in execution.
• Delay in completion of the works
• Defective work
to
or
BREACH BY THE OWNER
•
Failure to handover possession of the site to the
Contractor
•
Delay in supply of working drawings, details,
designs and decisions
•
Delay in supply of materials
•
Ordering suspension or stoppage of work or
entering with the progress of work in any manner.
•
Failure / Delay in making payments of R.A. Bills,
extra
items,
excess
quantities,
including
settlement of final bill.
Contd…
•
Failure/Delay
in
nominating
subcontractors and suppliers.
•
Delay caused by other agencies employed at the
site of work by the owner in addition to the
contractor.
•
Wrongful deduction of liquidated damages /
penalty.
•
Termination of contract wrongfully and illegally.
•
Failure / Delay in appointing architect or an
Engineer or in filling the vacancy.
specialist
BREACHES BY CONTRACTOR
• Abandonment or total failure to complete
• Delay in completion
• Defective design,
workmanship
materials
and
/
or
• Failure to submit planned programme
• Unauthorised sub-contracting
Contd…
•
Failure to insure as required
•
Failure to employ qualified engineers
•
Failure to maintain and submit labour reports
•
Payment of unauthorised wages
•
Failure to take safety precautions
•
Causing damage to property of work of other
agencies.
CONTRACTOR’S IMPLIED
CONDITIONS
Contractor to do work and supply materials
implicitly undertakes:
•
To do work in workman like manner that is with
care & skill
•
To use the material of good quality and where
specifications of quality are agreed this will mean
good of their expressed kind.
•
Both the work and material will be reasonably fit
for the purpose for which they are required.
DAMAGES ARE CLASSIFIED AS
UNDER
• General Damage – proximity &
Remote
• Special Damage
• Nominal Damage
• Exemplary or vindictive Damage
REMEDIES OF BREACH OF
CONTRACT
•
Every Breach of Contract entitles the injured party
to damages for the loss he/her suffered.
•
The injured party must be entitled to claim the
value of the work done in which case he is said to
sue upon a “Quantum Merit”.
•
The injured party may obtain an order for specific
performance of the contract or an injunction to
restrain its breach.
•
Standard Form Contracts include provisions of
forfeiture which take effect upon a breach of
contract.
PROVISIONS OF LAW –
CONSEQUENCES OF BREACH OF
CONTRACT
Indian Contract Act – Chapter VI
Sec.73
-
Unliquidated Damages
Sec. 74
-
Liquidated Damages
Sec. 75
-
Compensation
for
any
damage which a person
who
rightfully
the Contract.
rescinds
ESSENTIALS CONDITIONS TO BE FULFILLED
BY INJURED PARTY FOR ENTITLEMENT TO
DAMAGES
•
It must be proved that a contract exists
•
It must be proved that defaulting party was under an
obligation to perform that part which is alleged to
have been breached.
•
The party making the allegation should prove there
is a breach of contract or on grounds of any
audition of contract.
•
It must be proved that the breach of contract
caused “loss or damage” to the injured party.
Contd…
•
It must be further proved that loss or damage
caused by the breach of contract naturally arose
in the usual course of things from such breach.
•
The fact that the parties to the contract knew,
when they made the contract, such loss or
damage to be likely to result from the breach of it
must be established.
•
It has further to be proved that the loss or
damage sustained by reason of breach is neither
remote nor indirect.
•
The injured party has to establish that he did
take precautions to mitigate the losses to the
maximum extent possible
DAMAGE ASSESSMENT
•
Depriving the Contractor of the right to his
profits upon work which was never carried
out.
•
Reduction in Contractors profit or increase in
cost of work done due to Breach of Contract.
DELAY IN COMPLETION OR TERMINATION
OF CONTRACT MAJORITY OF CASES
LEADING TO DISPUTES ARE:
•
Completion of work getting delayed due to breach
of contract by owner.
•
Contractor treats himself discharged from further
performance due to breach of serious nature.
•
Owner terminates contract by granting – nongranting extension of time illegally.
•
The Contractor completes or pending completion
of the work commences legal proceedings for
recovery of damages caused for delay in
completion.
CONTRACTOR ENTITLEMENT TO
DAMAGES DUE TO BREACH OF
CONTRACT
•
Loss of overheads and profit
•
Direct losses on account of idle labour,
machinery
and
equipment
reducing
productivity.
•
Increased cost of materials and labour.
HUDSON FORMULA FOR
LOSSES DUE TO DELAY
H.O profit percentage
100
x ___Contract Sum_______
Contract period in weeks
x
Period of Delay in weeks
Force Majeure
• The contract may excuse non-performance
of the Contract (part or Whole) where
performance is rendered impossible by
specified unavoidable causes:
• “Act of God”
• “The Queen’s enemies”
• “Vis Major”
• “Force Majeure”
Quantum Meruit – Compensation for
• “Work done or services rendered when price
thereof is not fixed by contract”.
• When the organisation orders modifications in
scope of work involving additional cost, if the
contract is silent or is not suitably modified, the
contractor
is
still
eligible
for
claiming
compensation.
Subramanyan Vs Thayappa (1961) 2 SCR 663
Gangapathy Vs Trudaya Swamy (1962) AIR Mad 345
ARBITRATION – ARBITRATION ACT
1940
Arbitration is the settlement of dispute by the decision
not of a regular and ordinary court of Law but of one or
more persons called arbitrators.
Advantages – Efficient, Expeditious,
substitute to court actions.
Economical
Disadvantages – Legal principles may be violated,
rules of evidence may be waived, injustice.
CASE STUDY - I
• Foundation Co. Vs. State of New York
(233 N.4 177) (1960)
• Contractors were ascend to resort to 7
stage pumping operations Vs Single
operation provided in Contract.
• Court held the contractors can claim
Quantum Merit
Case Study II
• Citizens National Bank
L L Gloss – Cock Inc.
of
Meridian
Vs
(243 SO 2d.67) – (1967)
• An existing Bank Building was to be
dismantled and a new building to be
constructed at the same site in (Mississippi)
• After demolition, the contractor found a
conflict between existing building foundation
and the new foundations (overlapping).
Removing old foundations resulted in extra
cost and claimed extra under Quantum
Meruit
“Quantum Meruit”
• But the contract contained a clause
“that old foundations should be
removed/ bored if found necessary”
• The Court held that removal of old
foundations was contemplated by the
contract and hence no case for
Quantum Meruit.
Case Study III
1. Bailing out water for CC 1:5:10; RCC 1:2:4 in
foundations
2. Footing Formula
accepted
H/3 (A1+A2+ A1A2 ) not
3. Change in roof height from 10’ to 12’
4. Height of Slab 16’ above Ground Level (Not
from basement)
5. Re-erecting the Form work dismantled by
neighbours
6. Claim for CC 1:2:4 for curbing instead of
(1:3:6) – difference in cost.
7. Cost of double centering – done at the
instance of dept.
8. Cost of Steel extra consumed – difference in
theoretical co-efficient actuals.
9. Interest for delays in payments & refund of
FSD etc.
10. Idle labour, machinery, OH Charges
11. Extra for work executed beyond the period of
agreement
12. Recovery wrongfully made : rectifications,
extra cost
CASE STUDY - IV
`X’ Work is awarded to `A’ for a consideration
of 2.73 Crores
•
Period of Completion
: 18 months
•
Date of Commencement
: 21.4.92
•
Date of Completion
: 20.5.96
•
Delay
: 31 months
•
Claims preferred but rejected by Department.
•
Went in for Arbitration
GROUNDS
Breach of Contract by Department by
causing delays and other
impediments.
•
Not handing over Clear site
•
Not furnishing drawings in time
•
Not providing structural designs
•
Changes made in Foundation designs
• No Place to dump Excavated soil
• Delay in supply of steel by department
• Delay in making part payments
•
Non- payment of Final Bill
•
Change of Specifications in doors / windows
•
Interference by other Contractors, etc.
1. Claim towards compensation for the
loss sustained due to rise in prices for
the work done beyond agreement
period
1,79,48,863.00
2. Claim towards payment of Sales Tax on
Work Contract
13,69,613.00
3. Claim towards payment of extra
overhead and establishment charges
beyond the agreement period
53,75,838.00
4. Claim towards payment of interest on
delayed payment
19,33,451.00
Contd…
5.
6.
7.
Claim towards refund of difference in
cost of cement between design mix
and nominal mix
5,28,221.00
Claim towards refund of difference in
cost of empty cement bags collected
by the corpn. (difference between
Gunny & Polythene Bag)
1,45,869.00
Claim towards refund of excess
amount collected by the Corpn. On
electricity consumption
17,071.00
Claim towards payment of loss of
profit due to illegal entrustment of
part of the contractual work to the
third party.
1,93,347.00
Contd…
8.
Claim towards payment of loss
of profit on due to illegal
deletion of Agreement items
7,47,640.00
9.
Claim towards payment of
quantities of work done in
excess of Agreement quantities
64,27,261.00
10.
Claim towards difference in
rates for supplemental items
34,36,809.00
Contd…
11.
Claim towards difference of cost
executed
other
than
the
agreement specifications but
paid for treating it as agreement
item and also some of the items
not recorded and paid for
26,51,174.00
12.
Claim towards payment of
provisional final bill along with
interest
10,00,000.00
13.
Claim towards refund of Earnest
Money Deposit
1,73,200.00
Contd…
14. Claim towards refund of
further Security Deposit
8,81,437.00
15. Claim towards refund of
illegal recoveries proposed
in the C.C. 50th & Final Bill
40,567.00
Dispute Resolution
• Statement of facts
• Grounds for claims
• Law applicable to the case
• Quantum of Damage / Compensation
THAN Q
MODES OF INVITING TENDERS
 NEGOTIATED TENDERS
 LIMITED COMPETITION
 OPEN COMPETITION
TENDER DOCUMENTS TO BE READY BEFORE
INVITING TENDERS
 NOTICE INVITING TENDERS
 STANDARD FORM OF TENDER
 SCHEDULE OF QUANTITIES OF WORK
 COMPLETE SET OF DRAWINGS
 COMPLETE SET OF SPECIFICATIONS
 ESSENTIAL ARCHITECTURAL DRAWINGS
INFORMATION TO BE PROVIDED IN NOTICE
 QUALIFICATIONS
 NAME
 EMD
 SECURITY DEPOSIT
 TIME LIMIT
 COST
 MODE OF SUBMISSION
 DATE, TIME AND PLACE OF OPENING TENDERS
PREPARATION AND SUBMISSION OF TENDER
 PURCHASE OF BLANK TENDER FORM
 STUDY OF TENDER DRAWINGS
 VISIT TO THE SITE OF WORK
 ROUGH VERIFICATION
 ANALYSIS OF RATES
 DECIDING THE PERCENTAGE
 WORKING OUT THE LUMPSUM
 CHECKING OUT THE RATES
 COPIES OF DOCUMENTS
IRREGULARITY IN SUBMISSION OF TENDER
 UNSIGNED TENDER MAY BE BINDING
 ESTIMATES AS OFFERS ARE BINDING
 PAYMENT OF EARNEST MONEY
 WITHDRAWAL OF TENDER PRIOR TO ITS ACCEPTANCE
 PRE QUALIFICATION OF TENDERS
CONTRACT
As per Indian Contract Act 1872 is “An agreement
enforceable by law” (Section 2`h’).
AGREEMENT
“A promise or a set of reciprocal promises
necessarily involves a minimum of 2 persons. A
person who makes the proposal is a promisor, a
person who accepts the proposal is a promisee”.
Contract can be Oral or Written
Classification of Contracts –
•
Formal and Informal Contracts
•
Express and Implied Contracts
•
Unilateral and Bilateral Contracts
ESSENTIALS OF VALID CONTRACT AS PER
SEC. 10 OF INDIAN CONTRACT ACT
• There must be agreement or meeting of
minds
• The agreement must be between parties
competent to enter into a contract
• The parties must give their free consent
• The Agreement must be supported by
consideration which must be lawful
• Subject matter of the agreement must be
definite and lawful.
Who are not competent to enter
Contract
• Minor
• Lunatic
• Members of Parliament legislature, etc.
All Agreements are Contracts if they are
made by
• Free Consent
• Party's Competent to Contract
• Lawful Consideration
• Lawful Objective
Contents of Contract Agreement
• Scope of Work
• Schedule of list of work or items of work
• General Conditions
• Special Conditions
• Specifications
• Notice of Tender, Correspondence
acceptance and letter of acceptance
to
Important Points for Drafting Agreements
• Collect accurate basic data
• More time to allotted for proper planning
• Acquisition of Land prior to commencement
• Realistic period of completion
• Omit nothing material and avoid repetition
• Clarity in expression beyond the reach of
perversion
Types of Contracts
• Lumpsum
• Item rate
• Percentage rate
• BOT family Contract
• Design & Build
• Turnkey & EPC