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