Building and Engineering Contracts

Revised and Enlarged FIFTH EDITION

BY

B. S. PATIL

B.E. (Civil), LL.B., RLE., M.I.C.A.

Mrs. S. B. Patil Publication 2005

: B.S.Fatil

First Edition:1972

Second Edition1974

Third Edition1992

Fourth Edition1994

Fifth Edition2005

Published by:

MRS. S. B. PATIL

"Saish"

120, National Society Pune411007 (India)

Printed By:

Maharashtra Sahakari Mudranalaya 915, Shvajinagar, Pune 411004.

ULC CC No. 75-902224

r

II gives me greal pleasure to place this fifth edition in the hands of its readers. It is longer than the fourth edition by more than 220 pages, and increase of nearly 50%. This is despite the fact that the fourth edition itself had more or less standardized the 'design and contents' of the book. The main reasons are not many. Firstly, there was delay in updating the fourth edition. A few hundred cases, most of which were decided and reported in the decade 1994 to 2004 needed to be covered. Secondly, in the said period, judicial review of administrative actions has become expansive. It is becoming wider and wider day-by-day. State activity too is fast becoming pervasive. The policy decision by the Governments to get many public works executed on 'Build, Operate and Transfer' (BOT) basis necessitated inclusion of the said topic in the first chapter.

The contents of the first chapter "The Tender' and the third chapter 'The Contracts by Government' are recast by bringing most of the cases of judicial intervention in the process of invitation, conditions of pre-qualifications, scrutiny and acceptance of tenders by Public Authorities in Chapter 3. For example, how a lapse in a tender notice may vitiate the entire process is illustrated with eight decided eases. The four categories of the cases of judicial intervention are further subdivided into ten categories including the doctrine of legitimate expectation and illustrated with nearly one hundred cases. This means the first three chapters are virtually a separate textbook on the law relating to 'tenders and award of contracts by public authorities'. It is hoped that this text will make all concerned aware of the pitfalls in the process of invitation and acceptance of tenders and help avoiding them.

But this is not the whole explanation for the increase in the length of this book. In chapter 4 on Interpretation of Contract the illustrations based on the important cases decided since the publication of the last edition in 1994 are added. For example, the rule of contra-proferentem is illustrated with the decision of the Supreme Court reported in 2004. Similarly new illustrations have been added under exemption clauses, public policy, etc. Chapters 5 to 9 cover, by far the most important conditions of construction contracts, giving rise to disputes and litigation. FIDIC revised the Standard Form conditions and published the 1999 edition. Ministry of Statistics and-Progranime Implementation, Government of India published 'Standard Contract Clauses for Domestic Bidding Contracts' in 2001. Reference to these recent conditions has been made. The temptation to reproduce the conditions is avoided except where the interpretation made it necessary to reproduce the relevant parts. Where required,- illustrations have been added to incorporate the decided cases in the last decade. Additions have been made in the chapters on Breach of Contracts, Common Breaches of Contract and Remedies for Breach of Contracts. Subcontracts and Contract between Owner and Architect/Engineer are shifted to chapter' 13 and 14 respectively with additional illustrations. The form for assessing the damages in the cases involving delays; by the owner evolved by the author and therefore popularly known as the "Patil Form" has found wider use and acceptance and being more suitable than either the Hudson formula or the Eichleay Formula for the Indian conditions continues to hold the ground.

Chapter 13 on Limitation, in the old edition, is shifted to chapter 15. Chapter 14 on Arbitration is virtually deleted and is substituted by a new chapter under the heading 'Claims, Disputes and their Resolution by DRE/DRB/Conciliation and/or Arbitration.' The present day conditions of the contracts require fulfillment of prerequisite steps prior to arbitration and the ADR techniques deserved to be given justice by treating it in a separate chapter.

The Arbitration and Conciliation Act, 1996 replaced the old 1940 Act, lock, stock and barrel. Word by word commentary of the said 1996 Act written by me is in its fourth edition with updated case law up to 2003. The reader will not feel the lack of the text on the law of arbitration, as two books are offered together as companion volumes.

Reference deserves to be made to a few cases of far reaching implications. Some decisions, intended to change the otherwise well established law, are potentially disastrous to the underlying commercial realities of all building and engineering contracts while some, on the other hand, show remarkable understanding of the commercial realities. The first is the decision in the case of National Highways Authority of India v. M/s Ganga Enterprises. The said decision upholds the statutory right of a tenderer to revoke his tender before acceptance, but with forfeiture of earnest money by public authority. That the autority is as liberty to rejcel all tenders without giving any reasons and without making itself liable to tenderers yearly indicates non existence of mutual rights and liabilities prior to acceptance of tenders. This is exprecessly provided in the Indian Contract Act. As such the earnest money cannot be forfeited without a distinct and separate consideration for the tenderer to keep the offer valid for a definite period of time is the well-established position of the law prior to this decision and the issue deserves to be reconsidered at the earliest occasion. This case is dealt with in Art. 12.20.1. In a number of deserving cases, provisions of the contracts, which clearly amounted to exemption clauses, were made the basis for denying compensation. The law that an exemption clause will not be attracted, if the beneficiary party is guilty of breach of essential conditions of contract deserves to hold the field in the interest of justice. Of course, lack of proper pleadings by the parties concerned and reasoning by the tribunals, did contribute to the said cases being decided denying the relief. These cases are discussed in Art. 12.8.1.

Most construction contract conditions provide for possible extension of time but without specifying or limiting the duration of extension. The fourth edition contained the suggestion that in such cases, by operation of the provisions of Section 46, the extension should be limited to a reasonable time say 10% to 20% of the originally stipulated time limit, and the exemption clauses be held valid for such reasonable duration only. This reasonable interpretation stands negated in D.S.A. Engineers v. Housing and Urban Dev. Corporation reported in 2004 (2) Arb. LR 33 (Delhi). It is not uncommon in India that construction

Preface to the Fifth Edition

Vll

projects linger for more lhtm double the originally stipulated time limit for their completion and to hold that the quoted rates and exemption clauses remain valid till completion of the project, irrespective of the duration of extension, is to completely ignore the basic commercial reality that in the engineering field, the prices/rates have a definite relationship with the time limit for completion and there are no realistic formulae available to assess full impact of escalation in the cost. It is heartening to note that in a few cases the right to get compensated has been upheld in the event of breaches of contract by the employer but not a claim for escalation/revision of rates if prohibited by the terms of the contract. One such case: Bengal Traders v. West Bengal State Electricity Board, 2001 (Suppl.) Arb. LR 7 (SC).) is discussed in Art. 12.12. It is felt that but for the cases involving exemption clauses, the law entitling the contractor to claim revision of rates for the work done during the extended period, for which extension he is not to blame, is well settled in view of a large number of earlier judicial pronouncements dealt with in Art. 12.12.

Basic-commercial considerations in the engineering field found mention in the judgement delivered on public policy, delay due to breaches of contract by employer and relief sought by the contractor, in Municipal Corporation of Greater Mumbai v. Jyoti Construction Co., 2003 (3) Ar, LR 489. Other noteworthy decisions that need to be mentioned include N.T.RC. Ltd. vs. Reshmi Constructions, AIR 2004 SC 1330 and Bharat Coking coal; Ltd. v. Annapurna Cosntruction, 2003(3) Arb. LR 119 SC, in which the right to refer claims to arbitration in spite of having signed 'no claim certificate to receive the final bill, strongly urged in the fourth edition, stands restored, by distinguishing the earlier decisions, if it is validly contended that the said certificate was given under financial coercion. Recent decisions in respect of 'excepted matters' and also in respect of treating the decision making authority named in the contract conditions as an Arbitrator are also included in appropriate places.

I cannot end this preface without reiterating the need for adoption of one uniform standard form of contract for public works by the authorities responsible for various government and semi-governments departments of the States and the Central Government, Municipal Corporations and other Public Sector Undertakings, in India. The Government of India Form 2001, is stated to be the result of the analysis and monitoring of a few thousand infrastructure