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The consolidation of India’s construction laws: a long overdue reform

Gagan Anand and Shivani Anand Monday 28 June 2021

Gagan Anand

Legacy Law Offices, India

Shivani Anand

Legacy Law Offices, India

India’s construction sector is a manifestation of scattered legislation and uncertainty in interpretation, leading to disputes and lingering litigation. Construction laws in India are governed by various legislation, ranging from the 1872 Contract Act, to extensive statutory provisions in labour laws including a few specific laws, such as the Building and Other Construction Workers Act, 1996 and other state-specific laws and regulations.

The need for amalgamated construction law arises from the lack of a uniform format for construction contracts. This in turn creates problems of its own, resulting in prejudiced contract conditions, delayed payments and drawn out dispute resolution.

The rationale behind Construction Contracts

In India, every contract needs to be in accordance with the Indian Contract Act, 1872, which requires that there be an agreement between two or more parties who are competent to contract and that the parties have entered into the agreement with their free consent, for a lawful consideration and with a lawful object.1 Like any other contract, construction contracts must also comply with the aforesaid requirements in order to be legally enforceable. The contracts between contractors and employers are mainly governed by the Indian Contract Act, and formats are picked from organisations with an international standing in construction contracts.

FIDIC, the Fédération Internationale Des Ingénieurs-Conseils, or the International Federation of Consulting Engineers, was started in 1913 by France, Belgium, and Switzerland.2 Headquartered in Switzerland, the FIDIC is a proud federation with 60 different countries as members. Digressing from its primary function, FIDIC gained popularity for producing standard forms of contracts for construction and engineering. After the release of its first form contract, titled ‘The Form of contract for works of Civil Engineering construction’, also known as the Red Book due to the colour of the cover, all FIDIC form contracts came to be known by their cover’s colour. Given how extensively construction companies and consulting engineers make use of FIDIC’s standard form contracts, with time, distorted versions surfaced which do not maintain the integrity of the motives underlying the FIDIC form contracts.

In India, the construction sector does not subscribe to any standard form of contract. However, contracts published by FIDIC, the Institute of Civil Engineers, and the Indian Institute of Architects are often used. Apart from these, many government organisations have their own standard forms of contract, suiting their department’s needs. It is therefore safe to conclude that when it comes to construction contracts, there is a lack of uniformity in contract terms and formats.

Disputes in construction contracts and the disparity in interpretation by arbitrators and courts: a global perspective

Construction disputes primarily concern delays in the performance of contracts. It is relevant to note here that the way these disputes are determined by arbitrators or courts of law reveals the practical application of related laws and displays the inevitable disparity in interpretation.

A three-day International Conference on Construction Law and Arbitration was held in New Delhi in December 2019. It was co-hosted by the Society of Construction Law-India and the Chartered Institute of Arbitrators-India. The conference consisted of a panel of renowned judges and speakers from around the world who discussed issues faced by construction contracts and reasons for delays in construction. It is vital to note the trend and approaches followed by the interpreters of law to understand the working of the dispute resolution aspect of construction issues. Some of the issues considered by the panellists are discussed below.

Concurrent delays

There is no single generally accepted definition of concurrent delay. A narrow definition is ‘true concurrency’, where the employer and contractor delay events occur at the same time and cause a delay to progress for the same period sharing the same start and finish dates, either of which, in the absence of the other, is likely to cause the same delay to the completion of the project.3

There are two main approaches followed by arbitrators and courts across different jurisdictions in the world.

The Malmaison approach

This approach is best explained by the UK’s Technology and Construction Court (TCC), in the case of Henry Boot Construction Ltd v Malmaison Hotel.4 Essentially, if there are two concurrent causes of delay, one of which is an event that is relevant and beyond the control of the contractor, and the other of which is not beyond the control of the contractor, then in such a case, the contractor is entitled to an extension of time caused by the relevant event. Although this is notwithstanding the concurrent effect of the other event, the contractor shall not have the option of recovering any time-related costs. This approach is well appreciated in Swiss law and is contained in Article 44 of the Code of Obligations of the Swiss Civil Code.

Apportionment approach

Rejecting the Malmaison approach, the Scottish courts in City Inn v Shepherd Construction Ltd5 laid down the apportionment approach. In summary, where there are two competing causes of delay, neither of which is dominant, the delay must be apportioned between the contractor and the employer. This approach was also adapted by the High Court of Hong Kong in Hing Construction Co Ltd v Boost Investments Ltd,6 which was sanctioned and followed by the Scottish courts in the City Inn Case. Along similar lines, the United Arab Emirates Civil Code also has similar principles embodied in articles 287, 290, and 291.

Although the Malmaison approach has been consistently upheld by UK courts, there have been a few distinguishing interpretations. In Saga Cruises v Fincantieri,7 the court held that the contractor should not be given the opportunity to take advantage of the employer’s delay event if there was already an existing delay, and the employer’s delay has no significant impact on the completion.

Therefore, it can be seen how different jurisdictions interpret and rule on concurrent delay in construction contracts, although they are still applying the same settled principles of law.

Exclusionary clauses

Exclusionary clauses refer to clauses in construction contracts which exclude the liability of the employer for delays caused by the employers themselves. It is common knowledge that in India, government contracts are biased towards the government employer and often include terms that give the government an upper hand while dealing with contractors. This has paved the way for exclusionary clauses to be included in contracts, even if there are delays that could be attributable to the employer, no liability for damages could be claimed by the contractor. In General Manager, Northern Railways v Sarvesh Chopra,8 it was laid down that the contractors could only claim damages if they give notice of their intention to claim while accepting the extension of time, although the contractors were the non-defaulting party.

It is relevant to note that India’s Contract Act, section 54 provides that when the defaulting party gains any advantage under the contract, such party in breach cannot keep the benefit and will have to compensate the non-defaulting party.

Eventually, such exclusionary clauses were strongly condemned by India’s courts. In Pioneer Urban Land and Infrastructure Ltd v Govindan Raghavan,9 the Court reiterated what was said in Central Inland Water Transport Corporation v Brojo Nath Gangululy10 that the courts will not enforce and will strike down an unfair and unreasonable contract or clause entered into between parties who are not equal in bargaining power. In these cases, exclusionary clauses were not binding on the judicial authority and would forbid the employer from entertaining claims made by the contractor.11 Justice will not be served if the contractor was provided with an advantage but there was not commensurate compensation for the other for the loss caused by the contractor’s delay. Any exclusionary clause itself is contrary to law and the public policy of India, and therefore, any such clause would be void ab-initio.12

Time being the essence of construction contracts

The Indian Contract Act provides for claims for breach of contract while also envisaging section 55,13 which sets out how compensation may be available for the delay in the performance of the contract. Different consequences are stipulated based on whether time is of the essence of the contract or not. Where time is not of essence, the provision does not provide any conditions for claiming compensation from the employer. However, it states that notice must be given when accepting a time extension from the employer for the contractor eventually to seek compensation at a later date.

In this regard, it is vital to note the UK practice of using standard contractual terms in construction contracts. The contractor is supposed to carry out the work ‘regularly and diligently’ and proceed with the resources available keeping in mind time, sequence, and quality of work. If there is any delay in such situations, either of the parties can suspend or terminate the contract. Having said that, some of the formats followed by FIDIC contains a clause which mandates issuance of notice to be a precondition to making claims. This leaves the contractor in difficulty if it fails strictly to obey the terms regarding notice.

It is also to be noted that these principles are not universal and differ from one jurisdiction to another. Therefore, different countries use different approaches to deal with disputes related to construction contracts.

Contractor’s ability to anticipate ground conditions

A contractor ought to have enough knowledge about the practical ground conditions of any construction project. Proper due diligence, inspection, and independent assessment must be carried out at the time of the bidding stage in order to assess the nature and scope of work. If the contractor fails to do so, it not be eligible to make claims with respect to ground conditions. To understand the expectations from a contractor, it is useful to take look at the judgment of the TCC in Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar (‘Obrascon’).14 In Obrascon, it was held that an experienced contractor must make its own assessment of all available data and come to its own conclusions, rather than to ‘slavishly’ accept the information from the employer. Failure to carry out an independent assessment of ground conditions would deprive a contractor from claiming damages and would entitle the employer to terminate the contract for the delay on the part of the contractor attributable to ground conditions.

Consequences of delay

To determine the nature of claims due to any delay, some conditions need to be fulfilled. Damages for extended financing and project administration costs, extended use of facilities by contractors, and loss of profits can be claimed by the employers on the one hand. On the other, any additional cost of labour and field supervision, extended equipment and tool financing costs, extended overheads, lost profits on the contract and on other contracts can be claimed by the contractor. Ultimately, it is both tests of ‘beyond the control of the party’ and ‘unforeseeable’ which determine whether damages as a consequence of delay are available under construction contracts.

A brief analysis of the above issues indicates that when it comes to disputes relating to construction contracts, no standardised approach is applied. However, a deeper examination reveals that courts and arbitrators follow rules based on principles universally applied.

Amendments in India’s laws

India’s government has made efforts to review laws to tackle issues and disparities faced by the construction sector. Amendments have been made to certain laws which have simplified particular provisions or issues.

Specific Relief Act

The Specific Relief Act, 1963 was amended in 2018 by the Specific Relief (Amendment) Act, 2018.15 Section 20B prohibits any civil court from granting an injunction order for any such infrastructural projects where the injunction can cause impediment or delay the progress or completion of such project.16 This was an effort towards relaxing the pressure on construction contractors or workers engaged in disputes.

Arbitration and Conciliation Act

On 9 August 2019, the Arbitration and Conciliation Act, 1996 was amended through the Arbitration and Conciliation (Amendment) Act 2019. The changes introduced seek to promote institutional arbitration in India and expedite the resolution of commercial disputes by arbitration with a view to making the country a hub for domestic and international arbitration. The amendments mainly focused on promoting institutional arbitration, graded by a newly established Arbitration Council of India. This was necessary to organise the current arbitration regime, avoiding disorder and confusion. Qualifications for arbitrators were laid down, focusing on confidentiality and time limits in disposing of any dispute brought before the arbitral tribunal.

Nevertheless, these amendments lack clarity and fail to address current issues faced by construction and infrastructure companies. It must be borne in mind that the construction sector deals with complicated transactions and have adapted their evitable technological advancement. Laws must therefore aid the smooth flow of transactions. The core issue remains whether construction laws will undergo the sort of consolidation or unification required.

Suggestions and recommendations

The need for a unified construction law can be met only by consolidating India’s existing laws, taking inspiration, for example, from the Code of Wages, which seeks to consolidate labour laws.

A unified construction law should also borrow from the relevant legislation of other countries, such as the UK Construction Act and the United States False Claims Act (FCA).

The FCA is the US’ first whistleblower law and remains one of the strongest whistleblower laws in the country.17 Since its original signing, the FCA has seen several revisions and become increasingly powerful. One aspect has remained since its conception: the qui tam, or whistleblower, provision. Under this, whistleblowers can provide useful information while maintaining anonymity and reveal any fraud or misappropriation that goes against the interest of the people or the government. On successful prosecution, they are awarded a mandatory reward of between 15 and 30 per cent of the collected proceeds. This can help bring to light corruption or fraud in construction transactions, especially where government is a party.

Similarly, the UK’s construction laws have themselves gone through significant changes which could inspire revisions to India’s construction regime. For example, the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) brought into force the Economic Development and Construction Act 2009 (LDEDCA) in 2011 in order to correct anomalies or close loopholes. Among many changes, the UK Construction Act contains a provision allowing an adjudicator to correct errors in the arbitrator’s decision, known as the ‘slip rule’. Adjudication can be enhanced by closely studying such provisions that address issues such as delay in arbitration or challenge of the award when it comes to errors made by the adjudicating authority. The US also has a provision in its law relating to ‘mistake in bid’ which allows a company to withdraw its bid where it has made a genuine mistake during the submission of its bid. In this regard, India could implement such provisions specific to the practical problems relating, for example, to errors in quoting.

Furthermore, the use of quality material in construction is a growing concern and legislation relating to this is ripe for introduction in India. Often, the employer is at the mercy of the terms of agreement with the contractor and the contractor’s choice of materials. Although the employer can claim damages, whether substituted materials are considered to be different than what was agreed or deliver the agreed results is subject to interpretation.

In the United Arab Emirates, there is a local practice of imposing a limit of ten per cent of the contract value for any delays on the part of the contractor in failing to complete the work by a stipulated completion date notwithstanding any fixed damages which may have been agreed to by the parties. This local practice was ignored by the UAE Court of Cassation in a case which held that local courts had the authority to fix a level of damages (in order to balance the equities between the contracting parties) should it become evident the damages actually suffered were either higher or lower than the contractual amount originally envisaged and agreed upon.18 It can guarantee price balancing in construction contracts, allowing parties to be on equal footing regarding claims keeping in mind the integrity of the contract. Therefore, liability clauses must be framed bearing in mind the genuine pre-estimate of losses that a company may incur.

While it is unknown whether the above laws of various jurisdictions will be taken into account in revising India’s construction law regime, a few steps can be taken on a micro level to bring about clarity. While drafting tender conditions, balanced conditions should be framed to avoid the project becoming hindered. It is recommended to implement checks and balances so that projects run smoothly with regards to costing and setting timelines.

Consolidated construction law can augment growth and expand the outreach for the industry. India’s construction laws, however extensive in provisions, are required to be unified in a way that can deliver the idea behind the legislation in its truest sense.

Notes 
1 Section 10, Indian Contract Act, 1872, No 9, Acts of Parliament (India).
2 Koko Udom, ‘A brief introduction to FIDIC contracts’, NBS, 1 February 2014, see www.thenbs.com/knowledge/a-brief-introduction-to-fidic-contracts, accessed 21 April 2021.
3 ‘Conquering Concurrency: Part 1 What is concurrent delay?’, FTI Consulting, 2018, see, www.fticonsulting-asia.com/~/media/Files/apac-files/insights/articles/conquering-concurrency-part-1-what-concurrent-delay.pdf, accessed 6 April 2021.
4 70 Con LR 32 (1999).
5 [2010] C SIH 68.
6 (2009) BLR 339.
7 (2016) EWHC 1975 (Comm).
8 AIR 2002 SC 1272 (SC of India).
9 Civil Appeal No 12238 of 2018, judgment dated 2 April 2019.
10 AIR 1986 SC 1571.
11 Asian Techs Ltd v Union of India (2009) 10 SCC 354(SC).
12 Simplex Concrete Piles v Union of India, CS(OS) No 614A/2002, judgment dated 23 February 2010 (Delhi HC). 
13 Section 55, Indian Contract Act, 1872, No 9, Acts of Parliament (India).
14 [2014] EWHC 1028 (TCC).
15 Specific Relief (Amendment) Act, 2018, No 18 of 2018, Acts of Parliament (India).
16 Section 20A, Specific Relief Act, 1963, amended in 2018, No 18 of 2018 Acts of Parliament (India).
17 ‘The False Claims Act’ NWC, see, https://www.whistleblowers.org/protect-the-false-claims-act, accessed 6 April 2021.
18 Parveen P Mahtani, ‘Reformation of Construction Law in India’, Legal Era, 21 October 2020, see www.legaleraonline.com/within-the-circle/reformation-of-construction-law-in-india-671465?infinitescroll=1.

Gagan Anand is Managing Partner at Legacy Law Offices, India. He can be contacted at anand@legacylawoffices.com.
Shivani Anand is an associate advocate at Legacy Law Offices, India, and can be contacted at shivani.anand@legacylawoffices.com.