contract by definition is an agreement between two parties valid in law.
As such all contract conditions and clauses must be strictly in conformity
with law. Any condition or clause not as per law will be automatically
to be treated as null and void. The standard form contract in use in Central
Govt organisations like OPWD, Telecom and ISRO etc must also confirm to
relavant legal provisions.
Planning Commission in 1960 broughth out an uniform, unifiled contract
document but Govt Departments did not follow it fully. Many changes were
made by organisations to suit their interests and because of which many
conditions and clauses do not confirm to legal principles.
forms invariably suffer from a serious draw back. The forms are drafted
at the instance of one party and the drafters are tempted to insert in
the conditions certain provisions which exempt the party from legal liabilities.
court can render such provisions or transaction ineffective or uneforceable.
Inequality of bargaining power is a fact of life in present day economic
set up and standard form contract is the external expression thereof. Govt
contract being one such prominent illustration.
strike down an unfair and unreasonable clause in contract entered into
between parties who are not equal in bargaining power.
only the conditions/clauses but also the procedure in execution in may
instances go in conflict with provisions in the India Contract Act 1872.
of the law aspect can be understood from the provision in section 28(1)
of the arbitration act which require decisions to be taken as per substantive
from existing contract documents conditions which lead to disputes are
enumerated along with modification suggested.
Compensation :- Only reasonable compensation not exceeding the actual loss
is permissible in law. For both the contractor and the owner this principle
is to be followed and a clause to this effect is a must in any agreement.
Section 73 and 74 of the Indian Contract Act provides for contractual damages
by way of compensation. Here also the loss must be established. The legal
principle of mitigation of damages requires a provision in the contract
Forfeiting of Security Deposit. In spite of default on the part of the
Contractor, if no loss to the owner is there no forefeiting of Security
Deposit is possible. A clear provision in this regard in the agreement
Liquidated damages :- The usual provision by way of a percentage for each
day delay fails to meet the legal principle. Provision by way of liquidated
damages must be based on a genuine pre-estimate and as such it must be
a firm figure for a particular contract and not as a varying percentage
for all contracts.
Time is of the Essence of contract on the part of the Contractor. Why specially
for the contractor is not understood. It must be one applicable to both
the parties. Law has established that if provisions for granting extention
of time, and for levy of liquidated damages are made in the contract/agreement
the purpose of making time as the essence of contract losses its meaing
The inclusion of a clause to make time as the essence of the contract must
be for genuine cases only and section 55 of the Indian contract Act will
Rescinding is repealing, revoking or cancelling a contract. For rescinding,
the contract must become voidable. It cannot be done unilaterally. There
must be repudiation of contract by one party which can be acted upon by
the other party. Provisions like clause 3 a in the standard form contract
in use in departments like CPWD, Telecom and ISRO etc. must be deleted.
The present provisions are acted upon by the Engineer/Owner to suit their
whims and Fancies and are to be deleted as they are illegal. The law provides
for terminating a contract if there is a fundamental breach going to the
root of contract like prevention of performance abandoing etc. The clear
provision in law that for ordinary breach only compensation can be levied.
It is to be noted that even extra ordinary delay is not recission/repudiation.
The legal aspect must be reflected in the contract agreement itself.
In the present standard form contract the provision for rescinding the
contract is clause 3a. It provides for forfeiting the security deposit
after recinding. This provision is not valid in law and requires to be
law requires section 64 of the Indian contract to be followed which does
not permit risk and cost action aganist the contractor. Section 64 requires
the value of work done by the contractor upto date of rescinding to be
paid along with refund of security deposit.
Once action as per clause 3a is taken to recind the contract, the contract
is closed. No subsequent action is permissible, which require the contract
to be subsisting. Provision is required to be made in the contract that
after action through clause 3a it is not permissible to adopt clause 3d
A provision is required to be made in the contract conditions/clause that
wrongful rescinding by one party will entitle the other party to claim
For arbitration the present clause 25 in the standard form contract prescribes
a limit of 90 days for raising any claim. The provision must be changed
to react as per limitation act and law.
The usual arbitration clause 25 provides for a Designated officer to name
the arbitrator. It is the responsibility of the Designated officer accepted
by both the parties to appoint a sincere, impartial and appropriate person
as arbitrator. The only function required of him is appointing a suitable
arbitrator. For the purpose the claimant is required to furnish a list
of claims along with the amount claimed which will guide the desingated
officer about the requirements for the arbitrator with regard to qualifications
the desingated officer considers himself as one authorised to frame the
terms of reference and some designated officers even direct how the proceedings
are to be conducted.
terms claims etc are for the parties and arbitrator to decide. This aspect
to be made clear in the arbitration agreement itself. The provision through
Sec 23 of the arbitration act which permits modification and supplement
any claims and or Rule 17 of CPC authorising additional claims before the
award is given require to be pointed out.
The power given to the designated officer must be exercised with regard
to legal principles especially principles of Natural Justice. Appointing
an arbitrator from his own department is against principles of natural
justice NEMO JUDEX IN RESUA A Judge is disqualified from determining in
a case in which he may be biased. Bias-prejudice, favour, disfavour, hostility,
antogonism, prepoessession that aways the mind.
DEBET ESSO JUDEX IN CASUA SUA - No one should be a judge who is interested
in the subject matter of a dispute.
The present clause 25 - arbitration agreement reuires to be modified completely
to be in conformity with law. The Conciliation and Arbitration Act 1996.
The most important provision through Section 31 is that the arbitrator
must give reasons in the award.
Escalation :- The present standard Form contracts provide clause 10c.,
if the period of construction is more than 6 months and in some cases more
than 12 months.
10c or 10cc give the procedure for calculating the escalation. Even without
these escalation can be claimed through section 73 of the Indian Contract
courts have pronounced "Escalation has been judicially recognised as a
fact of life". Supreme Court in P.M Paul vs Union of India, AIR 1989 SC
1034 has observed "Escalation is a normal incident arising out of gap of
tim in this inflationary age in performing any contract".
in M/s Tarapore and Co., vs Cochin Shipyard Ltd, AIR 1984 SC 1072 payment
of escalation was approved though there was no provision for escalation
in the contract.
view of the above, limitations by way of presribing months for eligibility
will not be in order. In some contracts the tendency to remove the escalation
clause itself is one unlawful.
must be made permissible irrespective of the period of contract.
Deviation limit :- In item rate contracts Bills of quantitites are given.
The contractor quotes with careful consideration of the quantities and
the resources of men and materials available with him. Hence the usual
limit of 20% to 50% is not reasonable, increase of more than 5% in the
quantities is not permissible. Further any item not included in the Bills
of quantities and quantities exceeding deviation limit are outside the
contract as per law and so such items and excess quantities payment on
Quantum Merit basis must be authorised. The Deviation limit clauses require
to be modified.
The present contract form requires the contractor to appoint an Engineer
of prescribed qualification. If this is not complied with recovery is made.
Any contracting organisation will have Engineers and generally the contractor
himself with be one well experienced in the field. As such the provision
is one not fair, not reasonable.
the prupose for which the Engineer is to be appointed is for receiving
instruction. Instructions can be given to any representative of the contractor.
The site order instruction book can well be used for the purpose. The provision
requires to be deleted.
The stipueated date of completion is prescribed the owner, so the contract
requirement is that the contractor must take all steps to complete the
work by the stipulated date. Having fixed the date for completion the owner
should not be given the right to fix date of starting. This usual stipulation
regarding proportinate progress that is ¼ work within ¼ time
½ work within ½ the time and ¾ time is not only meaning
less but also not possible in a building contract. Earthwork may be only
a very small part but requires considerable time. Concreting may be one
of very large proportion but can be completed within days. Similarly, finishing
items may form a little portion of the contract. For this item the period
requires is much higher than the propertionate period.
stipulation cannot find a place in the contract.
The contractor is selected with reference to his experince in the field
and the resources available with him, because of this he is entiled to
have his own planning, programming to complete the work in time. Interfering
with the progress is a serious breach. The contract being one of reciprocal
promises time limits for the owner to perform his obligations must also
be fixed in the contract.