THE INDIAN COUNCIL OF ARBITRATION
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Disputes Through Contract Conditions/Clauses

N. Sreenivasan Bargere

 
A 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.

The 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.

Such 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.

The 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.

Courts strike down an unfair and unreasonable clause in contract entered into between parties who are not equal in bargaining power.

Not only the conditions/clauses but also the procedure in execution in may instances go in conflict with provisions in the India Contract Act 1872.

Importance 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 law.

Points from existing contract documents conditions which lead to disputes are enumerated along with modification suggested.

1. 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.

2. 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 agreement.

3. 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 is essential.

4. 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.

5. 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 itself.

6. 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 be applicable.

7. 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.

8. 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.

9. 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 modified.

The 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.

10. 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 or 3c.

11. 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 heavy damages.

12. 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.

13. 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 and experienced.

But 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.

The 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.

14. 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.

NEMO DEBET ESSO JUDEX IN CASUA SUA - No one should be a judge who is interested in the subject matter of a dispute.

15. 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.

16. 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.

Clauses 10c or 10cc give the procedure for calculating the escalation. Even without these escalation can be claimed through section 73 of the Indian Contract Act.

The 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".

Further 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.

In 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.

Escalation must be made permissible irrespective of the period of contract.

17. 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.

18. 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.

Further 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.

19. 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.

Such stipulation cannot find a place in the contract.

20. 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.

 
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