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Construction Contracts: Some Legal Aspects P.M.BAKSHI*

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Contracts for the construction of roads, buildings and other works present certain special
features from the legal perspective. Having regard to the importance of these contracts in
the economic life of the country, it is proper that their legel significance be examined in
some detail.

The element of contracting

A good deal of construction activity has been going on in the country, for the last four
decades. Both the public sector and the private sector have been engaged in projects of
varying magnitude. One feature common to most construction activities is, that they
involve a good deal of "contracting". There may be only one contract, if the work is small
in magnitude. Or, there may be a number of contracts, where the project is a large one - a
case of "horizontal multiplicity". If the contract is a complex one, then there may be an
hierarchy of contractors, involving several "sub-contractors". That can be called an
instance of "vertical multiplicity". But, whatever the nature and magnitude of the contract
involved, it is obvious that the transaction is a consensual one, intended to have "defined
legal consequences". In terms of the Arbitration and Conciliation Act, 1996, it is a "defined
legal relationship", which is contractual in nature. It is in this respect, that the law of
contracts becomes very relevant.

Sources of the law

Undoubtedly, there is no separate set of legal rules for construction contracts, as such.
The law relevant to such contracts is to be derived (in a broad sense) from the same
sources of law, as are the sources relevant for any other contract. These sources (in the
main) are - the law of contracts, and the law of dispute resolution (through courts or
otherwise). In regard to some contracts, there also exist special statutes dealing with
buildings etc. - such as, the Defective Premises Act, 1972 (in U. K.)

However, certain aspects of the law of contracts acquire special relevance in the context
of construction contracts. So do some aspects of the law of dispute resolution and the law
of arbitration (as will be dealt with, presently). In particular, in a construction contract, the
number of persons interested in its successful completion would be large. Hence, the
number of persons who can benefit from prompt and peaceful settlement of disputes, is
also correspondingly large.

Nature of Construction projects and problems involved

The special features of the construction industry can be thus enumerated:

(a) The industry itself is a specialised one, with its own patterns and practices.

(b) Planning and execution of a construction project involves numerous parties and
organisations, who must work in unison - though temporarily. A small deviation
(real or alleged) affects numerous parties.

(c) A construction project is a continuous one, usually spread over a number of

years. A dispute that operates as an impediment at any single stage may upset the
entire time-table, unless the dispute is speedily resolved.

(d) Some of the problems that arise in the working of the project are not
foreseeable or, even if they are foreseeable, their magnitude may not be
foreseeable. If litigation is resorted to, then such problems may increase (rather
than resolve) the tension generated by the emergence of various problems.

Proper approach

When a legal question arises pertaining to a construction contract, one has first to study
and apply the provisions or rules of the general law of contracts, and then to see whether
any special or peculiar approach (in applying those rules) is needed, in the light of the fact
that one is concerned with a construction contract. And, of course, the specific terms of
the particular contract under consideration have to be kept in mind. The Brahant, (1966) 1
All ER 961.

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Legal issues

Theoretically, any legal issue that can arise under a contract (in general) can arise in
relation to a construction contract also. These include issues relating to formation of the
contract, legal validity of the contract, performance of the contract, effect of force majeure,
assignment of the contract, damages and so on. However, in the case of construction
contracts, some of these issues, arising as they do against the background of a contract of
some magnitude or complexity, present a few peculiar features, requiring special
attention.

Some of these peculiar problems will be dealt with, at this place.

Quantity of work and escalation

A question may, for example, arise as to the quantum of work. In a recent case decided by
the Supreme Court of India, involving a construction contract with the State, the drawings
and designs were changed in the course of construction of the works. This resulted in an
abnormal increase in the quantum of work and, consequently, the contractor claimed a
higher amount, which the arbitrator awarded, after a consideration of all relevant
materials. When the award was challenged (under the Arbitration Act, 1940 then in force),
it was held that the court cannot interfere, in the circumstances. The argument of the
State, that under the terms of the contract, the contractor was not entitled to a higher rate,
was not accepted, as there had been a material change of drawings and designs. The
case is State of U.P. Vs. Ram Nath International Construction Private Ltd., AIR 1996 SC
782, 784, 785.

Escalation claimed for increase in wages

Escalation may also be in issue, where an increase in the wages of labourers (engaged by
the contractor in the construction work) is put forth by the contractor, as a ground for
proportionate enhanced payment (to the extent attributable to statutory or departmental
increase in wages). How far such a claim is legally justified, will depend on the language
employed in the particular contract. It is obvious, that if the contractual clause refers, say,
to the wages fixed by the Public Works Department, and the latter Department increases
the wages after the particular contract is signed, the contractor would be entitled to claim a
proportionate increase. In such a case, the judges do read a "meeting of the minds" (of
the parties), in so far as the claim of escalated payment on account of increase of wages
is concerned, because of the wording of the contract. Tarapore & Co. Vs. State of M.P.,
(1994) 1 Arbi. LR 341, 351 (SC).

Unjustifiable claim

A claim by the contractor which is unjustifiable cannot be granted by the arbitrator. Thus,
in an Allahabad case, the arbitrator had awarded certain amounts in contravention of the
contractual provision. He had awarded to the contractor a certain amount for "de-
watering", even though the Schedule of "bids and quantities" clearly stipulated that the
rates included de-watering. The award was set aside, as suffering from illegality. State Vs.
Allied Construction Engineers & Contractors, AIR 1996 All. 295, 298, 299 (DB). (Case
under the 1940 Act).

Acting without jurisdiction

An arbitrator who acts in disregard of the express terms of the contract may be held to
have acted without jurisdiction. This is illustrated by a Supreme Court decision. Associated
Engineering Co. Vs. Government of A.P., AIR 1992 SC 232; (1991) 4 SCC 93. In this
case, the arbitrator had awarded several claims, for which the contract made no provision.
These included the following:

(i) escalation in the cost of nap slabs;

(ii) payment towards extra bed for water;

(iii) extra expenditure incurred owing to the flattening of canal slopes and
consequent reduction in the top width of banks used as roadway.

The contract did not provide for any of these claims. The award was set aside, as going
beyond the contract.

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Appreciation of evidence

It is a well-established proposition that when an arbitral award is challenged on the ground

of factual errors and no issue of law or breach of natural justice is involved, the court
cannot re-assess the evidence. Thus, if the arbitrator holds that the claim would be in the
nature of anticipated expenses, the court cannot re-assess the evidence. Army Welfare
Housing Organisation Vs. Gautam Constructions Ltd., AIR 1998 SC 3244.

Reasons and conclusion

In fact, there is the wider principle, that where the arbitrator has given reasons for the
amount determined by him, the award cannot be set aside, even if the court disagrees
with his actual conclusion.

(i) S.A. Builders Vs. Delhi Development Authority, (1998) 2 Arb LR 422 (Del.);

(ii) Union of India Vs. Supreme Construction, (1998) 2 Arb LR 81 (Bom.).

View of the site

Sometimes, one finds that trivial objections are raised (during arbitration) as to minor
points of procedure - such as, questions relating to view of the site by the arbitrator.
Subject to agreement to the contrary, the arbitrator has a discretion as to whether he will
view the site and, if so, on what date. Munday Vs. Black, 9 CB (NS) 557: 30 LJ CP 193.

In one of the English cases, where the reference related to the terms on which a mine
should be let, it was held that it was not a valid objection, that one of the arbitrators,
instead of himself viewing the site, acted on the report made to him by another person.
Eads Vs. Williams, (1854) 24 LJ Ch 531; 1 Jur NS 193; 4 De M & G 674.

Of course, the final decision must be of the arbitrator himself (or of all the arbitrators).
Jugobandhu Vs. Chand Mohan, 22 Calcutta Law Journal 237: 31 Ind Cas 33 (Cal)
(Mookerjee J.).

Documents and their incorporation of documents

A works contract usually involves numerous documents, namely:

(a) the main agreement,

(b) the general conditions,

(c) the specifications,

(d) the bills of quantities,

(e) the drawings,

(f) the schedule of rates,

(g) the form of tender, and

(h) the bond.

Ordinarily, reference in the work order (or in the agreement), to a particular document,
suffices to incorporate that document in the contract. Royston U. D. C. Vs. Royston
Builders Ltd., (1961), 177 Estates, Gazette 589; Halsbury 4th ed., Vol. 1, para 1107.

This is subject to two important qualifications:

(a) Intention to incorporate the document should exist;

(b) A document incorporated for one purpose will be treated as incorporated for
that purpose only;

(i) Moore Vs.Shawcross, (1954) JPL 43.

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(ii) Davis Contractors Ltd. Vs. Fareham UDC, (1956) 2 All ER 145 (HL).

(iii) Dunlop and Ranken Ltd., (1957) 3 All ER 344 (Divisional Court).

Implied Terms

In a contract for work and materials, three warranties are implied [Halsbury, 4th Ed. Vol. 4,
para 1159].

(a) The material used in the works, and also the completed works, shall be
reasonably fit for the purpose for which they are required. Francis Vs. Cockrell,
(1870) LR 5 QB 501.

(b) The materials will be of good quality. Young & Marlew Ltd. Vs. MCManus Childs
Ltd., (1968) 2 All ER 1169 (HL).

(c) The work will be carried out in a good and workman-like manner.

(i) Billyack Vs. Leyland Construction Co. Ltd., (1968) 1 All ER 783.

(ii) Hancock Vs. B. W. Brazier (Anerley) Ltd., (1966) 2 All ER 901, 903
(CA).

Sub-contractors and suppliers

A "sub-contractor" is one who agrees with the contractor to carry out a part of the works. A
"supplier" is one who supplies those fabricated parts and materials, which are necessary
for completion of works. Where the employer himself nominates the sub-contractor, such a
sub-contractor is called a "nominated sub-contractor".

Architects

Contracts for works commonly give the architect or engineer jurisdiction to determine
certain disputes and to issue certain certificates. In exercising this duty, the architect or
engineer must act fairly. R. & M. Kaye Ltd. Vs. Hosier & Dickinson Ltd, (1972) 1 All ER
121, 136.

Issues: certification

How far the certificate of the architect is binding on the arbitrator, will depend on the terms
of the contract. On the one hand, one comes across contracts in which the certificate itself
cannot be questioned before the arbitrator. On the other hand, there are cases where the
contract gives the arbitrator absolute power to override or modify any such certificate.
Windsor Rural District Council Vs. Otterway, (1954) 3 All ER 723.

Generally, a certificate does not have the status of an award. Northampton Gas Light Co.
Vs. Parnell, (1855) 15 CB 630.

Clerk of Works

The Clerk of Works is usually employed on behalf of the employer, to supervise the works.
He may assist the architect in the supervision of the works, but the architect cannot
delegate to him duties of the architect. Halsbury, 4th Ed., Vol. 4, para 1104.

Claims under the contract

Contracts entered into in connection with buildings and other construction projects are
drawn elaborately on standard forms, seeking to provide for various contigencies.
Nevertheless, legal disputes about payment of the contractors's claims thereunder do
arise from time to time, occupying a considerable time of arbitrators and courts. Some
legal principles have been evolved as to the quantification as well as the validity of such
claims. These deserve discussion in view of the practical importance of the subject.

Types of claims

Claims by a building contractor (or other contractors engaged in construction work) are
principally of two types - (a) claims under the contract, and (b) claims for payment for work
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which is done outside the contract, for which, the contractor seeks payment as a matter of
justice. The first category is contractual. The contractor claims payment on the basis of the
contract. Such claims usually involve questions of assessing the work (seeing that it is
according to contract) and questions of interpretation of contractual terms.

The second category of claims mentioned above is extra-contractual. In legal parlance,

they are known as claims quantum meruit. Such claims do not derive their source only
from this or that particular term of the contract, as originally entered into. The contractor
claims that he should, in justice, be compensated for the work done, even if the terms of
the contract do not cover such work.

Quantum Meruit

Compensation quantum meruit is awarded for work done or services rendered by the
contractor when the price thereof is not fixed by contract. Quantum meruit is a right which
arises dehors (outside) a contract. The party is not proceeding on contract, but upon
quasi-contract. Heyman Vs. Darwins Ltd., (1972) 1 All ER 33 (HL).

A quantum meruit claim arises, where work is done or services performed by one person
for another, in circumstances which entitle the person doing the work or performing the
services to receive a reasonable remuneration, the situation being one where either there
is no contract or (though there is a contract), the particular situation is not covered by the
contract.

Jurisdiction of the Court to award compensation in quantum meruit rests on equitable

considerations. For work which has been done by A, for B and of which the benefit has
been taken by B, B will be made to compensate A, unless it be shown that A intended to
do the work gratis. This is the broad principle on which quantum meruit compensation is
granted. This jurisdiction is often described as "restitution for quasi-contract". However,
the facts necessary for exercising this jurisdiction must still be proved by the claimant and
the proof of such facts must be cogent.

Litigation: the psychological aspect

Litigation is based on the spirit of combat and accentuates the differences and keeps the
parties isolated from each other. Moreover, it results in an "imposed" decision, which the
parties may not find emotionally acceptable. The winning party wins, at the cost of
goodwill of the losing party.

Since a fund of goodwill is required in a construction contract throughout its duration, this
aspect assumes considerable importance.

Categories of dispute resolution

Resolution of disputes comprises:

(a) resolution without litigation,

(b) resolution through litigation, and

(c) resolution through alternative dispute resolution.

The term "Alternative Dispute Resolution" in its wider sense, can include arbitration also -
because arbitration constitutes an alternative to litigation. However, in its narrower sense,
it excludes arbitration, because it contemplates an imposed decision. Thus, in the
narrower sense, the expression "ADR" embraces only those processes in which the
decision is finally arrived at, with the consent of the parties. "Amicable settlement" appears
to be an appropriate word to denote modes of dispute resolution in which the parties retain
their freedom to decide the outcome of their dispute. It could cover negotiation, mediation
and conciliation (and some of their variations, combinations or sophisticated forms).

Essence of amicable settlement

Amicable settlement of a dispute involves the following steps:

(a) bringing the parties to the negotiating table;

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(b) identifying the problems;

(c) establishing the facts;

(d) clarifying the issues;

(e) developing the options for settlement; and

(f) ultimately reaching agreement.

Advantages of amicable settlement

Advantages of amicable settlement are that it:

(i) enables the parties themselves to resolve the dispute and to bury the past;

(ii) preserves the present relationship; and also

(iii) paves a better future.

Quality outcome

This becomes possible because of the direct involvement of the parties. Only amicable
settlement has the potential to deal properly with the technical and legal uncertainties
involved and any other concern of the parties. It can therefore achieve a better quality
outcome. It can provide a quick and relatively inexpensive means of dispute resolution,
that seeks to avoid unnecessary confrontation and conflict.

Participation by disputant's

Besides this, amicable settlement offers the disputants opportunities to participate in the
process and empowers them to be creative, in solving their own problems. It is well suited
to disputes arising from construction contracts, where all parties are striving to complete
the work on time and within budget, and usually hope to work together again, in the future.
They are more likely to accept the agreements which they reach, because such
agreements are perceived to be fairer and easier to implement.

Saving of time

Parties will not want their key personnel to waste time on detailed preparation of evidence
and attendance at hearings. Nor will they want them to be exposed to the potential
antagonism and criticism which is inherent in adversarial proceedings. The parties are
also likely to be concerned to protect their business reputations and on-going
relationships, which might be damaged in the win-lose "atmosphere of litigation.

The commentary on the UNCITRAL Conciliation Rules notes that - "business partners with
long standing relations ........... might prefer the 'marriage counsellor' approach inherent in
conciliation, to the 'divorce judge' approach of adversary proceedings."

No unnecessary compromise

Amicable settlement does not mean compromise at any cost, although reasonable
compromise is a relevant factor. Settlement is more likely to result from the parties
becoming better informed about the dispute and about the risks that would be involved, if
the matter were to proceed to a binding adjudication. If they have the freedom to decide
an outcome for themselves, they will be more committed to the outcome and their on-
going relationship is less likely to be adversely affected.

When settlement not favoured

There may, however, be reasons why amicable settlement is not favoured in the special
facts of a case.

(a) One party may be claiming a big sum of money and simply be looking for the
final and enforceable decision which can be obtained by resorting directly to
arbitration or litigation.

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(b) A party against whom a claim is made may owe money and seek to use
amicable settlement as a delay and discovery mechanism. The other party may
therefore be concerned about the delay, and the likelihood of incurring extra costs
and of being disadvantaged in subsequent arbitration or litigation.

(c) Adjudicative methods may be the most appropriate for resolving some
situations, such as, frivolous claims, outrageous claims, claims which compromise
a particular principle, cases which involve bodily injury or alleged criminality, and
claims to which there is an adequate legal defence.

Dispute Review Boards

Dispute Review Boards are very useful in construction contracts. The traditional methods
of resolution of dispute come after the fact, (when the project is complete and the parties
have already become adversaries). On the other hand, a Dispute Review Board visits the
job site regularly during construction and is kept advised of contract as it progresses.

If a dispute arises, the Board recommends settlement, soon after the dispute occurs and
before any adversarial attitude grows.

Normally, the Dispute Review Board consists of three members. One member is
appointed by each party. The third member (who becomes the Chairman) is selected by
the two members and approved by the parties. The members are expected to have:

(a) experience with the type of construction,

(b) familiarity with interpreting contract documents, and

(c) adequate background in the construction industry. They must not have any
affiliation with the parties.

The Board, after recording the parties' submissions, suggests a settlement. If it is not
acceptable to both the parties, they can make a request to the Board to make further
efforts, or pursue litigation or arbitration, as the case may be.

Conclusion

The above discussion is intended merely to highlight certain aspects of constriction law,
particularly as they have come up in the course of arbitration proceedings. The treatment
is not intended to be exhaustive. As was stated at the outset, there is no separate code or
set of legal rules applicable to construction contracts. But the size and complexity of such
contracts lends importance to certain issues.

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