MODULE 3

CONTRACT MANAGEMENT
Discharge of contract, Breach of contract, Tendering issues, Risks in construction
contract, Regulatory aspects and ethics, Intellectual property act, Law of Torts, General
Construction specifications, Commercial Construction Specifications, Bonds, Types of
Bonds, Insurance, Workers compensation Insurance, Commercial general liability
insurance, Builders risk insurance.
DISCHARGE OF CONTRACT

• A contract between parties is a one time affair and shall be performed as per agreed terms

• Once the contract is performed satisfactorily it has to be closed.

• All the clause of the contract (engineering, materials, finance..) shall be settled, reconciled and
closure certificate be arranged.

• Termination of the contractual relationship between the parties is called discharge of contract

• the point at which the parties involved are no longer bound by the terms of the contract.

• The specific method of discharge and its legal consequences can vary depending on the nature
of the contract, the applicable laws, and the unique circumstances of the case.
MODE OF DISCHARGE OF CONTRACT
Acc. to Indian Contract Act, 1872

1. By Performance
2. Where performance is dispensed with or excused
3. By the act becoming impossible or unlawful (frustration)
4. By novation, rescission or alteration of contract
5. By waiver
6. By accord and satisfaction
7. By rescission of a voidable contract
8. By the promise failing to afford facilities for performance
9. By operation of law
1. BY PERFORMANCE
• A contract is discharged when both parties fulfill their contractual obligations as
stipulated in the agreement.

• Most usual mode of discharge

• Eg ; in a sales contract, the buyer pays the agreed-upon price, and the seller
delivers the goods. Once both parties have performed their duties, the contract is
considered discharged.
2.Where performance is dispensed with or excused

• The contract act says that when parties enter into a contract, they have to either do
what they promised or show that they are ready to do it.

• But there are some situations when they don't have to do what they promised, and
this law or other laws can excuse them from it
3. BY THE ACT BECOMING IMPOSSIBLE OR
UNLAWFUL (FRUSTRATION)

• Frustration = Efforts made ineffective; discontented because unable to

achieve one’s desire

• When the performance of the contract becomes impossible, the purpose of

which the parties have in mind is frustrated.

• If performance becomes impossible, because of a supervening event, the

promisor is excused from performance of the contract

• In English law, it is called “Doctrine of Frustration”

• In Indian law, it is called “Impossibility of Performance”

Frustration of Contract:
• Sometimes, unforeseen events or circumstances occur that make it
impossible to fulfill the contract. This is known as the "frustration of
contract."

• For instance, if a building intended for a business lease is destroyed by a

natural disaster, the contract may be frustrated because it is no longer
possible to use the premises for the intended purpose.
4. BY NOVATION, RESCISSION OR ALTERATION OF CONTRACT

• Novation = when the parties to a contract agree to substitute the existing

contract with a new contract.

• Parties can mutually agree to discharge a contract through a new agreement or

a process called "rescission."

• often involves creating a new contract that supersedes the previous one.

• Parties may also agree to terminate a contract if they find it impossible to

perform their obligations or if there has been a fundamental breach.
5. BY WAIVER

• Since a contract is created by means of an agreement, it may also be

discharged by another agreement

• It nullifies the previous agreement

• Waiver : An agreement discharging the previous contract

• Waiver or release is the surrender of a contractual right

6. BY ACCORD AND SATISFACTION

• First the parties to the contract made a contract between them

• Later they mutually changed the terms and conditions of the previous
contract

• Therefore in place of previous contract, a new contract takes place.

• The new agreement is the accord

• The performance is the satisfaction

• Thus the previous contract is discharged.

7. BY RESCISSION OF A VOIDABLE CONTRACT

• According to Section 64

• When person cancels a contract that can be canceled, the other person
doesn't have to do what they promised to do in the contract.

• If the person who cancels the contract has gotten any benefit from the
other person in the contract, they have to give back that benefit to the
person who gave it to them, as much as they can
8. BY THE PROMISE FAILING TO AFFORD
FACILITIES FOR PERFORMANCE

• Section 67 explains the effect, if the person who made a promise doesn't help the
person who has to fulfill that promise.

• If the person receiving the promise neglects or refuses to provide the necessary help
for the promise to be kept, then the person making the promise is excused from
fulfilling it for any part that couldn't be done because of this neglect or refusal.
8. BY OPERATION OF LAW

• Certain events or circumstances, such as the death or bankruptcy of one of the

parties, can lead to the automatic discharge of a contract.

• Operation of law may include discharge in the following ways;

a. By death of any one or both the parties of the contract

b. By merger i.e., the acceptance of a higher security in place of a lesser

security.

c. By insolvency : when a person is adjudged insolvent, he is discharged from

all liabilities incurred prior to his adjudication.
 DISCHARGE PROCEDURE
• The following steps have to be followed to issue a discharge and contract
closure certificate by the owner.
STEP – 1
The contract department shall obtain a certificate from construction
department and finance department for the responsibility entrusted to these
departments.
STEP – 2
A “no claim” certificate is to be obtained from the contractor.
STEP – 3
On the basis of the certificate from all the departments, the contract
department shall issue to the contractor a “contract closure and discharge
certificate”
No claim certificate
contract closure and discharge
certificate
 STEP - 1 (CONTD..)
Construction Department
• Shall ensure and clearly certify that the scope of the agreed in the
contract had been completed.
• Equipment, plant and machinery had been taken over after successful
performance tests.
• Short supplies, damaged items have been identified, replacements
obtained.
• All surplus materials have been accounted and duly disposed off.
• All temporary structures put up by the contractor have been disposed
off
STEP - 1 (CONTD..)

Finance Department

• Ensure that the advance payment if any made had been duly
adjusted.

• All work/job bills claimed have been paid.

• No dues are outstanding from the contractor.

• IT remittance if any have been paid

STEP - 1 (CONTD..)
Contract department

• Ensure that all the bank guarantees have been duly discharged

• Ensure that Bill of lading and bill of entries in case of imports have
been verified and tallied.

• Ensure that there is no arbitration case initiated

• Ensure that there is no claim/report from outside agencies/statutory

bodies.
 BREACH OF CONTRACT
• Occurs when one party to a legally binding agreement fails to fulfill their obligations as
outlined in the contract without a valid legal excuse.

• If one party fails to meet their contractual obligations, it constitutes a breach of contract.

• The innocent party may choose to discharge the contract and seek damages for the breach.

• In essence, One party does not perform or deliver what they had promised in the contract.

• When a breach of contract occurs, the party that has not breached the contract may have legal
remedies available to seek compensation or other forms of relief.

• The nature and severity of the breach, as well as the terms of the contract, will determine the
consequences.
Financial remedies for breach of contract
● The primary remedy for any breach of contract is an award of damages.
● Remedy is available , only available in cases of serious breach.
● Damages are assessed with the intention of making the innocent party’s
position (so far as money can do this) equivalent to what it would have
been if the contract had been properly performed.
GENERAL DAMAGES

● A legal remedy is a court order that seeks to uphold a person’s rights or to

redress a breach of the law.
● When one party breaches a contract, the other party may ask a court to
provide a remedy for the breach.
● The court may order the breaching party to pay money to the non-
breaching party.
TYPES OF BREACH

1. Material Breach
2. Minor Breach
3. Anticipatory Breach
4. Fundamental Breach
Material Breach
• Failure of performance that affects the purpose of the contract and
makes it impossible for the non-breaching party to receive what was
agreed to.

• Eg. if there is an agreement to buy a truck and the seller delivers a

car, the buyer is excused from paying for the wrong vehicle
 Minor Breach (Partial Breach)
• In this type of breach, the party has not fully performed their
obligations, but the breach is not significant enough to excuse the other
party from their obligations.

• The non-breaching party can still seek damages for the incomplete
performance.

• Eg. when a seller's delay in delivering goods is a minor breach of

contract, the buyer must still pay for the goods but may recover any
damages caused by the delay.
Anticipatory Breach
• This occurs when one party communicates, either through words or actions, that they
do not intend to perform their obligations under the contract.

• The non-breaching party does not have to wait for the actual breach to occur but can
treat it as a breach immediately.

• Eg. The supplier informs the construction company that they have run out of stock and
will not be able to provide the materials as agreed. In this scenario, the supplier's
communication serves as an anticipatory breach, as they have indicated their intention
not to fulfil their contractual obligations.
Fundamental Breach

• A fundamental breach is a severe violation of the contract that goes to the core or
essence of the agreement.

• In cases of fundamental breach, the innocent party may terminate the contract and
seek damages.

• Eg; if the wedding photographer you hire simply doesn`t show up at your
wedding without explanation or another photographer in their place.
Legal remedies for a breach of contract may include:

• Damages: The non-breaching party can seek monetary compensation to cover

the losses they suffered due to the breach.

• Specific Performance: In some cases, a court may order the breaching party to
fulfill their contractual obligations as originally agreed.

• Rescission: The contract may be canceled or terminated, and both parties may
be restored to their original positions before entering into the contract.

• Reformation: A court may modify the contract to reflect the true intentions of
the parties if there was a mutual mistake or a contract term was written
RISKS IN CONSTRUCTION CONTRACT

• Construction projects are inherently complex and involve numerous parties, intricate processes,
and significant investments.

• Consequently, there are various risks associated with construction contracts that can impact
project success, cost, and timeline.

• Understanding these risks is crucial for both contractors and project owners to manage them
effectively.

• Contractors and project owners should conduct thorough risk assessments, engage in proactive
risk management, and maintain clear communication throughout the project to minimize the
impact of these risks.
Major Risks in construction contract are :

1. Design and Planning Risks

2. Financial Risks
3. Schedule Risks
4. Contractual Risks
5. Regulatory and Compliance Risks
6. Quality Risks
7. Safety Risks
8. Market Risks
9. Geopolitical Risks
10.Insurance Risks
1.Design and Planning Risks:
1. Inadequate Design: Incomplete or unclear project designs can lead to changes, delays, and
increased costs.
2. Design Errors: Mistakes or omissions in the design can result in rework and disputes.

2.Financial Risks:
1. Cost Overruns: Budgets can be exceeded due to unforeseen circumstances, scope changes, or
mismanagement.
2. Payment Delays: Delays in payments to contractors can strain cash flow.

3.Schedule Risks:
1. Delays: Weather, unforeseen site conditions, labor strikes, or supply chain disruptions can cause
project delays.
2. Unrealistic Schedules: Setting overly aggressive timelines can lead to quality issues and cost
overruns.
4. Contractual Risks:
1. Ambiguous Contracts: Unclear or vague contract terms can result in disputes.
2. Breach of Contract: Failure to meet contractual obligations can lead to legal action.

5. Regulatory and Compliance Risks:

3. Environmental Regulations: Failure to comply with environmental laws can result in fines and
delays.
4. Permit Delays: Obtaining necessary permits can be time-consuming and uncertain.

6. Quality Risks:
5. Poor Workmanship: Substandard work can lead to defects and the need for rework.
6. Deficient Materials: The use of low-quality materials can compromise the project's integrity.

7. Safety Risks:
7. Accidents and Injuries: Workplace accidents can lead to legal and financial liabilities.
8. Unsafe Practices: Non-compliance with safety regulations can result in penalties.
8. Market Risks:
1. Economic Conditions: Economic downturns can affect project financing and demand.
2. Supply Chain Disruptions: Disruptions in the availability of materials can affect construction.

9. Geopolitical Risks:
3. Political Instability: Political changes or conflicts in the project area can disrupt operations.
4. Currency Exchange: Exchange rate fluctuations can affect project costs.

10. Insurance Risks:

5. Inadequate Coverage: Insufficient insurance can leave parties exposed to financial losses.
6. Claim Disputes: Disagreements with insurance companies can result in delays in compensation.

11. Force Majeure Risks:

7. Natural Disasters: Unforeseeable events like earthquakes, floods, or pandemics can disrupt
projects.
 LAW OF TORTS
• It is a fundamental area of civil law that deals with civil wrongs or wrongful
actions committed by one party (the "tortfeasor") against another party (the
"victim" or "plaintiff").
• Tort is when the act of one party causes some harm to the other party due to
negligence, carelessness on the part of another party. The one who sues is known
as ‘plaintiff’ and the one who is sued is known as ‘defendant’.
• Tort allows people to hold the other person accountable for the injuries suffered
by them.
• The person who causes such harm shall be made liable to pay compensation to
the injured party (plaintiff)
• This compensation can be in the form of money.
• This money received in the form of compensation is known as ‘damages’.
TORT VS CRIME
S.N
Tort Crime
O
The person who commits a tort is The person who commits a crime is known
1.
known as ‘tortfeasor’. as ‘offender’.

2. Proceedings take place in Civil Court. Proceedings take place in Criminal Court.

The remedy in tort is unliquidated

3. The remedy is to punish the offender.
damages.

It is not codified as it depends on Criminal law is codified as the punishments

4.
judge-made laws. are defined.

Private rights of the individuals are Public rights and duties are violated which
5.
violated. affects the whole community.
Remedies
 Damages: To restore the plaintiff in the position he was if the tort
would not have been committed, damages are awarded to the
claimant.
•The injury caused includes not only physical injury but also
emotional, economic or reputational injury and many other.
•Damages payable to the plaintiff are made in terms of money.
•Damages depend upon the cause, fact and the circumstances of the
case.
•Damages can be awarded more than that claimed by the defendant.

 Injunction: it is granted to refrain the party from further

continuing an act.
•Sometimes damages are not enough to compensate the party, the
act which is causing such harm needs to be permanently to be
stopped. It is granted at the discretion of the court.
•
 SURETY BONDS
• Agreement between a tenderer/contractor and a financial institution other than a bank

• Provides a financial guarantee to the principal that the tenderer will fulfill certain

obligations as defined in the bond.

• This guarantee is made provided that the principal will also fulfill the obligations in

return.

• Means of ensuring responsible contract performance and financial security without the

tenderer having to provide funds for guarantee

TYPES OF SURETY BONDS

1. Tender (Bid) Bond

2. Performance Bond
3. Payment Bond
Tender Bond

• Provided as a tender deposit

• Does not guarantee the performance of the contract by contractor.

• financial guarantee provided by a contractor or bidder when submitting

a tender for a construction project or procurement opportunity.

• It is a form of security that demonstrates the bidder's commitment to

the project and their ability to fulfill the contract if they are awarded
the project.
 PERFORMANCE BOND

• Provided as security bond

• Purpose of a performance bond is to protect the project owner from financial loss if the contractor
fails to perform the work as agreed upon in the contract.

• Acts as a form of insurance in case the project is not completed according to the terms and
conditions of the contract.

• It guarantees that the project will be completed according to the contract's terms, quality
standards, and within the agreed-upon timeline.
PAYMENT BOND

• It is a financial guarantee provided by a contractor to ensure that

subcontractors, suppliers, and laborers who contribute to the project will
be paid for their work and materials.

• Ensures that all parties involved in a construction project receive the

compensation they are owed.

• often used in public works or larger private projects.

 INSURANCE

• Provides financial compensation for covered losses to a building or

structure, as many mistakes, errors, and unforeseen events can lead to
damages and losses during the construction of a building.

• Primary function is to transfer certain risks from clients, contractors,

subcontractors and other parties involved in the construction project to
insurers to provide contingent funding in time of difficulty.
• In order to protect the rights and interests of the parties to the
contract, it is usual to require the contractor to insure against such
events or claims.
• Three major areas to be covered by insurance are;
1. Death or injury to employees
2. Damage to works
3. Claims by third parties.
WORKERS COMPENSATION INSURANCE
• Workers’ compensation insurance covers medical expenses and lost wages of
employees when they suffer a job-related injury or illness.
• Construction is a physically demanding industry with a lot of opportunities for
injuries.
• If you or one of your employees were to get hurt on the job and you didn’t have
workers’ comp coverage, you could be held responsible for the resulting medical bills
and lost wages.
• Workers’ compensation insurance protects you, your business, and your employees by
covering those expenses.
• Additionally, employer's liability insurance is included in most workers' compensation
policies and can help pay for employee lawsuits should a worker point to unsafe
working conditions as a reason for their bodily injury.
GENERAL LIABILITY INSURANCE
• Protects against common risks that construction businesses face. These
risks include:
• Third-party property damage
• Third-party bodily injury
• Copyright infringement and other advertising injuries
• Damages caused by your completed construction or installation
• If one of these events occur, the commercial general liability policy would
cover the cost of any medical bills, and any property repair or
replacement costs.
• Because the risk of bodily injury and physical damage to property is much
higher in construction than in other industries, general liability should be
an essential part of your construction insurance coverage.
BUILDER'S RISK INSURANCE
• Builder’s risk insurance also known as course of construction insurance
• Covers the costs of damage done to a building or structure while it’s still under
construction. This damage could be caused by:
• Fire
• Weather
• Vandalism
• While other construction insurance policies protect equipment and people, most won’t
cover an unfinished structure.
• ensure that business isn’t stuck paying for damaged or ruined building materials before
it’s even finished.
• provides peace of mind to both owner and clients, making it a great addition to
construction and contractor insurance bundle.