Legal system
1. Is your jurisdiction primarily a common law, civil law, customary law or theocratic law jurisdiction? Are the laws substantially derived from the laws of another jurisdiction and, if so, which? What instruments have legal force and effect? Who are the lawmaking bodies? How and where are new laws published? Can laws be passed with retrospective effect?
India
India is primarily a common law jurisdiction. There are certain personal laws based on customary practice that are applicable to some religious communities.
Indian law substantially derives its origin from English law. There are several pieces of legislation that were enacted pre-independence by the Imperial Legislative Council, such as: the Indian Penal Code 1860, the Indian Contract Act 1872, the Evidence Act 1872, etc.
The Constitution of India 1950 adopts a quasi-federal structure. The Seventh Schedule of the Constitution allocates subjects between the Parliament and the state legislature into three lists (ie, Union List, State List and Concurrent List).
The Parliament, the apex legislative body, consists of two houses and is empowered to enact laws on subjects mentioned in the Union List. The state legislature is empowered to enact laws on subjects that are mentioned in the State List. Both the Parliament and the state legislature may enact laws on subjects mentioned in the Concurrent list but in case of a conflict, the law enacted by the Parliament prevails. Laws enacted by the Parliament and the state legislature are valid and binding. In addition, laws pronounced by the Supreme Court of India (judicial precedents) are also valid and binding.
Laws enacted by the Parliament are published in the Gazette of India, whereas laws enacted by the state legislature are published in their respective state gazettes. Apart from criminal legislation, the Parliament as well as the state legislature are empowered to enact laws with retrospective effect. Laws are applicable prospectively, unless specifically mentioned otherwise.
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Contract formation
2. What are the requirements for a construction contract to be formed? When is a "letter of intent" from an employer to a contractor given contractual effect?
India
There are no specific requirements for formation of a construction contract. As per the Indian Contract Act 1872, any agreement that is enforceable by law is a contract. The essential requirements of a construction contract are similar to any other contract under Indian Law – ie, (i) there should be an offer and an unconditional acceptance on part of the employer and contractor respectively, (ii) the parties should be competent to contract, (iii) there must be a valid consideration and (iv) the object or subject matter of the contract should be lawful.
A ‘letter of intent’ is not defined or used under any legislation. However, courts have interpreted it to mean ‘an agreement to enter into an agreement’ and is generally not enforceable, nor does it confer any rights upon the parties. However, a letter of intent may amount to acceptance of the offer resulting in a concluded contract between the parties. The question whether the letter of intent is merely an expression of an intention to place an order in future or whether it is a final acceptance of the offer thereby leading to a contract is a matter that can be decided with reference to the terms of the letter or the conduct of the parties subsequent to the issuance of the letter of intent (State of UP v Combined Chemicals Company (2011) 2 SCC 151).
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Choice of laws, seat, arbitrator and language
3. Are parties free to choose: (a) the governing law of their contract; (b) the law of the arbitration agreement; (c) the seat of the arbitration; (d) any arbitral rules; (e) anyone to act as arbitrator; and (f) the language of the contract and the arbitration? If not, what are the limitations on choice and what happens if the parties act contrary to them?
India
Parties are free to choose the law of the arbitration agreement; the seat of arbitration; arbitral rules; anyone to act as an arbitrator; the language of the contract and the arbitration. Generally, there are no limitations on choice of arbitrator except factors set out in Fifth and Seventh Schedule of the Arbitration and Conciliation Act 1996, that affect the independence and impartiality of an arbitrator. Any person falling under the categories in the Seventh Schedule of the Act would be ineligible to be appointed as an arbitrator, such as: if an arbitrator is a lawyer in the same law firm that is representing one of the parties, a close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties, etc. The grounds stated in the Fifth Schedule of the Act shall determine whether circumstances exist that give rise to justifiable doubts as to the independence or impartiality of an arbitrator. The grounds for challenge to appointment of arbitrators is dealt with in section 12 of the Arbitration & Conciliation Act 1996.
The Arbitration and Conciliation (Amendment) Act 2019 (Amendment Act 2019) proposes certain changes to the procedure of appointment of arbitrators. The Amendment Act 2019 empowers the courts to designate arbitral institutions, which will be responsible for the appointment of arbitrators. The Act provides for the establishment of the ‘Arbitration Council of India’ which will grade these arbitral institutions on the basis of inter alia the quality and calibre of arbitrators. The Amendment Act 2019 further proposes an ‘Eighth Schedule’, which provides for the qualifications, experience and norms for accreditation of arbitrators.
The Amendment Act 2019 has been passed by both the houses of the parliament and received Presidential assent on 9 August 2019. However, the above-mentioned provisions of the Act are not in operation yet, as only limited provisions have been notified.
However, under Indian Law where two Indian parties may choose a foreign seat of the arbitration, they cannot choose to contract out of Indian law and choose a foreign governing law as it would appear to be against ‘public policy’ (see TDM Infrastructure Private Ltd v UE Development India Pvt Ltd 2008 (14) SCC 271). However, no such restriction applies if one of the contracting parties is a foreign entity (see definition of ‘international commercial arbitration under section 2(f) of the Arbitration and Conciliation Act 1996').
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Implied terms
4. How might terms be implied into construction contracts? What terms might be implied?
India
A contractual term may be express or implied. It would depend upon the construction/interpretation of the contract, the nature of the transaction, the surrounding circumstances and also the conduct of contracting parties. An implied term may not be read or interpreted to negate any express terms of a contract and must only come into play in case of a strict necessity.
Courts in India have relatively accorded more weightage to an express term than an implied term while adjudicating contractual disputes. In Nabha Power Limited v Punjab State Power Corporation Limited & Another (2008) 11 SCC 508, which involved a dispute emanating from a construction contract, the Supreme Court has cautioned commercial courts from relying on implied terms in a contract. After having analysed national and international jurisprudence on implied terms, the Supreme Court laid down guidelines in relation to interpretation of implied terms in a contract and affirmed the ‘five condition test’ laid down in BP Refinery (Westernport) Proprietary Ltd v Shire of Hastings 1977 UKPC 13. These include:
- it must be reasonable and equitable to imply terms;
- it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
- it must be so obvious that ‘it goes without saying’ (Officious Bystander Test);
- it must be capable of clear expression; and
- it must not contradict any express term of the contract.
See questions 13 and 14 on implied terms regarding parties obligations to conduct themselves in good faith and fair dealing.
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Certifiers
5. When must a certifier under a construction contract act impartially, fairly and honestly? To what extent are the parties bound by certificates (where the contract does not expressly empower a court or arbitral tribunal to open up, review and revise certificates)? Can the contractor bring proceedings directly against the certifier?
India
There is no specific notion regarding a certifier in construction contracts in Indian law. Therefore, a certifier’s acts and obligations are not regulated by any statute.
Where a person has been engaged by an employer to approve work or make decisions for facilitation and administration of the construction contract, such person would be required to act in accordance with the service contract (between the employer and certifier), and his conduct must accord to principles of fairness and impartiality.
Generally, the construction contract sets out terms governing the certification process, including whether a certificate can be reviewed or challenged by a contractor. No express term is required for a contractor to be able to challenge certificates. Moreover, a tribunal may also call upon further evidence while examining veracity of a certificate. A certificate may be challenged on various grounds, including defects in its contents, dishonesty, patent errors, etc. Any restriction in a contract, preventing contractor from challenging a decision of a certifier would be in violation of section 28 of the Indian Contract Act 1872.
In most cases, there is no privity of contract between the contractor and certifier. Accordingly, a contractor is highly unlikely to be able to proceed against the certifier.
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Force majeure and hardship
9. What events of force majeure give rise to relief? Must they be unforeseeable and to whom? How far does the express or implied allocation of risk under the contract affect whether an event qualifies? Must the event have a permanent effect? Is impossibility in performing required or does a degree of difficulty suffice? Is relief available where only some obligations (eg, to make a single payment or carry out one aspect of the works) are affected or is a greater impact required? What relief is available and does it apply automatically? Can the rules be excluded by agreement?
India
The Indian Contract Act 1872 does not define or enlist situations or circumstances that would qualify as a force majeure event.
Generally, force majeure events are those where performance by the promisor becomes impossible. Construction contracts usually contain a force majeure clause under which specific events are enlisted, for example: floods, sabotage, earthquake, strikes, riots, epidemics, etc. A construction contract would also contain provisions detailing the consequences of such force majeure events and allocation of risks between the parties.
Parties may exclude certain circumstances from qualifying as force majeure events, such as: fluctuations in foreign exchange rates, increase in cost, machinery, equipment, materials, spare parts, fuel or consumables, etc.
If the contract does not contain a force majeure provision, then such an event would be tested as per section 56 of the Indian Contract Act (see question 10). If performance of the contract becomes impossible, the parties would be dispensed from performing it. Mere difficulty to perform would not qualify as a force majeure event and dispense the parties from their obligations under the contract (see question 10).
A force majeure event need not necessarily have a permanent effect as circumstances, such as strikes and riots, have been considered as a force majeure event.
Recently in NTPC v Voith Hydro Joint Venture, 2019 SCC Online Del 9014, it was held that where there exists a force majeure clause in the contract, the parties would be bound by such a clause and would be precluded from relying on section 56 of the Indian Contract Act to escape performance of the contract.
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10. When is a contractor entitled to relief against a construction contract becoming unduly expensive or otherwise hard to perform and what relief is available? Can the rules be excluded by agreement?
India
Section 56 of the Indian Contract Act 1872 stipulates that the underlying contract becomes void, when either:
- the act itself is impossible to perform;
- where by reason of an unforeseeable supervening event beyond the control of the parties, the performance of the contract becomes frustrated.
However, merely because the contract has become unduly expensive, or otherwise hard to perform would not dispense the contractor from performing the contract and discharge him from the obligations and liabilities under the contract. In Energy Watchdog and Others v Central Electricity Regulatory Commission (2017) 14 SCC 80, the Supreme Court held that an unexpected rise in the price of the commodity would not absolve the party to a contract from performing its part merely because the performance had become commercially onerous or unviable.
It is only if there is a change of circumstance that fundamentally alters the entire nature of contract can a party or contractor be entitled to dispense with the performance of the contract. Rules relating to consequences of impossibility to perform can be modified or even excluded by the agreement of the parties.
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Impossibility
11. When is a contractor entitled to relief if after the contract is concluded it transpires (but not due to external events) that it is impossible for the contractor to achieve a particular aspect of the contractual specification? What relief is available?
India
A contract to do an act, which after the contract is made, becomes impossible, or by reason of some supervening event, impossible or unlawful or impracticable, such a contract becomes void as per section 56 of the Indian Contract Act 1872.
Construction contracts generally contain provisions apportioning liabilities between parties in case of impossibility to perform or frustration of the contract. However, if such an impossibility could have been ascertained with reasonable diligence by the contractor, an employer may be entitled to damages and compensation from the contractor. A contractor cannot avoid a contract merely on account of commercial inconvenience. Similarly, if the employer prevents the contractor from performing his part of the contract, the contract becomes voidable and the innocent party is also entitled to damages at the option of the innocent party (see question 16).
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Time bars
15. How do contractual provisions that bar claims if they are not validly notified within a certain period operate (including limitation or prescription laws that cannot be contracted out of, interpretation rules, any good faith principles and laws on unfair contract terms)? What is the scope for bringing claims outside the written terms of the contract under provisions such as sub-clause 20.1 of the FIDIC Red Book 1999 ("otherwise in connection with the contract")? Is there any difference in approach to claims based on matters that the employer caused and matters it did not, such as weather or ground conditions? Is there any difference in approach to claims for (a) extensions of time and relief from liquidated damages for delay and (b) monetary sums?
India
The law on prescription of a time period for notifying and claiming reliefs such as extensions of time, liquidated damages and other damages is not settled.
Indian courts have distinguished between clauses limiting the period to notify a claim and fixing a time period within which the claim is referred to arbitration. There is a line of judgments that have held that any time period stipulated under the contract requiring a contractor to notify the party’s intention to make claims has to be strictly construed. However, there are also judgments wherein a stipulation of such time period have been held to be in violation of section 28 of the Indian Contract Act 1872.
A party’s right to invoke arbitration is likely to be applicable as per the laws of limitation. The Limitation Act 1963 stipulates a three-year limitation period from the date the contract is breached or the cause of action arises.
Some construction contracts permit only certain kinds of disputes to be referred to arbitration. Arbitration clauses that are broadly worded (‘any other matter’ or ‘in connection with the contract’) are likely to be considered wide enough to include related claims within the scope of the arbitration.
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Suspension
16. What rights does the employer have to suspend paying the contractor or performing other duties under the contract due to the contractor’s (non-)performance, or the contractor have to suspend carrying out the works (or part of the works) due to the employer’s (non-) performance?
India
A construction contract generally enlists the obligations of the employer and contractor respectively. In case of non-performance of such obligations, either party may be entitled to suspend or exercise requisite rights stipulated under the contract, after notifying the employer of its intention to do so.
In absence of such a stipulation within the contract and even otherwise, section 53 of the Indian Contract Act, 1872 stipulates that, where a contract consists of reciprocal promises, and one party to the contract prevents the other party from performing his or her obligations under the contract, the contract becomes voidable at the option of the party so prevented and he or she is even entitled to compensation in consequence of the non-performance of the contract. Section 51 of the Indian Contract Act 1872 stipulates that contracts containing reciprocal promises to be performed simultaneously, a promisor need not perform his promise unless promisee shows his willingness to perform his reciprocal promise. Further, under section 54, when a reciprocal promise cannot be performed without the other party performing his or her part, the party who fails to perform, cannot claim reciprocal performance and must make compensation to the other party for any loss suffered due to non- performance. Section 55 of the Act makes the contract voidable at the option of the promisee when the promisor fails to perform the contract within the stipulated time, provided time is the essence of the contract.
In view of the recent amendment to the Specific Relief Act 1963, which mandates that specific performance will be a general rule rather than a limited right, it would be difficult for the contractor to sustain an argument for suspension of works.
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Omissions and termination for convenience
17. May the employer exercise an express power to omit work, or terminate the contract at will or for convenience, so as to give work to another contractor or to carry out the work itself?
India
‘Termination at will or for convenience’ clauses are accepted if expressly agreed by the parties in the contract. Ordinarily, Indian law permits an employer to (i) omit work; and (ii) terminate the contract, only if there exists a valid clause or there exists fundamental or repudiatory breach of the contract. However, in case the employer is unable to demonstrate fundamental breach or repudiation of the contract by the contractor and termination has been effected for no cause, the contractor will be entitled to damages.
In view of the recent amendment to the Specific Relief Act 1963, in case a contractor fails in complying with its obligations, an employer can seek substituted performance, through a third party or by his or her own agency. The employer will be entitled to recover such expenses and costs actually incurred from the contractor.
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Termination
18. What termination rights exist? Can a construction contract be terminated in part? What are the practical and financial consequences?
India
The right to terminate a contract may either be exercised pursuant to the termination provisions in the contract or under the Indian Contract Act 1872. The parties may stipulate certain circumstances that allow either party to terminate the contract. Illustratively, delay in completion of work beyond a certain time limit, abandonment of work, force majeure, liquidation or bankruptcy are some of the grounds, conditions or circumstances contained in a construction contract for which a party may terminate a contract.
There exists no express provision under the Indian Contract Act, 1872 but courts have upheld partial termination of contracts.
In case of a breach of contract or wrongful termination of the contract, the innocent party can seek compensation and damages from the defaulting party, in terms of sections 73, 74 and 75 of the Indian Contract Act 1872. On the other hand, a party rightfully terminating the contract is entitled to compensation for any loss suffered due to the non-fulfilment of the contract. In cases of fundamental breach by the defaulting party and partial termination of the contract thereof, the innocent party is entitled to claim damages for the entire contract (ie, costs incurred on account of the tasks fulfilled as on the date of termination and also for the loss of profit that the innocent party was prevented from realising).
A party’s right to terminate in law has been dealt with in detail in question 19.
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19. If the construction contract provides for the circumstances in which each party may terminate the contract but does not expressly or impliedly state that those rights are exhaustive, are other rights to terminate available? If so, what are they and what are the practical and financial consequences?
India
In addition to circumstances provided in the contract, a party is entitled to terminate a contract pursuant to provisions under the Indian Contract Act 1872.
- Section 19 of the Contract Act 1872, stipulates that, if consent of either of the party has been vitiated by use of coercion, fraud or misrepresentation, such contracts are voidable and the innocent party has the option to rescind the contract.
- Section 39 of the Contract Act 1872 provides that if one of the parties refuses to perform its promise in its entirety, the other party may put an end to the contract.
- Section 53 of the Contract Act 1872 stipulates that when the contract contains reciprocal promises, and one party to the contract prevents the other party performing its part of the contract, such a contract becomes voidable at the option of the party so prevented.
- Section 55 of the Contract Act 1872 provides that in contracts where ‘time is of the essence’, and the party fails to perform the obligations under the contract within the stipulated time, such contracts become voidable at the option of the innocent party.
- Section 56 of the Contract Act 1872, stipulates that if the subject matter of the contract becomes impossible to perform by some unenforceable event, such a contract becomes void.
When a contract is terminated, the parties are under an obligation to restore any benefits received under the contract. The parties may additionally claim damages and compensation that are foreseeable and proximate to the breach of the contract, as provided under to sections 73, 74 and 75 of the Contract Act 1872 (see question 18).
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20. What limits apply to exercising termination rights?
India
Apart from the contractual requirements, there exists no statutory limitations on the exercise of termination rights under Indian Law. However, in some cases, in absence of contractual provisions, Indian courts have regarded serving a reasonable notice period to be mandatory before seeking to terminate a contract.
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Completion
21. Does the law of your jurisdiction deem the works to be completed (irrespective of what the contract says) if, say, the employer takes beneficial possession of the works and starts using them?
India
Construction contracts generally contain provisions governing the terms of take over and completion of works. Most contracts require the contractor to perform all works (including minor issues referred to as punch points) even if the employer takes possession. Even otherwise, merely taking beneficial possession of the work would not amount to a deemed acceptance on part of the employer or deemed completion by contractor.
Employers will have to pay for the value of works taken over. However, employers can still sue for unfinished work and the resultant damages suffered by him (including seeking costs on account of executing the remaining work through a third party).
In any event, the employer may justify the early possession on account its legal duty to mitigate other losses that it could have suffered and separately seek performance of the balance work or seek damages in lieu of the incomplete work.
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22. Does approval or acceptance of work by or on behalf of the employer bar a subsequent complaint? What constitutes acceptance? Does taking over the work by the employer constitute acceptance? Does this bar subsequent complaint?
India
A construction contract generally stipulates the mode of acceptance and approval of work, whereby an employer is required to issue a certificate or sign-off to the contractor confirming acceptance or compliance with the parameters and specifications stipulated under the contract. Further, most contracts also contain clauses in relation to guarantee, warranty, defect liability period and provisions seeking resolution of issues or defects in the work.
In the absence of such clauses, a contractor may argue that acceptance or approval of work bars an employer from raising any subsequent complaint. Unless the employer unequivocally submits or declares in writing that it accepts or approves the works, this argument can be rebutted by the employer. The employer may justify the early possession on account its legal duty to mitigate other losses that it could have suffered and separately seek performance of the balance work or seek damages in lieu of the incomplete work. Accordingly, it would not bar the employer’s remedy to make a subsequent complaint.
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Liquidated damages and similar pre-agreed sums ('liquidated damages')
23. To what extent are liquidated damages for delay to the completion of the works treated as an exhaustive remedy for all of the employer’s losses due to (a) delay to the completion of the works by the contractual completion date; and (b) delays prior to the contractual completion date (in the absence of, say, interim milestone dates with liquidated damages for delay attaching to them)? What difference does it make if any critical delay is caused by the contractor’s fraud, wilful misconduct, recklessness or gross negligence? If so, what constitutes such behaviour and can it be excluded by agreement?
India
Most construction contracts stipulate a fixed amount for each day or week or month of delay, and caps a certain maximum amount. In view of the Supreme Court’s judgment in Kailash Nath Associates v DDA (2015) 4 SCC 136, only a reasonable compensation can be awarded “not exceeding the amount so stated”. Such clauses purport to be the outer limit that may be claimed and the aggrieved party cannot claim any amount beyond the specified amount as liquidated damages.
For delays prior to contractual completion, an employer would be unlikely to be able to recover liquidated damages for losses suffered as a result of delay under section 73 of the Indian Contract Act 1872.
Most agreements carve out exceptions to limitation and exclusion of liability clauses in the form of contractor’s fraud, wilful misconduct, recklessness or gross negligence. While establishing these generally require discharging a high burden of proof, any critical delay caused by the above acts would entitle the employer to unliquidated damages. The principle of ‘fraud vitiates everything’ has been routinely applied by Indian courts. Establishing fraud is highly likely to have a serious impact on the credibility of a party’s case and the resultant award.
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24. If the employer causes critical delay to the completion of the works and the construction contract does not provide for an extension of time to the contractual completion date (there being no "sweep up" provision such as that in sub-clause 8.4(c) of the FIDIC Silver Book 1999) is the employer still entitled to liquidated damages due to the late completion of works provided for under the contract?
India
Generally, if the contractor is able to demonstrate any prevention, obstruction or impediment caused due to the employer, which has the effect of causing critical delay to completion of work, the employer may not be entitled to liquidated damages.
Indian courts have time and again held that a party cannot take advantage of its own wrong. As also held in the case of Mecon Limited v Pioneer Fabricators (P) Ltd 2007 (4) Arb LR 323, that if a party is responsible for the delay, it cannot avail the benefit of the delay.
Further, there have been other instances where high courts have rejected claims arising out of delay to the performance of work, where the employer was responsible for the cause of delay.
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25. When might a court or arbitral tribunal award less than the liquidated damages specified in the contract for delay or other matters (eg, substandard work)? What factors are taken into account?
India
The principles governing liquidated damages in construction contracts has been discussed in the Supreme Court’s judgment in Kailash Nath Associates v DDA (2015) 4 SCC 136.
- A party is required to demonstrate having suffered ‘actual loss’. Where the loss suffered is lesser than the liquidated damages, the court may award damages only to the extent suffered by the employer.
- Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of breach can receive as reasonable compensation such liquidated amount only if the claimant is able to demonstrate that actual loss is proved to have been caused or in cases where it is difficult to establish this, if the amounts may be considered as a genuine pre-estimate of damages fixed by both parties.
- Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated.
- The court is unlikely to award the full amount stipulated in the liquidated damages clause, if the amount is considered to be unreasonable or excessive in the circumstances of the case.
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26. When might a court or arbitral tribunal award more than the liquidated damages specified in the contract for delay or other matters (eg, work that does not achieve a specified standard)? What factors are taken into account?
India
Section 74 of the Indian Contract Act 1872 provides that the party complaining of a breach is entitled to reasonable compensation from the other party not exceeding the amount as stipulated in the contract. Where a sum of money has been provided in a contract as liquidated damages, it is the upper limit beyond which the court cannot grant damages or compensation for the particular type of breach, delay or event contemplated in the provision. Therefore, there is no limitation on general damages for other types of breach.
In most cases, construction contracts provide for exceptions to such limitation of liability clauses (wilful misconduct, fraud, criminal negligence, etc), which is dealt with in questions 31 and 37.
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Assessing damages and limitations and exclusions of liability
27. How is monetary compensation for breach of contract assessed? For instance, if the contractor is liable for a defect in its works is the employer entitled to its lost profits? What if the lost profits are exceptionally high?
India
The fundamental principle governing assessment of monetary compensation is to claim compensation for pecuniary loss that naturally flows from the breach.
Indian courts have distinguished the principles of calculation of damages (ie, reliance costs, expectation losses and mixed claims). In the absence of a specific contractual stipulation, and subject to compliance with the duty of mitigation of losses, an employer may only claim ‘actual loses’ suffered, which arose as a natural and proximate consequence of the breach and award damages proportionate to the actual loss suffered by the party.
While assessing the amount of damages or compensation to be awarded, courts are also guided by the reasonable compensation principle (see question 26). Parties may sue for loss of profits if adequate proof has been tendered to substantiate the claim. To be able to claim loss of opportunity, the party will be required to prove that (i) amounts that are due under the contract or (ii) investments made for the purpose of the contract could have been utilised for some other business to earn reasonable profits (see Bharat Coking Coal Ltd v LK Ahuja, (2004) 5 SCC 109).
In the event that the lost profits claim is exceptionally high, the employer would be required to demonstrate that the contractor was (or would have been) aware while executing the contract of the losses that would have resulted on account of a defect in works. In this regard, the principles set out in the English case of Hadley v Baxendale have been affirmed by Indian courts.
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Amogh Srivastava
28. If the contractor’s work is technically non-compliant, is the contractor liable for remedying it if the rectification cost is disproportionate to the benefit of the remedy? Can the parties agree on a regime that is stricter for the contractor than under the law of your jurisdiction?
India
Construction contracts generally contain provisions whereby an employer has to issue a certificate of satisfaction to the contractor confirming acceptance or compliance with the parameters and specifications stipulated under the contract.
For a contractor’s non-compliant work, an employer may withhold such a certificate and, therefore, withhold payment in lieu of such works. In such a situation, the contractor may be called upon to remedy or rectify the non-compliant work, irrespective of the rectification cost involved. Indian courts have held that the contractor cannot dispense performance of the contract on the ground that the contract has become onerous or difficult to perform.
Parties are free to contractually agree on a stricter regime and apportion or impose liability on either of the parties responsible for non-compliant work. These clauses are generally distinct from liquidated damages clauses and since they are considered penalising in nature, are referred to as penalty clauses. Penalties under a contract may not be enforceable if they are disproportionate or excessive that no prudent person would consider the same as a reasonable assessment of damages arising out of breach. In any event, the employer will still have to demonstrate entitlement to such a penalty by proving ‘actual loss’. Also, see question 10.
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29. If there is a defects notification period (DNP) during which the contractor must or may remedy any defect in its works that appears during a certain period after their completion, if the construction contract is otherwise silent, does it affect the employer’s rights to claim for any defects appearing after the DNP expires?
India
A construction contract generally contains provisions regarding warranties, guaranties and representations. Even after expiry of the defect notification or liability period an employer is normally not precluded from bringing bona fide claims against a contractor in relation to such warranties, guaranties and representations as stipulated under the contract. An employer is not precluded from bringing an action against the contractor even after the issuance of a final acceptance or taking over certificate (see question 22).
In this regard, section 16 of the Sale of Goods Act 1930 stipulates that where goods are sold by description by a seller who deals in such goods, in the absence of agreement to the contrary, there is an implied condition that the goods shall be of merchantable quality. A contractor would be responsible for ‘latent defects’ that render it ‘un-merchantable’ whether the employer has examined them or not, and for all such defects whether latent or discoverable on examination, in cases where the employer has not examined the goods.
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30. What is the effect of a construction contract excluding liability for “indirect or consequential loss”?
India
Only damages that are direct and foreseeable can be awarded. The parties to a construction contract are free to exclude liability for indirect or consequential losses. Parties would be unable to claim damages on account of indirect or consequential losses.
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31. Are contractually agreed limits on – or exclusions of – liability effective and how readily do claims in tort or delict avoid them? Do they not apply if there is fraud, wilful misconduct, recklessness or gross negligence: (a) if the contract is silent as to such behaviour; or (b) if the contract states that they apply notwithstanding such behaviour? If so, what causation is required between the behaviour and the loss?
India
Parties may contractually stipulate to either limit or exclude their liability altogether. Courts in India have strictly construed such limitation or exclusion of liability clauses and are unlikely to go beyond the terms of the contract. However, to date, the judgments in relation to exclusion of liability clauses have not been in relation to disputes emanating from construction contracts.
The exceptions to such exclusion clauses, such as wilful misconduct, fraud or criminal negligence are generally contained in the contractual provisions itself. If a party is able to demonstrate one of the exceptions, the limitation or exclusion clause will not be applicable. In a situation where the contract does not specify exception to the limitation of liability provision, the position under Indian law is unclear as there has been no judicial pronouncement on this.
The principle of ‘fraud vitiates everything’ has been routinely applied by Indian courts. Establishing fraud is highly likely to have a serious impact on the credibility of a party’s case and the resultant award.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
Subcontractors
33. How do conditional payment (such as pay-when-paid) provisions operate under the law of your jurisdiction (including interpretation rules, any good faith principles and laws on unfair contract terms)?
India
Conditional payment provisions, such pay-when paid, are valid and recognised under Indian law. Conditional payment clauses are generally found or contained in ‘back to back’ arrangement. In such contracts, a party (contractor) is required to make payment to another party (subcontractor) after receiving payment from a third party (employer or owner). Though recognised under Indian law, such clauses are not often relied in most agreements and are not a common industry practice.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
34. May a subcontractor claim against the employer for sums due to the subcontractor from the contractor? How are difficulties with the merits and proof of the subcontractor’s claim addressed, including any rights the contractor has to withhold payment? What if aspects of the project suggest that the law of your jurisdiction should not apply (eg, the parties to both the main contract and the subcontract have chosen a foreign law as the governing law)?
India
Construction contracts usually contain provisions whereby it is specifically provided that the employer will not be liable towards any action or claims brought by a sub-contractor.
Further, as a general rule, two persons cannot, by any contract impose contractual liabilities upon a third party. As per the law on privity of contract, a sub-contractor normally has no right to institute actions against an employer as no cause of action can be said to arise against an employer. Therefore, a sub-contractor will not be successful in bringing a claim against the employer for sums due to the sub-contractor from the contractor.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
35. May an employer hold its contractor to their arbitration agreement if their dispute concerns a subcontractor (there being no arbitration agreement between the contractor and the subcontractor or no scope for joining two sets of arbitral proceedings) or can the contractor, for example, require litigation between itself, the employer and the subcontractor? Does it matter if the arbitration agreement does not have its seat in your jurisdiction?
India
Ordinarily, in a construction contract, a sub-contractor is appointed by the Contractor and owes its duty towards the contractor.
An employer can bring a claim or invoke arbitration against the contractor for loss suffered by it due to the act of a sub-contractor pursuant to the underlying arbitration clause in the contract. The absence of an arbitration agreement between the contractor and sub-contractor would not affect the employers right to invoke arbitration and claim damages or compensation from the contractor. The contractor cannot seek to avoid arbitration and foment litigation between the employer and the sub-contractor as he would be bound by the arbitration clause in the underlying contract. Under section 8 of the Arbitration and Conciliation Act 1996, if an action is brought in a matter that is subject matter of an arbitration agreement, the courts are duty bound to refer the parties to arbitration.
The contractor’s remedy in such cases is to invoke the arbitration clause in the sub-contract agreement and claim damages or indemnification in relation to the breaches by the sub-contractor. In the absence of an arbitration agreement, a contractor can still sue a sub-contract and recover damages (without the employer being a party to it) by filing a suit.
If a contract refers to a document and provides that the said document shall form part and parcel of the contract, or that all terms and conditions of the said document shall be read or treated as a part of the contract, or that the contract will be governed by the provisions of the said document, or that the terms and conditions of the said document shall be incorporated into the contract, the terms and conditions of the document in entirety will get bodily lifted and incorporated into the contract, MR Engineers and Contractors Pvt Ltd v Som Datt Builders Ltd (2009) 7 SCC 696.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
Third parties
36. May third parties obtain rights under construction contracts? How readily can those connected with the employer (such as future or ultimate owners) bring claims against the contractor in respect of (a) delays and (b) defects? To what extent are exclusions and limitations of liability in the construction contract relevant?
India
Indian law recognises the principle of privity of contract, whereby a third party/stranger does not have any rights under the contract. An assignee or successor to a contract may, after it has stepped into the shoes of the previous entity, obtain rights under the construction contract.
However, Indian law bars transfer of a mere ‘right to sue’.
Recently, where several parties were involved in a single commercial project executed through several interconnected agreements, the Supreme Court of India in Ameet Lalchand Shah and Others v Rishabh Enterprises, held all parties to be bound by the arbitration clause in the main agreement. This is in view of the principles laid down in a previous Supreme Court judgment of Chloro Controls India Private Limited v Severn Trent Water Purification Inc. and others (2013) 1 SCC 641 (and amendment to section 8 of the Arbitration & Conciliation Act 1996). The court in Chloro Controls stated that an applicant seeking reference of disputes to arbitration can either be a party to the arbitration agreement or any person claiming ‘through or under’ such party. Thus, by referring contesting parties to arbitration, Indian courts are now readily adopting pro-arbitration approaches.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
37. How readily (absent fraud, wilful misconduct, recklessness or gross negligence) can those connected with the contractor (such as affiliates, directors or employees) face claims in respect of (a) delays (b) defects and (c) payment? To what extent are exclusions and limitations of liability in the construction contract relevant?
India
Under Indian law, a contractor (company) is recognised as a separate legal entity as distinct from its members such directors, employees or affiliates. A company under Indian law is capable of suing and being sued in its own name.
Any person who is not a party to the underlying construction contract cannot face any liabilities emanating therefrom. Therefore, affiliates, directors or employees of a company would not be held liable for any civil consequence for delays, defects, absent any personal undertaking, guarantee or any other agreement.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
Limitation and prescription periods
38. What are the key limitation or prescription rules for claims for money and defects (and insofar as you have a mandatory decennial liability (or similar) regime, what is its scope)? What stops time running for the purposes of these rules (assuming the arbitral rules are silent)? Are the rules substantive or procedural law? May parties agree different limitation or prescription rules?
India
The governing law with respect to limitations and prescription rules is the Limitations Act, 1963 which is a procedural law. The Schedule attached with the Limitation Act 1963 provides for varying periods of limitation for different kinds of suits, claims and applications. If not expressly provided under the Schedule of the Limitations Act 1963, generally the limitation period would start running from the date of accrual of cause of action or when the actual breach of contract occurs. For money suits, the Schedule of the Limitations Act prescribes a time period of three years from the date on which the cause of action arises.
Section 43 of the Arbitration and Conciliation Act 1996, provides that the Limitation Act 1963 also applies to arbitral proceedings. In the context of computing limitation for arbitral proceedings, section 21 of the Arbitration and Conciliation Act, 1963, provides that the arbitral proceedings in respect of a particular dispute commences on the date on which a request for that dispute being referred to arbitration is received by the respondent/party against whom the claim is sought. Therefore, when a party to a dispute, invokes the arbitration clause and sends a letter invoking and referring the disputes to arbitration, the period of limitation would start running from the date of receipt of such letter by the respondent.
Section 22 of the Limitation Act also stipulates that in case of a continuing breach of contract, fresh period of limitation begins to run at every moment during which the breach of contract continues or reoccurs.
The period of limitation stops running when there is an admission or acknowledgment of liability. Further, such an acknowledgment must be in respect of a contractual right, must be made before expiry of the limitation period, and should be in writing and signed by the party against whom such right is claimed.
For the question as to whether parties can agree to a different limitation period in the contract (see question 15).
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
Other key laws
39. What laws apply that cannot be excluded or modified by agreement where the law of your jurisdiction is the governing law of a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?
India
When the governing law of the contract is Indian law, there are a number of laws or legal provisions that cannot be excluded or modified by way of an agreement between the parties. The scheme of the Indian Contract Act, 1872, is such that it allows parties to incorporate any incident or event that is not contrary to or inconsistent with any provision of the Act. There are various provisions under the Contract Act, which specifically mention ‘in absence of a contract to the contrary’ or ‘unless otherwise provided’. When a provision under the Contract Act, does not contain such a stipulation, it would not be open for the parties to contract out or exclude the applicability of such a provision.
Lastly, courts are also permitted to examine certain clauses if they are proved to be unconscionable, unfair and unreasonable. However, courts rarely exercise their discretion in this regard.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
40. What laws of your jurisdiction apply anyway where a foreign law governs a construction contract? What are the key aspects of, say, the FIDIC Silver Book 1999 that would not operate as its plain words suggest?
India
When governing law of the contract is foreign law, certain Indian laws continue to apply to such contracts. Parties are entitled to approach Indian courts for interim reliefs and can also take court’s assistance in taking evidence.
Such reliefs have been laid down in section(s) 9 and 27 of the Arbitration and Conciliation Act 1996 (with 2015 amendments) respectively.
Additionally, other aspects of a construction project relating to Industrial Disputes Act 1947, Factories Act 1948, environmental law compliances, Workmen Compensation Act 1923 and other labour law legislation will have to be followed.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
Enforcement of binding (but not finally binding) dispute adjudication board (DAB) decisions
41. For a DAB decision awarding a sum to a contractor under, say, sub-clause 20.4 of the FIDIC Red Book 1999 for which the employer has given a timely notice of dissatisfaction, in an arbitration with its seat in your jurisdiction, might the contractor obtain: a partial or interim award requiring payment of the sum awarded by the DAB pending any final award that would be enforceable in your jurisdiction (assuming the arbitral rules are silent); or interim relief from a court in your jurisdiction requiring payment of the sum awarded by the DAB pending any award?
India
Generally, decisions by DAB or similar adjudicatory bodies are not binding. However, a contractor may request for payment of such amount by the employer based on DAB’s decision, in order to enable continuation of performance of contract, or upon lapse of period stipulated for challenging DAB decision.
An arbitral tribunal or court, in view of the facts and circumstances, may make a partial or interim award directing payment of the sum awarded by a DAB. The tribunal or court is likely to be persuaded by the DAB’s decision only if decision is just, fair, reasonable and does not violate the principles of natural justice. Such an order is normally subject to a bond or bank guarantee being furnished by the contractor in the event the employer is ultimately successful in the final award.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
Courts and arbitral tribunals
42. Does your jurisdiction have courts or judges specialising in construction and arbitration?
India
India does not have specific courts or judges specialising in construction arbitration. However, the commercial courts Act 2015 has established commercial courts/commercial divisions in a high court having original jurisdiction, which are empowered to adjudicate commercial disputes including disputes arising out of a construction contract. The judges presiding over such commercial courts are generally experienced/well conversant in handling commercial disputes.
Further, pursuant to the Specific Relief (Amendment) Act 2018, certain civil courts are to be designated as special courts, which will deal with suits filed under the Specific Relief Act in respect of contracts relating to infrastructure projects. However, to date, no state has constituted a special court for infrastructure projects.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
43. What are the relevant levels of court for construction and arbitration matters? Are their decisions published? Is there a doctrine of binding precedent?
India
Indian law recognises the doctrine of binding precedent. The highest judicial authority is the Supreme Court, followed by each state’s high court and the lower district level courts. The decisions of the Supreme Court are binding on all high courts and district courts.
The relevant levels of court for construction disputes are the district court and the high court. However, jurisdiction of such courts would depend upon the pecuniary and territorial limits of the court, and on whether the high court concerned has original jurisdiction or if the concerned state government has notified the constitution of commercial courts under the Commercial Courts Act 2015.
There are four high courts that have original jurisdiction namely Delhi, Bombay, Madras and Calcutta. If one of the contracting parties to the construction dispute is a foreign entity, then it would fall under the definition of an ‘international commercial arbitration’ and all related litigation would be amenable to the jurisdiction of the Commercial Division of the high court concerned.
The levels of court involvement in construction disputes between Indian parties depends on the value of the dispute. Where the value in dispute exceeds the pecuniary value for original jurisdiction of a high court, such litigation would be amenable to the jurisdiction of the Commercial Division of the concerned high court. Any other related litigation would be amenable to the jurisdiction of the Commercial Court (District Court) exercising territorial jurisdiction.
Appeals arising out of decisions of commercial courts or commercial divisions of a high court would lie before the commercial appellate courts or commercial appellate divisions respectively constituted under the Commercial Courts Act 2015, which courts are constituted within each state’s high court.
Decisions passed by the division bench of each state’s high court may be appealed to the Supreme Court of India. The decisions of all major district courts, all high courts and the Supreme Court are published and available in the public domain.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
44. In your jurisdiction, if a judge or arbitrator (specialist or otherwise) has views on the issues as they see them that are not put to them by the parties, can they raise them with the parties? Is the court or arbitral tribunal permitted or expected to give preliminary indications as to how it views the merits of the dispute?
India
Under the Arbitration and Conciliation Act 1996, an arbitrator is not empowered to raise its views, which are unrelated to the pleaded case of the parties.
A party is entitled to refer disputes to the tribunal and raise new issues by either seeking amendment of its pleadings or by contending that the pleadings covers the said issue. Where neither party raises a new issue, a court or an arbitral tribunal cannot make out a new issue not pleaded by the parties.
The court or the tribunal is not expected to give preliminary indications as to how it views the merits of the dispute. However, the court or tribunal may, during the course of hearing, indicate its preliminary thoughts on the merits of the dispute. This cannot be relied upon by the parties as having binding value.
In fact, while dealing with applications for interim relief or court’s assistance in taking evidence, courts often clarify that its views ought not to be taken as a comment on the merits of the dispute and that the tribunal ought to arrive at its findings uninfluenced by the court’s observations.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
45. If a contractor, say, wishes to arbitrate pursuant to an arbitration agreement, what parallel proceedings might the employer bring in your jurisdiction? Does it make any difference if the dispute has yet to pass through preconditions to arbitration (such as those in clause 20 of the FIDIC Red Book 1999) or if one of the parties shows no regard for the preconditions (such as a DAB or amicable settlement process)?
India
In the case of a binding arbitration clause or agreement between the parties, any parallel court proceedings brought by the employer would be limited to matters where the court has power to make orders in relation to the arbitration proceedings, such as: assistance in taking evidence, preservation of evidence, interim relief, enforcement of interim and final award, etc.
The court is bound to refer the parties to arbitration if any action is brought by the employer which is the subject matter of an arbitration agreement. However, an employer may file a civil suit in the appropriate court, in relation to a subject matter not covered by the arbitration agreement or which is not within the purview of the arbitration clause or which as per law, is not arbitrable.
There are divergent opinions expressed by different high courts regarding mandatory compliance or adherence to pre-arbitral steps before invoking arbitration and the same is not a settled position of law. However, the Supreme Court in Demerara Distillers Pvt Limited v Demerara Distiller Limited (2015) 13 SCC 610, held, that once parties are at dispute and have insisted reference to arbitration, the relegation of parties to any pre-arbitral mechanism will be an empty formality and resort thereto, is not mandatory.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
46. If the seat of the arbitration is in your jurisdiction, might a contractor lose its right to arbitrate if it applied to a foreign court for interim or provisional relief?
India
It is highly unlikely that in an Indian seated arbitration, a contractor will lose its right to arbitrate, if it applied to a foreign court for interim or provisional relief.
However, as per the Arbitration and Conciliation Act 1996, Indian courts have jurisdiction to pass interim or provisional relief even where the seat of arbitration is located abroad.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
State entities
48. Summarise any specific limitations or requirements that apply when the employer is a state entity or public authority (including, for example, public procurement rules, limits on rights to suspend or terminate, excluded lien rights and arbitrating – as well as enforcing an award – against such an employer).
India
Generally, contracts with government authorities or state corporations go through a rigorous tendering process. These tenders often require a technical and commercial bid. These tenders are subject to the writ jurisdiction of high courts where prospective bidders may exploit to have their bid considered.
Projects of national interest ordinarily may not be suspended or terminated on account of contractual restrictions mandating continuation of works irrespective of disputes having arisen. Further, the recently amended Specific Relief Act has deemed that specific performance of an agreement is a matter of rule instead of being an alternative. Thus, any attempt to suspend or terminate infrastructure projects (where the employer is a state or public authority) is susceptible to challenge.
Most state entities or public authorities are corporations that may enter into transactions at arm’s length basis. Therefore, arbitrations are akin to any other commercial arbitrations.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
Privilege
50. Does the law of your jurisdiction recognise "without prejudice" privilege (such that "without privilege" communications are privileged from disclosure)? If not, may it be agreed that a sum is payable if communications to try to achieve a settlement are disclosed to a court or arbitral tribunal?
India
In view of section 23 of the Indian Evidence Act 1872 a party is not entitled to produce documents that have been marked “without prejudice”. Courts have often held that documents marked “without prejudice” are not to be used against the party issuing the same. These are generally considered part of a settlement process and not susceptible to indicate the merits of a party’s claim.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
51. Is the advice of in-house counsel privileged from disclosure under the law of your jurisdiction? Is the relevant law characterised as substantive or procedural law?
India
Privileged and professional communications are dealt with under the Indian Evidence Act 1872. As per section 126, a barrister, attorney, pleader or vakil is not permitted to disclose communications that were obtained in the course and for the purpose of professional employment.
Generally, an in-house counsel is not recognised as a barrister or attorney or pleader or vakil. However, in terms of recent judgments of high courts, a party may refer to section 129 and successfully claim that it cannot be compelled to disclose communications between its legal professional adviser, and that privilege under section 129 extends to communication with those legal advisers working within the organisation.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
Guarantees
52. What are the requirements for a guarantee under the law of your jurisdiction? Are oral guarantees effective?
India
A ‘contract of guarantee’ has been dealt with under section 126 of the Contract Act 1872, whereby the ‘surety’ promises or undertakes to discharge the liability of the ‘principal debtor’ against the ‘creditor’, in the case of a default by the principal debtor. Anything done, or any promise made for the benefit of the principal debtor is sufficient consideration for a contract of guarantee. A guarantee contract presupposes the existence of a separate obligation which the principal debtor owes to the creditor and thus the liability of a surety is triggered only upon failure by the principal debtor.
A contract of guarantee can be wholly written, wholly oral or partly written and partly oral under the Indian law.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
53. Under the law of your jurisdiction, will the guarantor’s liability be limited to that of the party to the underlying construction contract, if the guarantee is silent? Can the guarantee’s wording affect the position?
India
Section 128 of the Contract Act 1872 provides that a surety’s liability is co-extensive with that of the principal debtor, unless otherwise provided by the guarantee. Thus, the liability of a surety is limited to that of the principal debtor unless otherwise agreed between the parties, under the contract of guarantee.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
54. Under the law of your jurisdiction, in what circumstances will a guarantor be released from liability under a guarantee, if the guarantee is silent? Can the guarantee’s wording affect the position?
India
Unless otherwise agreed in the underlying construction contract or the guarantee contract, sections 133–155 and 139 of the Contract Act 1872, provide for circumstances under which a surety may be discharged from the performance of the guarantee contract. A surety may be discharged, if:
- any variance is made in the terms of the contract between the creditor and principal debtor without the surety’s consent;
- the principal debtor is released of his or her liability under the contract by an act or omission of the creditor;
- the creditor compounds with the principal debtor or promises to give time to, or not to sue the principal debtor; and
- the creditor does any act or omits to do any act that is inconsistent with the right of the surety and that impairs the surety’s remedy against the principal debtor.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
On-demand bonds
55. If an on-demand bond is governed by the law of your jurisdiction on what basis might a call be challenged in your courts as a matter of jurisdiction as well as substantive law? Assume the underlying contract is silent on when calls may be made.
India
Generally, contractors are required to furnish unconditional and irrevocable bank guarantees as per the construction contract.
Courts seldom prevent the encashment of bank guarantees. Matters relating to territorial jurisdiction are generally specified in the bank guarantee itself or the construction contract. A contractor may approach the courts concerned seeking an injunction on the invocation or encashment of a bank guarantee.
As long as the invocation of the guarantee is in line with the terms of the guarantee, the general rule is that the invocation of unconditional bank guarantees should not be interfered with. The following exceptions have been recognised in Indian law:
- Fraud – the law relating to fraud as an exception was first elaborated in UP State Sugar Corporation v Sumac International Ltd, AIR 1997 SC 1644 wherein the court held that “the fraud pleaded must be of an egregious nature so as to vitiate the entire underlying transaction of the Bank Guarantee.”
- Irretrievable injustice – the Supreme Court, time and again, in cases such as UP Coopertive Federation Limited v Singh Consultants and Engineers (P) Limited AIR 1988 SC 2239 and Dwarikesh Sugar Industries v Prem Heavy Engineering Works (P) Ltd AIR 1997 SC 2477 has held that the irretrievable injustice should be of serious nature that the party is not able to reimburse itself and is not able to reclaim its loss.
- Special equities – the third exception of special equities is nothing but a carve-out of the exception of irretrievable injustice. The Court in UP State Sugar Corporation v Sumac International Ltd AIR 1997 SC1644 held that the special equities claimed must meet a similar high threshold of irretrievable injustice. The special equities need to be of a gross nature that leaves the party remediless.
However, when the bank guarantee is a conditional guarantee, the employer does not have an unfettered right to invoke it.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
56. If an on-demand bond is governed by the law of your jurisdiction and the underlying contract restrains calls except for amounts that the employer is entitled to (such as sub-clause 4.2 of the FIDIC Red Book 1999), when would a court or arbitral tribunal applying your jurisdiction’s law restrain a call if the contractor contended that: (i) the employer does not have an entitlement in principle; or (ii) the employer has an entitlement in principle but not for the amount of the call?
India
Generally, contractors are required to arrange for unconditional bank guarantees as part of their obligations under the construction contract. Most construction contracts do not restrain an employer’s ability to call these guarantees.
Indian courts have time and again held that a bank guarantee is a separate and independent agreement between the beneficiary and the creditor. The terms of a construction contract are rarely read while interpreting the terms of the bank guarantee, unless the bank guarantee specifically refers to or incorporates the terms of the construction contract.
As noted in question 56, only three exceptions have been carved out to the general rule that the invocation of unconditional bank guarantees should not be interfered with.
Answer contributed by
Binsy Susan,
Akshay Sharma and
Amogh Srivastava
