ssgusic a INTRODUCTION 0.1 THE NATURE OF THE LAW OF CONTRACT ‘The Law of Contract differs from the other branches of law inasmuch as it does not lay down a number ofrights or duties, which the law will enforce but consists ofa number of limiting principles subject to which the parties may create rights and duties for them, which the law wall uphold. ‘The law of contract is said to be the child of commerce. It therefore, developed with the development of commerce and industry in England. The principles of the English Law of Contract were given effect to with minor modifications or changes thought necessary in the Indian Contract Act, 1872 (hereinafter called the Act. A contract involves a minimum of two parties although more than two may be involved. The basic principle of the law is that when one person (promisor) gives a promise or makes an offer and creates reasonable expectation of performance in the mind of the other person (promisee) to whom it was made, the law enforces the promise. This objective theory of contract contradicts the subjective theory. According to the proponent of the subjective theory, the essence of a contract was said to be "the meeting of the wills of the parties; agreement was the outcome of free and consenting minds". The Law of Contract, on the other hand recognizes a promise and ‘ill aid its fulfillment or atleast payment of compensation on ts breach, evenif the parties were ‘manifestly not ad idem. For example, the law recognizes that a binding contract comes into existence when an offer is accepted by post, as soon as the letter of acceptance is posted. However, a letter revoking the offer has no effect until it has been brought to the notice ofthe promisee, Thus it is quite probable that an offer might get accepted when the letter of its revocation is being posted. The contract is valid though no consensus exists in such a case. ‘The English as wel as the Indian law, in fact, adopts neither a wholly subjective nor a wholly objective approach to the question of contractual obligations. To alleviate the difficulty of ‘combining the elements of the subjective and the objectives theories in a definition of contract, the Indian Contract Act simply defines a contract as "an agreement enforceable by law”. The ‘Act, ays down essential requirements of a valid contract and then the various defences, which may be raised. This approach has an advantage in view of the fact that not all defences render contract void or illegal and therefore, not enforceable by either party. In some cases the contract may not be so completely without effect. Itay be voidable, that isto say enforceable at the option of one or more parties but not at the option of the other or others. Freedom of Contract ‘The law of contract is based on the conception that the parties have, by an agreement, created rights and obligations, which are purely personal in nature, that is, are only enforceable by action against the party in default. The law is also based on the political philosophy of the * Anson's Law of Contract, 24th ed... pp5).2 ‘Building and Engineering Contracts eighteenth century namely the concept of human liberty. Every man, it was said, should be free to pursue his own interest in his own way. This resulted in freedom of contract that i to say freedom to contract on whatever terms might seem advantageous to the individual. Freedom to enter into a contract became the comerstone of nineteenth century laissez faire economics. This principle or concept essentially presupposes that the binding contract is a result of individual negotiations. This classical concept of freedom of contract suffers from certain grave weaknesses. Ittakes no account of social and economic pressures, which in many circumstances might virtually force a person to enter into a contract. Thus the idea that a contract is based on mutually negotiated terms is only true ina very restricted sense. Contract of Adhesion Ina great many commercial and other everyday transactions, a common man has rarely a say in finalizing terms ofthe agreement he enters into. Many examples can be cited; for example, when he applies fora ges connection, power connection, or for that matter steps into a bus or train or airplane on a joumey. The very nature and volume of transactions demand that such contracts, be standardized with their terms and conditions drawn in advance. The role ofthe party accepting those terms and conditions is rendered to be that of a consumer requiring signing on the dotted lines. Such contracts, which force one of the two parties to the contract merely to adhere to the printed terms, are called contracts of adhesion or standard form contracts With the increase in the volume of trade and commerce, advancement of technology and engineering, the use of standard form contract has become very common, The construction industry, which isthe second largest in the world being next to agriculture only, remained no exception to this practice. There are a number of standard contract forms in use in the world and in Tndia too. Attempts to rationalize and prepare one standard form applicable to the construction contracts in India have not succeeded. Surprisingly, even the public authority like NHAI, does not have one uniform form of contract for contracts executed on its behalf. Exclusion or Exemption Clauses While none can find fault with the idea and concept of having standard form contracts in trade and commerce, with a view of saving time and money and avoiding possible disputes arising out of the terms being misunderstood, such forms invariably suffer from a serious drawback. The forms are drafted at the instance of one party. At that stage the other party is not involved. ‘The drafters are tempted to insert in the conditions, certain provisions, which exempt that party from the legal liabilities in certain eventualities. Such provisions ae termed exemption clauses or exclusion clauses. These provisions pose a challenge to the judiciary for the reason as follows. Sanctity of Contract ‘The judiciary, world over, generally attempts to hold a contract between parties as a sacred document and tres to give effect to the provisions thereof with the view of giving effect to the intention of the parties, no matter how harsh the terms may be to one party or the other. This principle of dispensation of justice had its origin in the basic belief that an agreement is a bilaterally negotiated document with all the parties having agreed to the terms with their freeIntroduction 3 will, Standard form contracts falsified this basic belief with the result that if effect is given to exception or exclusion clauses, the law to that effect is rendered impotent and injustice will be caused to the innocent party signing the contract on the dotted lines. The judiciary accepted this challenge and found ways and means to avert patent injustice being dispensed to a party seeking its intervention. Itis noteworthy thatin a recent case the Delhi High Court held that the contract clauses in question would be void being violative of S. 23 of the Contract Act ? Reliance was placed on the Apex Court's decision holding that a clause in a contract cannot prevent the award of damages although the same are otherwise payable in law.? 0.2 CLASSIFICATION OF CONTRACTS 0.2.1 Formal and Informal Contracts ‘Where the law requires acontractto be under seal itis called a formal contract. All others are informal contracts. Contracts under seal such as deeds and bonds are instruments which are sealed by the party bound thereby, and delivered to the one to whom the liability is incurred. All deeds are documents under seal but all documents under seal are not deeds; for example, an award of an arbitrator, a company’s Memorandum of Association, ashare certificate, etc. are not deeds. 0.2.2 Express and Implied Contracts Contracts can be classified on the basis of the way in which the consent of the parties is manifested. Contracts are said to be express when the parties state their terms in words. They are said to be implied when their terms are not so stated, as, for example, when a person is permitted to board a bus or enter into a restaurant; from the conduct of the partes the law implies a promise by the person to pay the bus fare or cost of eatables and service received in the restaurant as the case may be. An express contract to last for fixed period, when allowed by the parties to continue beyond the said period as though the contract still bound them even after the stipulated term has elapsed, may result in an implied contract for the extended term. In such a case the Court may infer thatthe parties by their conduct agreed to renew the express contract for a new term. ‘The term implied contract is used in yet another sense to denote a situation in which the law imposes an obligation on one party to pay money tothe other, though there is no semblance of ‘an agreement between them, either express or implied. For example, "A, tradesman, leaves goods at B's house by mistake. B treats the goods as his own. He is bound to pay A for them". Itneeds to be clarified that a contract may be express or implied; the law does not distinguish the same to give legal effect. Thus the difference between the two if any, is of litte importance. 0.2.3 Unilateral and Bilateral Contracts A unilateral contract is one in which only one party is bound and does not mean a contract, made by one party alone. For, as already mentioned, there must be at least two parties to make a valid contract. A bilateral contract, on the other hand, is one in which both the parties are 2 Simplex Concrete Piles (India) Ltd. V. Union of India, 2010 (1) CTLJ 255 (Delhi). 3G, Ramchandra Reddy . Union of India, (2009) 6 SCC 414. “Anson's Law of Contract, 24 ed, Pp.3; (Ilustration under $.70 of the Indian Contract Act).Building and Engineering Contracts bound. Examples of unilateral contracts include an offer of a reward forthe retum of lost property. Bilateral contracts include contracts consisting of reciprocal promises andar by far the most common. 0.3 BUILDING AND ENGINEERING CONTRACTS ‘To builds to construc, erect or make by assembling separate pars or materials an edifice for any ase suchas adveling house, a factory, adam, abridge road, ete. For the purpose ofthis book the meaning assigned othe word "engineering" i limited tothe at of designing, building erecting civil engineering works. The scope of civil engineering itself, however, very wide and includes a large variety of works suchas residential and public buildings, road, bridges, railways, dams, docks, airports, power stations, water supply and drainage schemes, tunnels, eadefenses, land reclamation projects etc. Roughly 40 0 50 percent of India's Five Year Plan expenditure falls within the purview of construction activity. Those who camry ou this colossal ‘work of nation building are engineers, architects, and contractors. 0.3.1 Employer/Owner, Engineer/Architect and Contractor ‘No matter whether the work is public or private, the scheme must, in the frst instance, be setin mmotion by some ndvidal somebody or government department having the necessary capital foray fori. The term EmployedOwner used hereafter inthis bok fers o such ndivigua fr; company or pubic body which nates an finances the work, The word common used this connection s employer” because the person who initiates and finances the projectelly employs all the necessary agencies or organisations forthe execution of the projec. With the advancement of science and technology, increase in trade and commerce and sndustrialization the demand for developmental projects is onthe increase. Ifthe publi authorities ‘were to depend on public funds for executing all such projects, the execution of projects will get delayed The concept of BOT (Build, Operate and Transfer) contract is therefore taking hold. Privat entrepreneur finance certain works likely to generate revenue from end users. They also maintain and operate for amutually greed period and thereafter the projects transferred to the public authority. Individuals orfirms of consulting architects or engineers orby civil engineers in the employment of private and public bodies carry out te design and supervision of civil enginering works ‘The tenm'engineer (which includes architect used inthis book refers othe individual or firms of consulting engineers employed by the owner in order to advise him, negotiate for him, supervise the work and to protect his interest in general. Under most standard form contrac, the engineer also pays therole of deciding dispute between the employer andthe contractorin the first instance. “The term “contractor” is used to designate independent businessmen or companies who enter into a suitable agreement with the owner to shoulder the responsiblity of converting works from the blueprints to realty by organization and execution ofthe contract work. 0.32 Development of a Project Itis obvious that no scheme of appreciable size can be planned in a day. Most schemes take months, or sometimes years, before they each the construction stage. During this period ofIntroduction 5 development the project goes through the following stages: (1) Ifthe owneris an individual ora body witout its own engineering staf, the owner employs an engineer/architectto investigate and plan the project for him. (2) The engined/achitect caries out preliminary investigations, prepares an approximate estimate ofthe cost, and determines the financial feasibility ofthe project. G) Ifthe engineer recommends the project as technically and financially feasible, the owner may give his consent to go ahead with it. Inthe case of public works such an approval is called "Administrative approval", 4) The engineer then undertakes the work of detailed investigations and preparation of drawings, and all other papers containing the data needed to enable th contractors to bid onthe job, All these papers are referred to as_"Tender/contract documents'. (5) Incase the owner is a government department, the detailed plans and estimates have to be checked and. approved by a competent authority. This approvalis called "technical sanction’, (6) When alls set fr the construction of the project, contractors are invite to bid forthe job. ‘The contractors, after making all the business arrangements, submit their offers, which are ‘Known as tenders. The engineer scrutinizes the proposals and recommends a particular tender for acceptance by the owner who then enters into an agreement (the contract’) with the contractor. (7) The contractor sets his organisation into motion to. ‘carry out the project in the most efficient and economic way. 0.3.3 Standard Forms ‘There are many standard forms of building and engincering contracs in use in India. Almost every major Government Department like the Central Public Works Department, the Miltary Engineering Services, the Railways, etc. have evolved special forms for their use. Besides each Sate PWD. lnigation and Power Departmen use theirown fom. Public Secor Undertakings, Municipalities and other Goverment and Semi-government organisations like the State Electricity Boards et, use forms similarto one or the other standard forms, For private works, the Standard Form suggested by the Indian Institute of Architects is generally adopted. Use of comparatively well- drafted forms like LC.E., FLD.LCis common inrecent times in contracts for large projects. Important provisions of these forms requiring interpretation are considered under different chapter headings. 0.3.4 Need for Unified Standard Form as also Change in types of Contract Due tothe vast scope of undertaking massive multi-crore rupees projects in India, a number of companies and firms have grown up and operate nationally and internationally. It is always desirable thatthe engineers and executives of such companies have a thorough knowledge of the conditions incorporated inthe Standard Printed Agreements, There seems tobe no specific reason as to why one uniform standard form cannot be evolved and adopted in India, when for intemational contracts over fifty different countries agree to adopt one uniform standard form. and conditions.6 Building and Engineering Contracts ‘There are, it seems, mainly two causes for non-adopton of on frm forall contrac inthe countryava whole, The fist could be normal human nature to resist change, The se0ond could be the unwillingness to give up seemingly unlimited powers and exemption from liability which the engineer asthe owner's repesentatve gts for himself andthe owner under te a8 ‘id one sided conditions of contract by deliberately closing the eyes and ears to very maby Sdicial pronouncements and wards which have held many such powers and exemptionsto be of no effect. ‘Thee is yet another viewpoint from which the very type of agreements in use deseres be Footed at'These agreements incorporate the seeds of disputes and disagreement right athe time of signing by the partes. The most commonly used type of contract include: (1) Lump sum with or without Bill of Quantities. (2) Item Rate. (3) Percentage Rate. By its very nature each of the above type requires the contractor and the owneso a8 Pk citer the price or rates payablein future based on probable expenditure of executing the works. ‘The past experince shows thatthe consideration so based rarely proves to be realistic. There are many reasons for this. However, the main reasons include: (1) Inaccurate estimate of quantities, changes required to be made inthe designs, drawings and at times in specifications mainly due to inadequate investigation atthe preparatory sta8e- (0) Unprecedented trend of rise in pices of materials, machinery and equipmeh and labour wages making it virtually imposible for any one to make a correct guess of he probable vent of constrction, coupled with the fat tha there has been no satisfactory solution fo york out a reasonable and realistic escalation formula to take care ofthe probable sein cost. (Deliberate unbalancing of tenders by intending tenderers incuthroat competition somehow to gab the contract and then to rely onthe ist rte second factor above, f° make good the probable loss or walk away with a reasonable profit due to sucess ofthe gamble of unbalancing the rates. ‘The real solution to innumerable problems: faced by both the owner and the contracting comnparies the world over would lie in developing and adopting cost plus Pe conti form. STi determined efforts, itis pssibleto evolve a suitable frm for use in executing the pubic works also. wee