PROGRAMME

ON

“CONTRACT MANAGEMENT”
 CONTENTS

Page No.

1. Legal History of Contracts

05

2. Towards Contract Offer

32

3. Engineering Contracts and Contract Management

36

4. Taxes and Duties

73

5. Negotiations
80

6. Bank Guarantees
86

7. Time Schedule and Liquidated Damages

91

8. Insurance Aspects
97

9. Letter of Credit
105

10. Standard Price variation

109

11. Arbitration
115

12. Cost over run – Time over run

121
13. Legal Terms Versus Engineering Terms
128

14. Landmark Judgments – Citation

141
 1. LEGAL HISTORY OF CONTRACTS

100EVOLUTION OF LAW OF CONTRACTS

1.0 India is an ancient country with a civilisation and culture back ground of its own
which is distinct from European and even other Asian States. But its modern
development as a constitution is mainly due to its contact with Europe. The
events which led India to come into contact with Europe is due to the capture of
Constantinople and the discovery of the New World. The Cape of Good Hope
opened a new chapter in the history of Europe. The enterprising merchants of
Europe opened up the trade with the East as well as of the West. In 1499
VASCO DA GAMA, a Portuguese, landed at Calicut on the Malabar coast, which
can be said to be a prelude to the establishment of the Portuguese Empire in the
East. The Portuguese began to trade with India. Then the Dutch, the English and
the French followed the Portuguese in establishing trade with India. The power of
the Mughal Empire was at its Zenith when trade centres were first established in
India by the merchants of Europe. Purely commercial interests prevailed in their
trade in India. But, there arose keen competition between the merchants of the
European States in India due to large volume and many richness available. The
competition became very perilous and it came to be backed by armed forces.
Hence chartered companies came into existence to meet the situation. In India
also, the power of the Mughal Empire declined in the eighteenth century and in its
place nobles and chiefs came to establish separate kingdom. Major part of India
under one great Mughal Empire came to be divided into several small contesting
principalities. This created a golden opportunity for the merchants of Europe to
establish themselves firmly in India.

1.1 Slowly the Britishers took possession of land needed for the trade storage space
for goods
inward and outward. Later slowly enlarged it for then own universal trade
operations, by the same time, the trade by Dutch, French and Portuguese declined.
The Britishers took over large trade measures. Towards this enlarged trade
operations, they acquired lands and later created British Empire in India.

2.0 Queen Elizabeth-I granted to some London merchants a charter of incorporation

on the
last day of December, 1600. This charter of 1600 created a trading company.

2.1 The company carried its business on democratic lines. The company started
acquiring
Lands, property and all these are to be properly governed and suitably
administrated. The charter further granted legislative power to the company to
make laws, orders and regulations for the good government of the company and
its servants and to punish offences against them by fine or imprisonment
according to law status and customs of the realm.
3.0 The Charter of 1661. Under the Charter of 1661, the company was
authorised to
appoint Governors and Councils in its settlements. A general judicial
authority was given to the Governor and Council of each factory. It granted
the judicial power to the Governor and Council of a factory which meant the
Executive Government of the place. There was however, no line of
demarcation between the executive and judiciary. It paved the way for the
administration of justice according to English Law.

3.1 Thereafter, the principal role in the Indian scene was played by three Presidency,
viz., Mumbai, Chennai and Calcutta.

3.2 Then the English company entered into a treaty with the Mughal Emperor. The
treaty was the turning point in the legal history of India. Bu the said treaty, the
English Company secured the following privileges:

1. The disputes amongst company’s servants will be regulated by their own

tribunals.

2. The English people will enjoy their own religion and laws in the administration of
the company.

3. The local native authorities will settle such disputed cases in which English and
Hindus or Muslims were parties.

4. The Mughal Governor or Kazi of the relevant place will protect the English
people from all sorts of oppression and injury.

3.3 In 1716, Courts of Judicature consisting of the Chief Justice, five English and four
Indian Judges respectively in various communities were established. They were
required to administer justice according to caste, customs, orders of the company
and the Laws of England. In 1726, Letters Patent were granted by George-I
which created for the first time Crown Courts in the three Presidencies of
Mumbai, Chennai and Calcutta on a uniform and permanent basis. It also
established Municipal corporations in the three Presidencies. The Municipals
consisted of a Mayor and nine Aldermen. Seven of the Aldermen and the Mayor
to be English. The Mayor and Aldermen constituted a Court which was known as
Mayor’s Court in the Presidency Towns.

4.0 PLAN 1772

4.1 The of Circuit prepared the first judicial plan on August 15, 1772. The same was
the first step to regulate the machinery of administration of justice. The plan was
a land mark in the judicial history of India and the same became famous as
Warren Hasting’s Plan of 1772.
4.2 The judicial plan of 1772 was the first of its kind for the administration of justice
within the framework of the country. Warren Hastings amply exhibited his desire
to promote impartial and less expensive justice.

4.3 The new plan was thus designed to provide for the first time after long years, a
semblance of justice, to the people and save them from exploitation in the name
of justice.

4.4 Certain changes in the Judicial Plan of 1772 was needed and it was through
Regulating Act of 1773 these changes were enacted. Then, Supreme Court of
India was first established at Calcutta. This regulating act eliminated the ills and
evils of the judicial plan of 1772.

4.5 Subsequent to this, certain reforms and changes were called for due to certain
specific cases like trial of Radha, Churan, execution of Raja Nand Kumar, Patna
Case and Cossijurah’s Case. Due to these things and certain representations an
Act of Settlement was reached in 1781 by the then British Parliament. By this
act, the judiciary and administrative measures had been clearly defined and
formulated to act independently.

5.0 It was Lord Cornwallis, who made a remarkable and highly constructive
reforms which formed the basis for the development of legal history and theory
besides, large contributions of LORD WARREN HASTINGS. It was really
LORD CORNWALLIS who had given a deep thought to the Mohammedan Law
prevailing at that time and made lot of reforms by creation of separate judicial and
revenue functions, reorganisation of Civil Courts, formation of Municipal Courts
and Registrar’s Courts. It was, further, he who realised the importance of need
for, to a well organised and regulated Provincial Courts and need for Professional
Lawyers. He introduced further modifications in 1790. It could, easily therefore,
be said LORD CORNWALLIS land the foundation for the legal and judiciary
systems in India.

5.1 The successive British General who held high esteemed office during the
erstwhile British period modified and developed, by studying the weaknesses in
the system created by LORD WARREN HASTINGS and LORD CORNWALLIS
and later the formation of Central Government, Central Legislative, Local
Governments, Local Legislative, relations between Central and Provinces, Indian
financed, defence, frontier relations, administrative and political relations,
judicial and legal system in the services, formation of Indian Civil Services and
establishment of High Courts were followed one after another, keeping in view
the needs of the people and prevailing conditions at that time.

5.2 The successive Law Commissions established during various periods further
improved the system and First Law Commission headed by Lex Loci, prepared
draft Penal Code, draft, Code, draft, Code of Civil Procedure and draft Law of
 Limitation, Law of tort, Law of crime. Later, Indian Civil, Indian Police Service,
Indian Forest Service, Indian Engineering Service, Indian Educational Service,
Indian Medical Service, Indian Agricultural and Veterinary Service, Public Works
Department, Railway Board, Post and Telegraphs, Customs Services were created
to serve the needs of the society.

6.0 The Law of Contracts was also enacted during the period 1872. It is called
INDIAN CONTRACT ACT 1872, exclusively to deal and regulate the
commercial business transactions between parties to the contract.

101INDIAN CONTRACT ACT 1872

1.0 Every person living in any State in the Country is governed by Law of that state.
The enactment of the various laws is the outcome of the necessity of regulating
their dealings, habits, convention, culture, customs, rights, duties etc. of the
people and to establish the society towards the needs and demands growing day
by day. The object of law relating to contract is to regulate the dealings between
individuals, between individual and company, between companies and so on
between two different parties. Before the proper codification of the law on this
subject, dealing between the parties as stated above, were governed on the basis
of customs, conventions, precedents and the usage of the religion. Towards the
contracting parties along with the growth of society, advancement of civilisation,
science and technology, the codification of the law relating to dealing with these
matters became an absolute necessity. Parties become aware of their needs,
obligation rights etc. in the deals between them. In order to achieve this
objective, the State thought it necessary and imperative towards the law
government these dealings between the persons concerned in certain uniform way
and accordingly enacted the law which is called “ LAW RELATING TO
CONTRACTS” and in India it is mainly incorporated in THE INDIAN
CONTRACT ACT 1872. Thus the Indian Contract was born in 1872. In short it
is defined and described as under.

1.1 According to the ordinary meaning attached to the word contract, all agreements
made by persons are contracts. But it is not so according to Law related to
contracts. According to the definition of ‘Contract’ maintained in the law of
contracts, only those agreements are contracts which are enforceable in law,
having made with the free consent of the parties, by person, competent to contract
with each other for a lawful consideration and lawful object and which are not
expressly declared to be void by stature. This is subject to any special law
according to which a contract should be in writing attested by witnesses and
registered under the law of reputations in force from time to time.

A knowledge is essential for the executive in the Contracts /

Purchase / Sales
Department on all these important legal acts namely:
 The Indian Contract Act 1872
The Sale of Goods Act 1930
The Arbitration Act and
Conciliation Act 1996
The Limitation Act 1963

2.0 A contract has been defined as an agreement enforceable in law. In order to

constitute as agreement, there must be a proposal and an acceptance to the
proposal. For such an agreement to become legally binding and result in a valid
contract, it is essential that -

there must be free consent to the parties concerned

parties must be competent to contract
there must be a lawful consideration
the object must be lawful
the agreement must not be expressly declared to be void
the agreement must comply with the provision of any law requiring it to
be in writing or attested or registered.

A valid binding contract originated from an offer given by a person who signifies
to any other his willingness to do or to abstain from doing anything with a view
to obtaining the assent of the other to such act or abstain, which is called a
proposal. When a person to whom the proposal is made signifies his assent in
toto the proposal is said to be accepted. A proposal when accepted becomes a
promise. The person making the proposal after its acceptance of the offer by the
other, is called the promisor and the person accepting the proposal is called the
promisee.

Every promise has a consideration

All these are built in the Indian Contract Act – 1872 which has 10 clear chapters
with 238 different sections.
2.1 The Indian Contract Act, 1872
It contains 238 sections under 10 Chapters out of which Sections 76 – 123 of
Chapter VII is taken out and Sale of Good 1930 enacted.
The most important sections of the Contract Act 1872 which are essential, are
noted below:

Section Chapter Items

10 II What agreements are contracts
11 II Who are competent to contract
37 IV Obligations of parties to contract
40 Person by whom promise is to be performed.
50 Performance in manner of at time prescribed of sanctioned
by promise.
 51 Premised not bound to perform unless reciprocal promise
ready and willing to perform.
52 Order of performance of reciprocal promises.
53 Liability of party preventing event on which contract is to
take effect.
54 Effect of default as to the promise which should be
performed in contract consisting of reciprocal promises.
55 IV Effect of failure to perform at fixed time in contract in which
time is essential.
67 Effect of neglect of promises to afford premised reasonable
facilities for performance.
73 VI Compensation for loss or damage caused by reach of
contract.
74 Compensation for breach of contract where penalty stipulated
fer.
126 VIII Contract of guarantee surely principal debtor and contractor.

2.2 Sale of Goods Act 1930

2.2.1 Goods means every kind of movable property other than actionable claim and
money and
Includes stock, shares, growing crop, grass and things attached to and forming
part of the land. Future goods means goods to be manufactured or produced.
2.2.2 Born out of the Indian Contract Act 1872, is the Sale of Good Act. It was enacted
in 1930 and is applicable in all the states of India except Jammu and Kashmir.
Since, in most of the Commercial transactions in the contract between the agreed
parties, involved transfer goods, movement of goods and transfer of ownership /
title of goods, it has become necessary to enact this Sale of Goods Act to define it
clearly.

2.2.3 There are ( 66 ) sixty six sections under ( 7 ) seven chapters.

The most important sections of the Sale of Goods Act 1930, which are essential,
are noted below:

Sections Chapter Items

5 II Contract of Sale how made
6 II Existing or future goods
11 II Stipulation as to time
12 II Condition and warranty
18 III Goods must be ascertained
31 IV Duties of seller and buyer
32 IV Payment and delivery are concurrent conditions
42 IV Acceptance
56 VI Damages for non acceptance
 57 VI Damages for non delivery
59 VI Remedy for breach on warranty

2.2.4 Doctrine of CAVEAT EMPTOR

Caveat Emptor means “ Purchaser beware “, when a person enters into a contract
for the purchase of goods, this maxim comes into operation and the buyer will be
obliged to fulfil the contract even if he has made any mistake in assessing the
quality of the goods which he is buying.
2.3 The Indian Arbitration Act, 1996

Section Chapter Items

10 III Number of arbitrators
11 III Appointment of arbitrators
12 III Grounds of challenge
16 IV Competence of arbitral tribunal to rule on its jurisdiction
17 IV Interim measure ordered by arbitral tribunal.
18 IV Equal treatment of parties.
20 V Place of arbitrators.
26 V Expert appointed by arbitral tribunal.
31 VI Form and contracts of arbitral award.

3.0 LAW OF CONTRACTS

3.1 Objects of Contract

The purpose of Law of Contract is to ensure the realisation of reasonable
expectation of the parties who enter into contract.
3.2 Essential of a Contract

Two Parties
Offer and Acceptance
Promise
Consideration
Capacity
Free consent of the parties
Must be for a legal object.
Not opposed to public law
Possibility of performance
Not prohibited by law.

3.3 Classification of Contracts

Void Contract
Voidable Contract
 Executory Contract
Executed Contract
Unilateral Contract
Bilateral Contract
Implied Contract
Guarantee Contract
Contingent Contract.

3.4. Formation of a Contract.

Agreement over an offer and an acceptance

3.4.1. Offer
Must be definite
Intended to give rise to legal consequence
Must be from a competent person
Qualified to make an offer
Must be communicated.

3. 4.2 Acceptance
Must be communicated in a reasonable manner & time specified
Must be made before the offer is revoked or rejected
Must be absolute, unconditional and shall correspond with the mutually agreed
terms.
Must be made only by a person or party to whom the offer has been made.

3.5. Lapse of Offer

After the stipulated time
Due to enactment of law
Due to the death of the offer or.
Due to counter offer.
Due by rejection by the offeree.

3.6 Revocation of the Offer

May be revoked by the offer or before its acceptance even though originally
agreed to hold it open for a definite period.

3.7 Terms
3,7.1. Promisor: The person making a proposal is called the promisor.

3.7.2 Promisee: The person accepting the proposal the promisee.

3.7.3. Promise: When the person to whom the proposal is made signifies his assent
 thereto, the proposal to said to be accepted. A proposal when accepted becomes
promise.

3.7.4. Consideration: Consideration is what a promisor demands as a price for his

promise .

3.7.3 Discharge of Contract.

By accord and satisfaction

By novation
By an agreement
By breach
By impossibility to perform
By waiver.

4 .0. DEFINITION

4.1 GENERAL TERMS

ACCEPTANCE ACCEPTANCE SHALL MEAN THE
MANIFESTATIONS BY THE OFFEREE OF
HIS ASSENT TO THE TERMS MUTUALLY
AGREED TERMS OF THE OFFER BY THE
OFFERER.
Agreement Agreement shall mean mutual understanding
between the parties which creates obligations
between each other.
Base data Base date shall a notional date generally fixed
as 1 month prior to the date set of opening of
tenders Part I to reckon the Published indicates
for raw materials/ labour etc. for computing the
Price Variances.
Bid: Bid shall mean a valid offer made against any
tender enquiry, indicating terms, conditions
and prices.
Bidder: Bidder shall mean a person/
party/firm/company/consortium who submits
an offer / bid against a tender enquiry.
Bill of Quantities: Bill of Quantity shall mean the completed bill
of quantities for various item descriptions
forming part of the bid.
Billing Schedules: Billing Schedule shall mean the items,
description and Quantities arrived at after
detailed deigns and engineering are prepared.
It generally occurs in lumps sum price contracts,
where rates are fixed up for such items, based on
the break up prices indicated in the offer.
Codes: Codes and Standards shall mean such codes
 and standards as prescribed in
ISS/DIN/BSS as applicable to the
equipments, components, plants machinery,
consumables. ASM Test Codes – AIEE
Codes – Indian Electricity Act, Indian
Explosives Act, Indian Petroleum Act,
Indian Mines Act.
Commencement data Commencement date shall mean the date
specified in the Letter of intent/ Award /
Letter of acceptance / contract agreement.
Commissioning Commissioning shall mean integrated
activity of operation of all equipments,
links in the system and carrying out the
performance tests.
Completion Final acceptance certificate / Completion
certificate.
Certificate /Final Acceptance certificate Shall mean the certificate issued by the
Engineer / Employer / Owner to the
Contractor after satisfactory completion /
execution of the works and compliance of
all the applicable terms and conditions
covered by the Contract agreement/ award
LOI and the accepted modifications thereon
which will enable the Contractor to get his
final payment.
Conditions: Condition shall mean the conditions agreed
between the parties and stipulated in the
Contract agreement.
Consultant Consultant shall mean the consultant
/consulting firm, independent professional
engaged by the employer / purchaser.
Contract period: Contract period shall mean the period /
time schedule agreed in the contract during
which period the contracted work shall be
performed / executed.
Contract price: Contract price shall mean the price
accepted in the contract between parties
and adjustment if any during contract
period.
Contract: The contract shall mean an agreement
between the employer and contractor for
execution of certain works as per agreed
terms, conditions specifications, prices and
enforceable as per law.
Contractor: Contractor shall mean successful bidder
whose bid/offer has been accepted by the
 employer/ purchaser.
Day: Day shall mean the period between
midnight to next midnight.
Defect liability period: Defect liability period shall mean the
agreed period specified in the contract
following the taking over / commissioning
during which period the contractor shall be
responsible for making good the defects at
his cost.
Defect: Defect shall mean the lack of something
necessary for completion /performance.
Demurrage : Demurrage shall mean the detention of a
Vessel / ship by the freighter beyond the
allowable time for sailing, loading and
unloading operations.
Dimensions: Dimensions shall mean length, area volume
etc. all expressed in metric system.
Drawing: Drawing shall mean such drawings
provided along with bid documents /those
submitted by the bidder along with the
offer / submitted during the progress of
work by the Contract / employer /
Consultant and later approved.
Employer: Employer shall mean the person / firm /
company named who shall engage / employ
the Contract to carry out / perform the
works.
Final acceptance certificate / Completion Final acceptance certificate / Completion
Certificate certificate shall mean the certificate issued
by the Engineer/Employer/Owner to the
Contractor after satisfactory completion
/execution of the works and compliance of
all the applicable terms and conditions
covered by the Contract agreement /
award / LOI and the accepted modifications
thereon which will enable the Contractor to
get his final payment.
Force Majeure: Force majeure shall mean an irresistible
force or compelling circumstances beyond
one’s control.
Foreign currency Foreign currency shall mean the currency
other than the Indian Rupee.
Gross misconduct Gross misconduct shall mean any act or
omission of the contractor in violation of
the most elementary rules of diligence
which a conscious contractor in the same
 position and the same circumstances would
have followed.

Inspecting Officer / Engineer Inspecting Officer / Engineer shall mean

any employee of the Employer / Purchaser
or Consultant or organization or agency
specified / intimated for the purpose of
inspection of goods kept ready.
Instruction Instruction shall mean any drawing,
instruction written, directions explanations
issued by the Employer/ Purchaser /
Consultant.
Letter of award Letter of award shall mean the official
communication issued by the Employer /
Purchaser notifying legally to the bidder
that his bid has been accepted on mutually
agreed terms, conditions and prices.
Letter of Credit Letter of Credit shall mean a documentary
proof of the availability of credit which can
be operated by presenting documents called
for
Manufacturer Manufacturer shall mean a person firm /
company who manufactures and / or
produces Plant, Equipment, Component
Spare Parts etc.,
Minutes of meeting Minutes of Meetings – MoM shall mean
officially recorded statement of points /
issues discussed between the parties and
signed by authorized representatives.
Month Month shall mean English Calendar month.
Notice Notice published by the Purchaser with the
intention to invite offer/ bid for his
requirements.
Plant Plant shall mean equipment, machinery
apparatus, instruments and all other things
forming integral part of the work to be
provided in the contract for due
performance of the work / system
Price Price shall mean the price agreed in the
contract between the parties towards the
scope of work.
Programme Programme shall mean a plan of action
agreed towards performance of the scope of
work in the contract.
Project Project shall mean the project specified in
the tender documents and specification.
Provisional take over Provisional take over shall mean
acceptance of prima facie and in principle
subject to completion of / fulfillment of
certain conditions. This is not a complete
acceptance of work entitling the contractor
to get full payment or to assume that all the
obligations and terms and conditions of the
contract have been fulfilled to the
satisfaction of the Owner / Purchaser.
Repel Repel shall mean refuse to accept or agree
to or subject to.
Revocation Revocation shall mean rescindment of
withdrawal.
Risk Risk shall mean an act, / action, / hazard
that causes injury or damage or loss to
persons and or property.
Schedule Schedule shall mean timed plan of action of
event for a Project or work.
Site Site shall mean the land acquired and set
for the location of the project / work.
Specification Specification shall mean the Technical –
Commercial specification including
modification set in the tender / contract
documents.
Sub-contractor Sub-contractor means a Contractor selected
with the approval of Purchaser to supply
certain items included in the scope of work.
Sub- Supplier Sub- Supplier means the supplier selected
with the approval of the purchaser to
supply certain items included in the scope
of work.
Taking over certificate Taking over certificate shall mean the
certificate issued by the Employer /
Purchaser to the Contractor. It means
physical possession of the erected plant
with or without minor defects and
deficiencies in work subject to testing and
fulfillment of guaranteed design
parameters.
Tender Tender shall mean the bidders’ offer with
his terms, conditions, specification and
prices to perform the scope of work.
Test Test shall mean such test / tests stipulated
or considered necessary by the Inspecting
Officers.
Time of Completion Time of completion shall mean the time /
 period stated / agreed for completing the
scope of work specified in the contract.
Turn key Turn key shall mean a method of
construction / erection / installation
whereby the Contractor assumes total
responsibility from design through
completion of the work / project.
Work Work shall mean plant, non-plant,
buildings, Structures, foundations and all
plant Equipment, Components to be
provided and other construction erection /
services that the contract requires the
contractor to provide.

4.2 LEGAL TERMS

1. Agreement Mutual understanding

2. Contract Is an agreement enforceable by law.

Agreement which creates obligation is a contract.

3. Offer When one person signifies to another his willingness to do

or
abstain from doing anything with a view to obtaining the
assent
of the other to such act or abstinence, he is said to
make an offer .

4. Acceptance Acceptance is the manifestation by the offeree of his assent

to the
terms of the offer.
5. Void Contract A contract not enforceable by law is a void contract.

6. Voidable Contract It is an agreement that is binding and enforceable but

because of
lack of one or more of the essentials of a valid contract, it
may be
repudiated by the aggrieved party at his option.

6a Executory Contract An executory contract is one in terms of which both the

parties
have not yet performed their obligations.

6b. Executed Contract An executed contract is one that has been completed or
performed.
6c. Unilateral Contract Unilateral contract is a contract in which one party to the
contract
has performed his obligation at the time of contract and
the obligation is outstanding only against the other.

6 d. Implied Contract It is one which can be inferred from the conduct of the
parties-the
contract may not express the terms in so many words,
orally or in
writing.

6e. Contingent Contract A contingent contract is a contract to do or not to do

something
if some event collateral to such contract does or not
happen.

Its performance depends upon something happening or

Not happening some event. The event is uncertain future
event.

7. Contract of Indemnity It is a direct agreement between two parties whereby one

promises to save another harmless from the result of the
conduct of the promisor himself or any other third person.

8 Contract of Guarantee A contract of guarantee is to perform the promise or

discharge the liability of a third person in case of default.
9. Continuing Guarantee A guarantee which extends to a series of transactions is
called a continuing guarantee.
10. Proposal When one person signifies to another his willingness to do
or to abstain from doing anything with a view to obtaining
the assent of the other to such an act or abstinence, he is
said make a proposal.

11. Promisor The person making a proposal is called a Promisor.

12. Promise The person accepting the proposal is called the promisee.

13. Promise When the person to whom the proposal is made signifies
his assent, thereto the proposal is said to be accepted. A
proposal when accepted becomes a promise .

14. Consideration Consideration is what a promiser demands as the price of

his promise.

15. Private of Contract Private of contract is said to exit between two persons when
 there is a valid contract, enforceable between them.

16. Obligation It is a legal tie which imposes upon a person the necessary
of doing or abstaining from doing a definite act or acts.

17. Novation Contract substituted by a third party with the consent of

the parties to the contract.
18. Revocation Rescind or withdrawal. An offer may be revoked by the
offer or before it is accepted even though he had originally
agreed to hold it open for a definite period.

4.3 SPECIFIC LEGAL TERMS

ADVERTISEMENT tHE PUBLICATION OF INFORMATION. A
LEGAL ADVERTISEMENT, MADE
PURSUANT TO LAW, CONSTITUTES DUE
NOTICE OF A PROCEEDING.
Amendment In the law of procedure, any change made in a
pleading or in any paper filed for purposes of
procedure. An amendment corrects errors of
commission or omission, modifies the system
without fundamentally changing the nature that
is an amendment operates within the
theoretical parameters of the existing
constitution.
Assignment Assignment shall mean transfer of claim, right
of property as an instrument as deed
authorizing it.
Beneficiary Beneficiary shall mean a person / party / firm /
company to receive the benefit
Breach Breach shall mean failure to adhere or perform
the agreed term/promise.
Breach trust: The failure of a trustee to perform his duties
either willfully or negligently, applied
especially to misuse for his own purposes of
the trust ‘res’ or property. Any act of trustee
which is forbidden by the trust deed or will or
by the court; or is beyond the trustee’s powers
express or implied. It is a tort for which an
injunction will lie, and if willful, is generally a
crime.
Capacity : Legal power to enter into binding obligations
or to enjoy the privileges of a legal status.
Testamentary capacity is the capacity, to make
a legally effective will. Contractual capacity is
the capacity to enter into a legally binding
 contract. Marital capacity is the capacity to
enter into a valid marriage.
Caveat In probate practice an entry of opposition of
probate which requires notice to be send to the
“caveator” of all the proceedings, of probate.
An intimation made to the proper officer of a
court of justice to prevent the taking of any
step without intimation to the party interested
to appear and object to it. A process to stop the
institution of a person, and more frequently to
stay the probate of a will. The issue of letters
of administration, a license of marriage etc.
the person filling or entering a caveat is called
the caveator.

Caveat emptor Caveat emptor shall mean Let the buyer

beware, in respect of quality of quantity of
goods purchased. The rule at common law,
unknown in the civil law, that the buyer in a
sale of personality, must protect himself by
demanding express warranties, and, if he does
not do so cannot reject the goods sold for
defects even if they were not apparent at the
time of the sale. Purchaser beware in respect
of quality and quantity of goods purchase.

Claim The assertion of a right to have money paid. It

is used in special proceedings like those before
administrative courts, or in bankruptcy.
Claimant One who makes a claim
Commercial Law The rules of law dealing with commercial
transactions, including the law of contracts of
business organizations, of principal and agent,
of security etc.,
Compensation Compensation shall mean anything as an
equivalent as to make assessment for loss or
damage.
1. The consideration for services rendered
by contract agreed or implied.
2. Remuneration for injury suffered,
especially when it has resulted in
measurable loss or in expenditure.
Money paid for damage caused by any
wrong or breach of contract, to the person
defrauded or injured.
Consensus ad idem Consensus ad item shall mean all terms
 conditions, drawings, tender specification,
offer etc., have been clearly understood and
identity of mind created between parties.
Consequential Consequential damages means the damages,
claimed in a tort or breach of contract which do
not normally follow from the tort or breach.
Consideration Consideration shall mean what a promisor
demands from the promisee as the price for the
promise.
Covenant Covenant shall mean a binding and solemn
agreement to do or not to do or keep away
from doing a specified thing.
These covenants are supported by the same
consideration as that which supports the
promise.
Damage Damage shall mean money claimed by a
person to compensate for injury or wrong
caused by the other party.
Default Default shall mean failure to do something
agreed upon as expected.
Discharge Discharge shall mean release of the burden or
relieve oneself from the obligation.
Disclaimer Renunciation of any right, title or internet in
any property or condition, especially by a
defendant in a suit, or by a person against
whom a right is claimed.
Dispute Dispute shall mean an unresolved claim among
two or more parties.
Duress The use of force or threats to compel a person
to make a contract or conveyance, or to
commit an unlawful act.

Guarantee Guarantee shall mean a promise to a person to

be answerable for the payment of debt, default,
miscarriage or the performance of a duty by
another in case he fails to perform.
A mercantile contract, the equivalent of the
common law contract of surety-ship, by which
a person undertakes to answer for the debt of
another. In a guarantee of payment, the
obligation of the guarantor and the debtor
becomes enforceable at the same time. In a
guarantee of collection or of solvency, the
obligation of the guarantor does not arise, until
an attempt has been made to enforce the
obligation against the debtor. A guarantee is
 revoked by death. The defences and rights of a
guarantor are the same as those of a surety, and
a guarantee of payment is indistinguishable
from a contract of surety ship. For this reason
the two contracts are regarded as practically
identical and in some jurisdiction are made so
by statute.
Heirs Heirs shall mean persons who are legally
entitled to inherit through the natural course of
law.
Infringement Infringement shall mean break or impair or
violate or fail to observe to the agreed term.
Instrument A formal written document having legal
effect, either as creating liability or as
affording evidence of it.
Interpret In the case of statues, to discover the meaning
of the statutes either in part or as a whole. It is
sometimes concerned with the meaning of
individual words and sometimes with the
general purpose sought by a large body of
legislation.
Jurisdiction The powers of a court to render a valid
judgment. Jurisdiction over the person (i.e., in
personam) is the power of a court to render a
valid judgment against a specific person.
Jurisdiction over the subject matter is the
power to hear and determine over a thing (ie..,
“in rem” the rights of persons in regard to a
concrete object or to a statutes.)

Lapse To come to an end or cease, generally said of

rights or privileges which have not been
exercised within the proper time, or which fail
because of the happening of some contingency.
Latches Latches shall mean failure to do the required /
agreed thing / job / act at the agreed proper due
time. It is a term used chiefly in equity to
indicate unreasonable delay to claim a right or
assert a principle. Laches is defence to an
action on equity even if the right is undoubted.
In law, it is, strictly speaking, impossible to
speak of laches, if the right exists and its
exercise is not barred by the statute of
limitations or some similar defence. Before
statutes of limitations included equitable
actions, as they now generally do, under code
 procedure, laches was used in equity as the
approximate equivalent of limitations.
Latent defect A defect in merchandise which would not be
apparent on ordinary inspection, but which
comes into evidence later, when the article is
used. The ordinary implied warranties in sales
guaranteed against such latent defects.
Liquidated damages Liquidated damages shall mean a
compensation to be made consequent to a
damage caused. It can be pre-estimated.

Liquidated damages, not as a penalty, is agreed

upon between parties in the contract towards
time delay. Liquidated damages can also be
prefixed towards shortfall in performance
parameters agreed in a Contract.
Mandate A general term for an order of any kind issued
by a court; a direction or precept.
Market price The price which any commodity ore specific
goods would obtain if sold at a given time
without restriction, at public sale.
Memorandum A note or record of a fact or an agreement. It
must be sufficient to enable the fact and the
terms nor follow any established form.
Minutes Notes or records of a transaction, or of a
meeting of some organization or committee, or
of corporate proceedings, kept in a minute
book.
A record of what takes place, which can used
as evidence.
Negotiable A written instrument signed by the marker or
drawer for the unconditional payment of fixed
sum of money and money only at a fixed or
determinable future time or on demand, to a
payee or to his order or to bearer.

Notice Information or knowledge by whatever means

communicated. Actual notice is such information
that can be shown to have reached the person to be
noticed.
Novation Novation shall mean that one party to the
contract is substituted by a third party with the
consent of the parties to the contract.
Obligation Obligation shall mean the condition or duty by
which one person/ party is legally bound to
perform the services for the benefit of the other
person / party.
 It is a legal duty, however, created, the
violation of which may become the basis of an
action at law.
Offer The proposal to enter into a contract made by
one person called the offerer to another called
the offeree. All the terms of the proposed
contract must be contained in the offer, so that
any indication of assent will be sufficient to
create the contract. An offer does not arise
until it is communicated i.e., comes to the
knowledge of the offeree. It ceases to exist
when it is revoked or rejected, or when it is
accepted, since it then becomes a contract. A
counter offer by the offeree is rejection of the
offer.
An offer will expire by lapse of a set time if
such a time is stated in the offer, or by the
lapse of a reasonable time is determined by
usage or by the special circumstances of the
case. Until the offer has expired it may be
revoked by the offeror as soon as knowledge of
its withdrawal is communicated to the offeree.
In the same way it may be revoked as soon as
knowledge of the offeree’s refusal reaches the
offeror. If the other has expired, it can neither
be revoked, rejected nor accepted.
Owner A person entitled to the privileges and rights of
ownership and subject to its obligations.
Patent right Patent right shall mean exclusive right
granted / obtained to produce and sell a product
so invented. / an invented product.
Power of attorney a formal document by which an agent is
appointed, generally with wide generally
power, although it may be for a limited group
of transactions, in which case it is called a
“special” power of attorney. It is subject to all
the rules of agency and to regulations that are
peculiar to itself.
Prejudice A state of mind in which a person entertains a
judgement about an event, the character of a
person or the validity of a proposition, without
examining the facts or hearing evidence.
Promise A proposal when accepted becomes a promise
and it means an oral or written agreement to do
or not to do some thing.
Promisee Promisee shall mean the person / firm /
 company accepting the proposal is called
promisee.
Promisor The person / firm / company making a
proposal is called a promisor.
Proof The process of establishing, by legal evidence
and argument the truth of the facts or
allegations necessary to sustain the cause of
action or defence. The burden of roof is
generally on the party seeking relief or having
the affirmative of an issue. The burden then
shifts to the defendant to establish the contrary
position. If the roof adduced by the plaintiff
does not outweigh that of the defendant he has
not sustained his burden. The evidence
introduced upon the trial.
Proposal Proposal shall mean that when a person / firm /
company signifies the willingness to do or abstain
from doing anything with a view to obtaining the
assent of the other to such an act or abstinence the
person / firm / company is said to make a proposal.
Quantum meruit Quantum meruit shall mean reasonable amount
to be paid for services rendered or work done
when the price therefore is not fixed by the
contract and also means right to be paid a
remuneration for work done.
As much as he has earned. The basis of an
action in which, when there is no express
contract alleged but only a contract implied in
fact or in law, a plaintiff recovers for the value
of services rendered. Such as action will lie
when the contract is rescinded, whether but the
act of the plaintiff or the defendant, but cannot
be used if the contract itself is relied on to any
extent. Some cases have relaxed this rule so
far as the measure of damage is concerned.
Rate of exchange The amount reckoned in one unit of currency
which will be exchanged for a unit of a
different currency. This is ordinarily done by
quotation on the market, but is often regulated
by statute, or administrative order.

Remedy Remedy shall mean act by which violation of

right is prevented or compensated for legal
redress.
Repeal The annulling of an existing stature,
constitutional provision or regulation, by the
body which originally passed it.
Restitution Restitution shall mean giving back to the
rightful owner something that has been lost or
taken away.
Revocation The calling back of a thing granted or
destroying or making void of some deed that
existed.
Revoke Revoke shall mean to withdraw an offer,. To
terminate an agency, to cancel a license.
Show cause A show cause order is a direction of the court
to a party in a law suit to show good reason
why certain action should not taken by the
court.
Sub-let Sublet shall mean to let out the work to
another.
Subrogation The substitution of another in the place of the
obligee of an obligation or the creditor of a
debt. It is , as a rule, created by law of equity
from facts which result in the discharge of
obligation by person not primarily liable. It is,
in effect, an equitable assignment of all the
rights that the obligee had against the
discharged obliger, to the person who has
discharge the debt.
Successor Successor shall mean one who succeeds an
officer / title.
Title The technical legal word commonly used for
ownership. It implies particularly the power of
disposal and the right and duty to protect the
property. The fights called title can be reduced
to a mere name without substantial content.
The caption describing a stature or legal
proceeding.
Tribunal A general word equivalent to court, but of
more extensive use in public and international
law.
Undertaking A promise, especially one formally given in the
course of a legal proceeding, which may be
enforced by attachment or otherwise. An
undertaking to appear is a promise by a
solicitor to appear for his client in an action so
as to make personal service on the client
unnecessary. In company law, the word
undertaking denotes all the property of the
company, past, present and future and it’s a
mortgageable, interest, being commonly
charged by debentures of the company.
Valid Having legal effect; binding according to law;
vested with legal authority.
Violate To disobey as a law. To interfere with the
rights of another especially when done
forcibly. To ravish.
Waive Knowingly to surrender or abandon a claim or
a defence which might have been legally made
in the course of procedure. In private
transactions it may take the form of a release or
an election of courses of action where several
are open. The effect of a waiver is that the
claim, defence, or right waived is wholly lost
and cannot be revived without the consent of
the other party. In many instances, failure to
claim a right or defence, is construed as a
waiver.
Warranty Warranty shall mean Sellers’ assurance to the
Purchaser that the goods or property is or shall
be as represented and if not it will be repaired
and reconditioned or replaced by the Seller at
his cost or expenses.
The general rule of law applicable to all sales
of goods is that the buyer at his own risk,
caveat emptor, unless the vendor gives an
express warranty, or unless the law imply a
warranty from the nature of the thing sold and
circumstances of the sale; or unless the vendor
have been guilty of a fraudulent representation
or concealment in regard to the thing sold –
Wharton.
Wear and tear Words employed to describe the amount of
surface destruction and other minor injury that
ordinary use or an article is likely to cause.
Without prejudice An expression indicating that an existing
agreement or other transaction is not too be
considered a waiver or surrender of any other
claim not then asserted.
Witness (testis) A person who on oath or solemn affirmation
gives evidence in any cause or matte. A
witness may attend voluntarily or be required
to appear by a command from a Law Court.

5.0 TERMS RELATING TO IMPORTS.

1. Air way Bills /
Air Consignment Notice - is a receipt and not a document of title of goods.

2. Parcel Port Receipt - Not a document of little.

3. Marine Bill of Landing (B /L) - is a document of title, a receipt from Shipping Co.
for the goods and also legal evidence of a contract
of carriage .

4. Full set of B/ L. - Bill of Lading normally issued in sets of two more,

one may be a negotiable copy.

5. Clean Bill of Lading - If the packaging or goods appear damaged, the

shipping
co. will specify this on the B/L to ensure he is not
liable
for any claim for damage already done. Absence
of such
clause make the B/L ‘clean’ as opposed to
clauses.

6. On Board of B/L - This means the goods are in the hold of the vessel.

7. Received for shipment B/L - No indication of loading on the ship and the
importer
does not know when the goods would reach
destination.

8. On Deck - Goods are loaded onto the deck and exposed to

waves
and weather.

9. Blank Endorsed - This is to transfer title to the holder thus releasing

the
Seller’s claim to the Cargo shipped.

10. House Airway Bill / - Unacceptable as neither evidence title nor

contract of
house bill of lading carriage. Can be accepted only if the carrier i.e.,
Air
India certified on the AWB that the goods have
been
Shipped.

11. Charter Party B / L - Goods carried by a chartered streamer due to legal

 complexities this form of B / L is not acceptable.

12. State B / L - This is one tendered to Paying Banker too late for
it
to reach consignee before goods arrive at their
destination.

13. Consular Invoice - Exporter submits to the Embassy of Importer’s

country
for them to stamp. Often to enable customs
authorities
in Importer’s country to clear the goods.

14. Usance Bill - A bill expressed to be payable months / days /

after sight
/ date.

15. Certificate of Origin - Issued by Chamber of Commerce in Seller’s

country
certifying origin of goods. This is required as per
Indian
Exchange Control Regulations.

16. Packing List - Details of which package contains.

17. Manufacturer’s / Suppliers - States that the goods are as per contract of sale.
Quality inspection certificate.

18. Analysis Certificate - Ingredients / proportions revealed by independent

analysis of chemicals etc.

19. Aval - Joint and several guarantee on the draft of a

person or
firm usually for the drawee where the guarantor
places
his signature on this draft together with a notation
indicating in whose favour his guarantee is given.

20. Bid Bond - The bid bond is a bank guarantee in lieu of tender
money. This is given so that seller executes the
contract
if the same is awarded to him. The buyer thus
protects
himself from the seller backing out of the offer
after an
agreement reached.
21. Bill of Exchange - Document issued in a legal form precisely defined
of
which the two following versions are most
common.

- draft, wherein drawer instructs drawee to pay a

certain
amount to a named person.

- promissory note wherein the issuer promises to

pay a
certain amount.

22. Certificate of Manufacture - Confirmation of a producer that the goods have

actually
been produced by him in his factory.

23. Charter Party - Contract according to which the owner leases the
vessel
to a charterer for a certain period or a certain
voyage.

24. FOB - Free on Board

C&I - F O B + Insurance
CIF - C & I + Freight
CIFC - C I F + Commission
CIFCI - C I F C + Interest

25. Demurrage - Extra charge to be paid if vessel is not loaded or

unloaded within the time allowed.

26. Dock Receipt - Receipt issued by a warehouse supervisor or port

officer
certifying that goods have been received by the
shipping
company.

27. Franco - Free from duties, transportation charges and other

levies.
Used also as delivery condition e.g. Franco
(Named place
of delivery) which means that the seller must bear
all
transportation charges and duties upto the named
place.

28. Incoterms - Publication of the International Chamber of

Commerce
regarding delivery terms currently in use.

29. Inspection Certificate - Confirmation that the goods have been inspected
prior
to shipment issued by neutral organisation.

30. Performance Bond - The performance bond is designed to provide

financial
assurance that the seller meets his obligations in
the
manner and within the time contractually agreed
upon.

31. Letter of Credit - A Letter of Credit ( L / C ) is a letter issued by

the
Bankers at the request of the importer in favour of
the
Foreign supplier informing him that it undertakes
to
Accept the bills drawn or effect payment in
respect of
The exports made to the Importer under precisely
Defined conditions.

32. Cad - Cash against documents.

6.0 Shipping Terms International

Abbreviations
1 Ex-Works EXW
2 Free Carrier (at a named point) FRC
3 Free on Rail or Free on Truck FOR
4 F.O.B. Air Port FOA
5 Free alongside Ship FAS
6 Free on Board FOB
7 Cost & Freight C&F
8 Cost, Insurance & Freight CIF
9 Freight / Carriage paid to DCP
10 Freight / Carriage and Insurance paid to CIP
11 Ex-Ship EXS
(deliver goods on Board at
Destination)
12 Ex-Quay EXQ
 (deliver goods on to quay at
destination)
13 Delivered at Frontier DAF
14 Delivered Duty paid DDP
EX – WORKS ( EXW )
( Basic Price + Packing Charges )

The delivery of goods shall be arranged by the Supplier at his premises and the purchaser
shall make all arrangements at his own cost and risk to take delivery of the goods and
transportation of the same to his destination.

FREE CARRIER ( F R C )

The supplier shall only provide export licence, pay any export taxes and provide
evidence of delivery of goods to the carrier. The purchaser shall nominate the carrier,
arrange for contract for the carriage, pay the freight and insurance premium.

FREE ON RAIL ( OR ) FREE ON TRUCK ( FOR )

The supplier shall deliver the goods to Railway / truck and provide the purchaser with an
invoice and transport documents. The purchaser shall notify the supplier of the
destination of goods and pay the freight charges.

F O B AIR PORT ( FOA )

The supplier shall deliver the goods to Airport of departure and contract for carriage or
notify the purchaser if the purchaser wants the supplier to do so. The purchaser shall pay
the freight charges and insurance premium.

FREE ALONGSIDE SHIP ( FAS )

The supplier shall deliver the goods alongside the ship and provide the purchaser with an
‘ alongside ‘ receipt. The purchaser shall nominate the carrier, contract for carriage and
pay freight charges, obtain export licence and pay any export taxes and also insurance
premium.

FREE ON BOARD ( FOB )

The supplier shall deliver goods on Board and provide a clean ‘ On board ‘ receipt,
provide export licence, pay export taxes and loading charges if not included in the freight
charges. The purchaser shall nominate the carrier; contract for carriage and pay the
freight charges and also insurance premium.

COST AND FREIGHT ( C & F )

The supplier shall contract for carriage, pay freight charges to named destination, deliver
goods on board and provide the purchase with an invoice and clean ‘ On board ‘ bill of
lading; obtain export licence and pay export taxes. The purchaser shall accept delivery of
goods on shipment after documents are tendered to him, pay unloading costs if not
included in the freight charges, pay insurance premium.

COST, INSURANCE & FREIGHT ( CIF )

The supplier shall, in addition to the cost and freight charges as stated above, also arrange
for the insurance of goods, pay the premium and provide the purchaser with a policy or
certificate. The purchaser shall accept delivery of goods on shipment after documents are
tendered to him pay unloading costs if not included in the freight charges.

FEIGHT / CARRIAGE PAID TO ( DCP )

The supplier shall contract for carriage, pay freight charges to named destination; deliver
goods to first carrier; obtain export licence and pay any export taxes; provide the
purchaser with the invoice and transport documents. The purchaser shall collect the
documents, accept delivery of goods when they are delivered to first carrier; arrange and
pay insurance premium.

FREIGHT / CARRIAGE & INSURANCE PAID TO ( CIP )

The supplier, in addition to ‘ Freight / Carriage paid to…’ as stated above, shall arrange
for contract for insurance of goods and pay the premium, providing the purchaser with a
policy or certificate and the purchaser shall accept delivery of goods after the documents
are tendered to him.

EX – SHIP ( EXS )

The supplier shall deliver goods on board at destination; provide the purchaser with
documents to enable delivery to be taken from the ship. The purchaser shall pay the
discharge costs, import duties, taxes and fees, if any; obtain import licence.

EX – QUAY ( EXO )

The supplier shall deliver goods on to quay at destination; provide the purchaser with
documents to enable him to take delivery, obtain import licence and pay import duties,
taxes, fees, unloading costs and insurance. The purchaser shall take delivery of goods
from the quay at destination.

DELIVERY AT FRONTIER ( DAF )

The supplier shall deliver goods cleared for export at a place named on the frontier;
provide the purchaser with documents to take delivery of the goods. The purchaser shall
pay for on-carriage; obtain import licence and pay import duties, taxes and fees if any.
DELIVERED DUTY PAID ( DDP )

The supplier shall obtain import licence and pay import duties, taxes and fees if any,
arrange and pay insurance premium, provide documents to enable the Purchaser to take
delivery of the goods at the named place of destination.
 2. TOWARDS CONTRACT OFFER

102TOWARDS A CONTRACT PROPOSALS

1.0 FOR ANY CONTRACT PROPOSALS, IT IS NECESSARY YOU KNOW

THE
FOLLOWING CLEARLY

1. YOUR COUNTRY
2. YOUR COMPANY
3. YOUR CLIENT
4. YOUR COST
5. YOUR CONSIDERATIONS
6. YOUR CONDITIONS
7. YOUR COMPETITOR
8. YOUR COMPETITIVENESS

2.0 THEN YOU WILL WIN THE CONTRACT AND THEREAFTER WORK
ON
THE CONTRACT BY RESPECTING AND ADHERING DULY

1. CARE FOR IT
2. CONDITIONS ABIDE IT
3. CONCENTRATE ON THE JOB
4. CONTROL ALL THE ACTIVITIES
5. CO-OPERATE WITH ALL AGENCIES
6. CO-ORDINATE WITH ALL DEPARTMENTS
7. COMMUNICATE ON ALL MATTERS
8. COMPLETE IT SATISFACTORILY

3.0 THEN YOU HAVE PERFORMED AND DISCHARGED THE

CONTRACT
SUCCESSFULLY AND THEREBY YOUR

PRESTIGE, PRIDE, ENRICHED

B. TOWARDS CONTRACT OFFER

1.0 PREPARATION OF OFFER

103Collect the Tender documents in full and screen it very carefully word by
word.
104Very little time given for preparation and submission of the offer.
105Generally these documents are loaded fully in favour of the Purchaser /
 Owner.
106Mostly unfair, unacceptable clauses / stipulations would have been built
in.
107Clear all the doubts initially with in your company itself.
108Get it cleared such words as etc. connected work, incidental to work, as
may be needed, other items as to meet the contract as these terms, if
accepted, will lead to lot of other work and cost.
109If necessary get the documents perused by some one who is more
experienced or even a Contracts Specialist.
110Check clearly the general conditions and special conditions look for
hidden meaning and sort them out.
111Do not submit an offer when tender documents says, as per drawings – as
generally drawings do not represent the complete scope of work.
112On all these loosely worded terms, you will suffer severally in the hands
of the owner.
113Do not agree all clauses for the sake of getting the order.
114Seek clarification where such doubts could not be cleared within.
115A visit to site where project is planned and interaction with the authorities
concerned may help.
116Do take care of the local problems at the site.
117Check on your strength, weakness, opportunities and threat.
118Check the risk and liability involved.
119Quote only in the area wherein you have all facilities – know – how.
120Prepare the offer and list out the deviation in the appropriate location.
121Do not quote a firm price offer - always quote with price variation as per
standard formula, make provision towards time overrun - monthly basis.
122Do not agree any additional work during negotiations - without
corresponding time extension needed and rates / cost needed.
123Elements like taxes and duties – Exchange Rate – Quote at prevailing rates
with clause to protect against any variations.

2.0 DURING NEGOTIATIONS OR EXCHANGE OF LETTERS

1. Get all the deviations sorted out carefully as it has a cost and time,.
2. Avoid raising fresh issues.
3. Equally do not agree for fresh issues - but if needed discuss and agree
with additional cost and time.

3.0 PRICE NEGOTIATIONS

1. Do not agree for any reduction / rebate in prices.

2. If due to special circumstance, such a rebate is to be agreed upon, please
have total check on your pricing and estimated cost, then offer rebate.

4.0 NEGOTIATING EXECUTIVE

 For any kind of negotiations, select an Executive who can do well balanced,
knowledgeable, unperturbed and polite gentleman and enough human psychology
to influence the party.

5.0 CONTRACT

1. Secure the order as of agreed terms, conditions and prices.

2. Respect it and adhere to it and do not deviate it.
3. Earnestly execute it, and discharge it with accord and satisfaction.
4. Get pride and prestige to your company.

6.0 PLANNING AND MONITORING

HEAD OFFICE

The planning shall include

to understand the scope of work the magnitude and sequence
Engineering, procurement and construction.
Scheduling and time duration
Materials supplies sequence
Resources, man power, funding
Advice on contraints
Grouping - major activities.

7.0 SITE OFFICE

Construction Manager -
Live wire of the site team.
Competent and Trustworthy person.
Planner and Decision maker, problem solver
Controls the job and workmen - staff team
Initiator & Indicator - Motivator
Authority - Delegated

The Construction Manager / at the project site, will be chief key man vested with
full authority and delegation of powers, to discharge the full responsibility to
execute the job within the agreed schedule, controlling all the inputs, costs,
maintaining quality, satisfying the owner and give the company the end results as
per budget.

He is a Planner, Materials Manager, Personnel Manager, Finance Manager.

He is also a liaison between both the contracting parties, and taken care of image
building, Customer service and ultimately brings out pride and prestige to the
company.
8.0 DURING THE CONSTRUCTION PERIOD

1. Adhere and follow the scope - Technical specification in the contract.

2. Execute the work as per approved drawings.
3. Prepare a work schedule also indicating the inputs needed from the owner
- discuss and get them approved.
4. If the input any, delayed, keep a record in writing and ask for extra time
and compensation if so needed.
5. Any change asked for, immediately get it approved for the change in
scope, price and time needed.
6. Do not accept any oral request.
7. During the site review meetings, please express the problems and
solutions if any, and should got to be recorded. Even if no solution
possible, difficult and points raised should be recorded.
8. Do not agree on any issue, which is not clear - not in the scope.
9. Any modifications / revision suggested, examine its implication of cost
and time before agreeing to it – and if agreed, get these items confirmed in
writing so that bills when raised are paid.
10. In case of any unforeseen event, keep the Owner informed in writing.
11. Keep the file and documents safely and in order.
12. Always assume there could be a possibility of any claim later to be settled.
13. It is desirable a sequence file is kept separately on all important letters a
copy filed herein.
14. Keep a record on time schedule – delays caused by each one.
15. Till the final bill is settled and paid, always keep in mind, any issue may
figure and may involve cost.
16. Settle all material account and get the document signed.
17. After due discharge of contract, get all the documents duly signed by
authorised Executive so that the obligations are completed, no more
liability or risk involved.
3. ENGINEERING CONTRACTS AND CONTRACTS
MANAGEMENT

1.0 Engineering design, manufacture, supply and services contracts are generally
reciprocal in nature, concluded between two parties. The basis on which such
contracts are drawn and concluded are:

-- International Competitive Bidding

ICB
-- Domestic Competitive Bidding
DCB
-- Bids invited among limited proven sources; or
Limited Tender Enquiry basis
LTE
-- Bids invited from the only known source; or
Single Tender Enquiry basis
STE
-- On Nominations
-- Outsourcing
In all these, there are set procedures laid down and are being followed since the
two contracting parties are not otherwise known or tied up with each other, except
through the contract for the particular stipulated scope, service etc. with certain
agreed terms and conditions. It must be ensured that the contract is carefully
drawn as it creates a special legal relationship between them. Any error, slip,
omission may later lead to disputes, litigations and cause Court legal action.

1.1 Huge investments are envisaged towards the creation of assets like factories,
production units, housing complex, power sector, coal mining sectors, chemical
industries, oil industries, transport sector, machinery, equipments etc. by Central,
State and Private sectors in the plan period. All these proposals, capital invested
both in Indian Rupees and in Foreign currency shall have to yield results and
Return on Investments ( ROI ) at the scheduled time and within the estimated and
approved and sanctioned cost. Any over run of cost and time as well, shall have
an averse effect on the total economy of that region and ultimately the nation as a
whole. Therefore, it is very essential, that every care is exercised in the tendering
procedure, specification both technical and commercial, in the selection of the
Vendor / Supplier / Erector / Contractor, the formation of contract, execution of
contract and discharge of contract, so that the planned and programmed objective
is attained within the sanctioned cost and time and without their overrun.

1.2 In other words, the promise made by the promisor and accepted by promisee is
duly performed by both the parties, promisor and promise duly discharging their
obligation set in the contract.

1.3 The scope of work as expected and envisaged at the time of entering with the
 contract, is performed.

1.4 In the process of management, man, money, materials, machines and managers
are to be
managed.

2.0 The term “ Management “ is normally meant to achieve the objective duly
controlling, expediting and monitoring all the activities concerned. Management
is defined by various learned people in different contexts. It is defined as a multi-
purpose organ that managers the business, manages the managers, manages the
workers and the work. It is also defined as getting them up done through people.
Some other has defined it as a distinct process consisting of planning, organising,
actuating, controlling to perform the determined objectives and set goal by the use
of people and all other resources. The Manager or the Management should be
effective and efficient to meet the objective set forth within the time frame, cost
frame and resources. There are different kinds of management theories and
broadly they are classified as under:

1. Personnel Management
2. Financial Management
3. Production Management and
4. Materials Management

2.1 The Personnel Management is meant to look into the human resources, training,
motivation, proper placement and other aspects required for development of man
– power and proper replacement.

2.2 The Financial Management is meant to find funds to control the financial
resources of the company by way of due budget regulations, proper phasing up of
expenditure, generating internal resources and effectively controlling resources so
that the due return on the investment is achieved.

2.3 The Production Management is meant to keep the machineries installed for
maximum utilisation reducing the down time, to operation & maintenance and to
meet the production targets set forth.

2.4 The Materials Management is meant to procure the materials at right time and at
right cost, receive, store and preserve them and effectively use them avoiding
wastage besides due inventory control with a view to minimise the holding cost.

2.5 While all the above have been fairly defined and there are a number of text books
and lot of information theoretically and on experience basis available, the
CONTRACT MANAGEMENT at the present moment is not gone into through
text books. It has become today great importance and it had assumed greater
significance to, due to the changes in the policy of the country. Business
community both within the country and outside are showing keen interest to
 invest in all the industrial sector. Therefore Management of contract is very
important and essential.

3.0 CONTRACTS MANAGEMENT

The contracts Management embraces all the above management functions. The Contract
Management has to manage the scope of work specified in the contract , manage the
Contractor with his manpower resources, manage the time property drawing sequence
and priority as set out in the contract, properly manage the construction machinery, tools
& plants for due and proper deployment to complete the construction/erection as per
schedule and also manage the contract within the amount agreed to in the contract, From
the above, it could be seen that management of contact has a very vital role which has to
manage materials, manpower, machinery and the money besides time. This contract
management, therefore, calls for deep and detailed knowledge on the principles of
management of personnel, finance, materials, and production technology. While all the
other four management’s require knowledge about particular aspects, the Contracts
Management necessarily requires knowledge about all the different types of management
theory. Therefore, from the above preamble, it could be appreciated easily that contract
management is a very difficult and vital task as it has to control five to six factors, but at
the same time, without any flexibility in regard to any one of them.

4. 0 COMMERCIAL SPECIFICATIONS.

The commercial specifications are drawn with a view to control the time, delivery, cost,
guarantee and certain protective safety and legal clauses against any possible mal-
performance of the contract. It is to ensure the reciprocal promises are performed well.

The commercial terms broadly include the following.

124Scope of work
125Commissioning /Delivery dates
126Time- Essence of the Contract.
127Price and Price Variation.
128Bank Guarantee for Performance
129Bank Guarantee for Advance Payment.
130Payment Terms
131Insurance
132Transport
133Excise Duty/ Sales Tax/ Octroi
134Customs Duty
135Exchange Rate
136Liquidated Damages
137Warranty – Guarantee for warranty
138Force-Majeure
139Suspension of work.
140Defence of Suits
141Power to vary or omit
142Facilities to be provided
143Termination of Contract
144Arbitration and compensation event
145Limits of Contract
146Discharge of Contact
147Legal jurisdiction.

4. 1 Each one of the above terms have a definite effect on the performance of the
contract and
in particular on time, scope and price and other liabilities.

4.2 Generally, the following form part of the tender documents.

1. Notice Inviting Tender.

2. Tender - Technical Specifications
3. Tender – Commercial Specifications
4. General / Special Conditions
5. Tender Drawings.

5.0 PRE-AWARD CONTRACT FUNCTIONS.

5. 1. Pr award contract functions are broadly classified as under:

• Preparing list of contracts related to Project and developing contract packages.

• Preparation and finalisation of tender documents and ensuring conformity with
project.
• Preparing detailed schedule for contractual activities ensuring conformity with
project.
• Evaluation and short listing of bidders.
• Preparation of Commercial evaluation of qualified offers.
• Issue of Letter of Award to the successful bidder.
• Co-ordination for the preparation of engineering schedule, site activity schedule,
resource mobilisation plans with the contractor and respective inter- departments.

Contract Agreement concluding.

• Keeping all the original bides, evaluation reports and other documents in safe
custody.

6. 0 FORMATION OF CONTRACT.

Contract is naturally formulated from an offer against an enquiry and acceptance thereof.
Therefore, it is obvious that there should be minimum of two parties – one who makes a
proposal or offer and the other who accepts it. Therefore, it is imperative that there
should be a concurrence of at least two minds. The parties must have identity of minds
and in legal terms it I is called “Consensus ad idem”. When a proposal made by one is
accepted by the other such a proposal then becomes a promise. The acceptance must be
absolute and unconditional and shall correspond to the terms of the offer and / or
mutually agreed terms.

The contract emerges from the acceptance of an offer.

The offer must be DEFINITE-

Intending to give rise to legal consequences and must be from a competent person
qualified to make the offer.

The Acceptance must be ABSOLUTE and UNCONDITIONAL-

Corresponding to the terms of the offer and must be made by a person competent and
must be the one to whom the offer is made and must be communicated.

CHART - 1
The Chart- 1 explains the position of the Owner with his bid specification and the Bidder
with his bid proposals. Naturally bid proposals may not be in line completely with the bid
specifications and may contain deviations. These deviations are analysed and examined
and an understanding reached and an identity of mind arrived at between the Owner and
the Bidder. In other words, these two parties narrowed down the differences/ deviations
and understood each other.
A privity of contract is created thus, between the parties by which terms and conditions
agreed can be enforced between them .
6.1 On the basis of a contract agreement reached and concluded between the parties
concerned to the contract, these parties create their rights and set their obligations,
risk and liabilities of each to the other. The contract so concluded draws out a
written clear cut relationship between the parties to the contract and set to a time
frame. These obligations are written in the contract under various clauses and each
one of the contracting parties has to perform these clauses with due respect and
faith and shall not breach them under normal circumstances. If this is arrived at and
achieved by the parties to the contract, then naturally the contract shall be executed
in time and within the agreed contract price without any dispute and it can be
termed as discharge of contract through accord, perform and satisfaction. The Chart
–2 explains the obligations under the contract in a broad sense between the owner
and the contractor.

CHART -2.

6.2
6.3 6.2 The contract must be signed by the holder of power of attorney issued by the
respective
company. It should be on non-judicial stamp paper of prescribed value as per stamp
act.

7.0 POST AWARD CONTRACT FUNCTIONS.

7.1 Post award contract functions involve inspection expediting and co-ordination
monitoring the progress of work through constant follow-up with the contractors
in order to ensure timely deliveries of equipment, erection, testing and
commissioning there of as per the requirements of project. This also includes
payment, dealing with disputes and taking necessary action in the event of
inadequate performance in the course of the execution of the contract, The
following are the typical post award activities.

• Finalisation of PERT network for the particular contract.

• Finalisation of contract co- ordination procedure.
• Co-ordination with quality assurance for vendor approval and approval of sub-
contractors.
• Co- ordination with quality assurance for finalisation of quality plans.
• Programme for release of inputs and work front.
• Monitoring and analysis of contractor’s progress report.
• Visit to manufacture’s premises to ascertain physical progress of the manufacture of
the equipment.
• Monitoring of despatch and receipt of goods at project site.
• Payments and monitoring of cash flow and budgeted financial consumption.
• Finslisation of scope changes, schedule changes and procedure changes.
• Co- ordination for Customs clearance for goods to be imported.
• Co-ordination for obtaining insurance policy,
• Co-ordination for erection methodology, performance test and commissioning
procedure.
• Co-ordination in taking over the equipment after performance test.
• C0-ordination in closure of the contract.

If the above aspects are considered in preparing tender documents/ finalising the
packages, concluding contracts and careful monitoring and managing the pre-contract
and post-contract functions, will definitely ensure completion within the cost and time
provision.

8. 0 CONTRACT MANAGEMENT
148
8.1 A contract is to be operated between the parties to the contract as per scope, price,
time schedule, payment terms and other clauses and conditions agreed upon. There
cannot be any change unless authorised. Chart- 3 & 3A explains the limitations
between the parties.
 CHART 3
OPERATION OF CONTRACT
CHART -3 A
The contract creates a technical, financial and warranty liabilities.

8.2 The Indian law of contracts under heading performance Section 50 stipulates.

Performance in manner or at time prescribed or sanctioned by promise. The

performance of any promise may be made in any manner, or at any time which
the promisee prescribes or sanctions.

8.3.1 The Indian law of contract under performance of reciprocal promises Section 51.
Stipulates “ Promisor not bound to perform unless reciprocal ready and willing to
perform. When a contract consist of reciprocal promises to be simultaneously
performed, no promisor need perform his promise unless, the promisee is ready
and willing to perform his reciprocal promise.

Even though generally contracts are bilateral in nature between the owner and the
contractor, the agencies involved in many contracts during the implementation of
the contract are:

• Owner
• Consultant
• Equipment manufacturer, and
• Contractor.

In most of the cases, the Purchaser and Consultant are one of the contracting party
and the equipment manufacturer and the contractor are the other contracting party.
The relationship between these two groups are again governed by a contract
between themselves though they are under one part of the contract. The objective
of all are to complete the scope of work entered into the contract within the time
schedule and price agreed upon and perform the contract. But in real execution of
the contract each one of the four plays in a different way mainly to meet his
interest first and foremost.

The attitude of the parties to the contract in the due performance of the contract
are explained in Chart-4.

OWNER always

• desires to complete the work earlier

• desires to control all activities
• desires all information to be furnished in time but generally causes
• Delays in releasing the fronts/inputs in due time.
• Delays in clearance and approvals;
• Delays in release of due payments.

CONSULTANT always
• desires his views are final but generally causes
• delays in basic engineering particulars.
• delays in approvals, release of drawings, technical data
• delays in inspections and despatch advice.
EQUIPMENT MANUFACTURER always

• desires that the equipment shall be accepted

• desires total freedom in quality and manufacturing methods.
And least advice/opinion from others.
• desires immediate inspections, despatch clearance
• desires early payment but generally causes
• delays in manufactures and inspection call.
• Delays in supply of erection methodology; and
• Delays in supply of operation &maintenance procedures.

CONTRACTOR always

• desires quick release of drawings, data and approval

• desires free area at site.
• Desires acceptance of work when completed.
• Desires quick payment and more profits but generally causes.
• Delays in submission of PERT chart schedules, QAP progress reports etc;
• Delays in mobilisation, progress and achieving the targets.

All these attitudes of these parties cause great problems in the proper performance and
discharge of the contract.

8.4 ELEMENTS AND FORCES OPPOSING THE CONTRACT.

While the parties may have their own desires, expectations, delays etc. Which could be
resolved among themselves there are number of elements and forces and uncertainties
that are really opposing the proper performance of the contract. These elements & forces
could be within as well as external. Within, is generally the change in scope of work or
additional and alternations .Such change shall cause impact on cost and time and many
times may involve prolonged discussions and negotiations. Naturally, these affect the
time schedule and the agreed prices. While these could be sorted out between the parties
only, the opposing forces from the external agencies really cause concern on cost and
time and even cause a frustration to the parties. These forces are generally acts of
Governments, acts of God and other agencies like carrier owners, power cut, strike,
terrorism, local problems etc. These are beyond the control of the contracting parties and
they cannot solve these problems. Consequences due to these problems have to be
examined in a fair way to both and time extension and additional price to be agreed upon.
Chart- 5 shows the position.
 CHART 4
ATTITUDE OF THE PARTIES TO THE CONTRACT
With the different views and objectives of each party as above and these views opposing
each of the other, the contract is to be managed and again within the scope of work, time
schedule and price. Any over run in time or cost and on both are not desirable and to be
discouraged.

9.0 HOW TO MANAGE THE CONTRACT.

Basically all parties involved in the contract shall understand the role to be played
by each and must be determined to play it correctly in due time without fail. Each
party must understand and appreciate the problems faced by the other party and shall
have open mind to resolve the problems with a view to complete the scope of work
agreed in the contract instead of looking at the problem in an isolated way with self
interest. Contract performance interest must be overriding factor than the self interest.

9.1 To manage the contract, the Purchaser’s interest in completing the project on time
and within the contract price agreed upon is ensured by time schedule guaranteed
by way of liquidated damages and the entire performance of the contract in total is
guaranteed by a contract performance guarantee to certain financial limit. A time
limit, reasonable one shall be determined and set for all activities to be done by the
parties to the contract. Periodical review is to be held and by the parties to the
contract. Periodical review is to be held and if necessary spot decision to be taken
with all concerned. There shall be a price variation clause with a standard formula
which will protect against the cost escalations. It must be ensured that the contract
shall be kept alive, active and agitated so that no frustration sets in. If due to external
forces like Force Majeure conditions, time extension to be granted to complete the
work and if for any reason overstayal is caused, then it has to be regulated as per
Hudson’s Formula mentioned below:-

9.2 Hudson Formula for compensation due to time extension.

9.2.1 The Hudson Formula’ explained:

For the assessment of the contractor’s losses, due to delay, under this head, the formula as
stated by Hudson as under:

(H.O / Profit Percentage) Contract sum

- - - - - - - - - - - - - - - - - X - - - - - - - - - - - - - - - - - X Period of delay in weeks.
149Contract period in
Weeks.

For example, overheads and profit combined contribute R s. 20 in the contractor’s

tendered rate of Rs.100, the contract sum is Rs.10,00,000/- and the time limit allowed is
40 weeks, the prorata amount per week, the contractor expects towards overheads and
profit from this contract would be:

20 10,00,000
- - - - - - - - X - - - - - - - - - - = Rs. 5000/-
100 40

This amount represents the loss per week of delay at the site of the work. For overstayal
for any work Rs. 5000/- shall be the compensation payable.

CHART 5
9.3 Scope Change – Additional Work
9.3.1 Within the limits agreed in the contract under variation clause, there will not be
any change in the price.

9.3.2 If the quantity in the additional work exceed these limits, then the rate as agreed
for such item under bill of materials shall be adopted.
9.3.3 If there is no rate for the item in the bill of materials, it should be fair to adopt the
rate for the same item agreed in any other contract of the same project.
9.4 Corresponding time needed to complete the additional work should also be worked
out, agreed upon and time extension granted.

10.0 INTERPRETATION OF CONTRACT AND CONNTRACT TERMS.

10.1 A contract shall be drafted and written in simple language which could be
understood even be understood even by layman. Plain and understandable words
shall be used in the construction of the contract. Such words shall be given their
ordinary and natural meaning. Clauses carrying same text and sprit shall not be
repeated at different sections/parts of the contract. Such repetition shall cause
great problem in interpretation and shall lead to dispute. Like wise. Words of
same meaning or nearer meaning shall not be used together in the same section or
clause. Construction of contract choosing the correct, apt and simple words
assumes a very great importance these days as more and more contracts are drawn
up and concluded due to very rapid development in various sectors.

10.2. Interpretation of a contract document or terms normally shall not arise if the
construction of the contract is drawn on the basis of simple chosen words
understandable by all including a layman. In such a case every one will conceive
and understand the sprit and meaning in the same way leaving little for a
different meaning for the same. Interpretation of the contract means literally the
intention of the contract. It can be said to be a method by which true sense or the
meaning of the word used in the contract, is understood, Interpretation, therefore,
emerges more or less picking the definition and meaning given to the words used
in the contract, as given in the standard dictionary. It may thus lead to find out
what is the intention conveyed in the contract through these words or expression.
In the process of interpretation, words used have to be given their ordinary,
natural and popular meaning only. In many cases, courts have observed that if the
words are simple and clear, there shall be very little for the court to do. A strict
construction of a contract can cut both the ways and it is in the interest of parties
to the contract to have liberal construction. An illustration of the bond or contract
executed by Antonio in favour of Shylock as a Security for the money borrowed
in Shakespeare’s “ THE MERCHANT OF VENICE” would give rise to the
judgement of strict interpretation. The bond said, if the money borrowed in not
repaid on the stipulated date, shylock can claim a pound of flesh from Antonio,
 Shylock insisted the pound of flesh when Antonio failed to repay the borrowed
money on the stipulated date. After even pleading by Portio, Shylock stuck to the
strict construction of the clause and finally the judgement was that Shylock can
take a pound of flesh without shedding a drop of blood and not to cut less or more
of flesh.
10.3 Courts though are vested with unlimited powers to interpret the terms of the
contract, it is to be noted that Courts cannot rewrite the contract. Generally the
Courts try to ascertain the intention of the parties to the contract while agreeing
such terms and consider all the words in the written down contract itself in their
ordinary and natural meaning and sense only. To understand the intention, Courts
will consider all the relevant part, section of the document in detail and as a
whole. Courts also take into account the circumstances leading to the use of such
words in the contract.

10.4 Courts have held in many cases and interpreted the contract as under:

• The intention of the parties to the contract shall prevail over the words written in the
contract.
• The words as written in the contract shall be interpreted with its normal and popular
meaning as understood by layman.
• Same words appearing at different clauses shall be given and interpreted with the
same meaning.
• Handwritten words or clauses shall prevail over the printed or typed clauses.
• Typed clause shall prevail over printed clause.
• Special conditions shall prevail over the general conditions.

10.5 In case of two views or interpretations possible over a clause one in favour of the
party who drafted the contract and the other against him, the interpretation
against him shall be preferred.

10.6 Similarly, in the case of two or more interpretations possible over a clause, the
one which helps to operate the contract and proceed further shall be preferred.

10.7 Technical and Scientific words in the document, such meaning technically and
scientifically applicable shall be the primary meaning.

10.8 The contract must be considered as a whole in order to ascertain the true meaning
and intention of the parties to the contract.

10.9 In the light of the above aspects of interpretation of contract, it becomes necessary
and essential to draft the contract clauses carefully leaving little or no room for
any scope for interpretation.

11.0 BREACH OF CONTRACT AND REMEDIES THEREON

11.1 A contract is drawn and concluded on the basis of agreements reached on all
 terms, conditions, prices, unit rates etc. with an identity of mind ‘ Consensus ad
idem ‘ and with free will, consent without force and compulsion. Therefore
parties to the contract are expected to perform the contract with its strict sense
diligently and faithfully respecting to the mutually agreed terms and conditions.
It therefore shall not be the intention of the parties to the contract, to breach it at
any point of time under normal circumstances. However under certain situations,
conditions created, there could be a possibility of any one of the parties to the
contract to breach it partly or totally. In such an event, there is always recourse in
the contract and in law as well, to compensate the damages caused.

11.2 A breach of contract is failure to perform an obligation arising out of the contract.
If the entire obligations are not performed or failed to perform it is called total
breach. When the contract is broken only in part, it is called a partial breach. If a
party announces before his performance is due, his definite unwillingness or
inability to perform or fulfill the contract the party thereby admits, he is guilty of
breach. This kind of breach is called anticipatory breach. A party may
deliberately incapacitate himself or render impossible to perform his obligation or
interfere in the performance of the other party. These also constitute a breach of
contract. Every breach of a contractual obligations confers upon the injured party
a right of action. An actionable breach of contract occurs when a promisor
without sufficient excuse or justification fails to perform in accordance with the
terms of the contract.

11.3 Under the complicated provisions of engineering contracts, the possible breach of
the contract by the owner and the contractor are numerous and are as defined
asunder:

11.3.1 Breach by the Owner

Delay in approving, drawing, designs, systems, sub-vendors, sub-contracts, PERT

network,
Delay in handling over the site at the agreed time,
Delay in making payments of the bills,
Delay in inspection,
Delay in furnishing inputs / work fronts,
Delay in approving the changes in scope, revisions,
Delay caused by other agencies employed at site.

11.3.2 Breach by the Contractor

Delay in submission of drawing, designs, system, list of sub-vendors, sub-

contractors, PERT chart network,

Delay in the execution of work as per agreed schedule, engaging unauthorised

sub-contracts.
 Failure to adhere to statutory provisions, regulations, safety measures,

Failure to ensure as required, to employ qualified people, failure to adhere to

standards and codes.

11.4 By breach the contract is broken

Breach of Contract occurs

Where a party to the contract repudiates it,

Where a party to the contract fails to perform one or more of the obligations
imposed on by the contract,

Where a party to the contract disables himself from performing his part in the
contract.
11.5 The right to treat contract as wholly discharged by breach may arise in anyone of
the following ways.

11.5.1 the other party to the contract may fail to perform his obligations, that is what he
has promised under the contract,

11.5.2 the other party to the contract may renounce his liabilities under it, he may make
an express repudiation that is, to state explicitly that he will not perform his
promise,

11.5.3 the other party to the contract may make an implicit repudiation he may do some
act which disables him from performing his obligation or by his own act he may
make it impossible to fulfill, his own obligations under the contract.

11.6 Breach of the contract always entitles the innocent party to maintain an action for
damages.

11.7 Remedies to the Breach of Contract

The injured party consequent to breach of the contract by the other party is
entitled for compensation due to loss or damaged. The Indian Contract Act
contains three provisions towards consequences of breach of contract as under.

11.8 Section 53: Liability of party preventing event of which contract is to take
effect - When a contract contains reciprocal promises, and one party to the
contract prevents the other from performing his promise, the contract becomes
voidable at the option of the party so prevented, and he is entitled to
compensation from the other party for any loss which he may sustain in
consequence of the non-performance of the contract.
Section 73 : Compensation for loss or damage caused by breach of
 contract - When a contract has been broken, the party who suffers by such
breach is entitled to receive, from the party who has broken the contract,
compensation for any loss or damage caused to him thereby, which naturally
arose in the usual course of things from such breach, or which the parties knew,
when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.
Section 74 : Compensation for breach of contract where penalty
stipulated for - When a contract has been broken, if a sum is named in the
contract as the amount to be paid in case of such breach, or if the contract
contains any other stipulation by way of penalty, the party complaining of the
breach is entitled, whether or not actually damage or loss is proved to have been
caused thereby, to receive from the party who has broken the contract reasonable
compensation not exceeding the amount so named or, as the case may be, the
penalty stipulated for.
Section 75 : Party rightfully rescinding contract entitled to compensation
- A person who rightfully rescinds a contract is entitled to compensation for any
damage which he has sustained through the non-fulfillment of the contract.

11.9 Conditions to be established

11.9.1 It must be first proved that there exists a contract or an obligation resembling
those created contract.

11.9.2 That the defaulting party was under an obligation to perform that part which is
alleged to have been breached.

11.9.3 That the breach of the contract must be established.

11.9.4 That such a breach of contract has caused loss or damage and arose in the usual
course.

11.9.5 That the parties to the contract knew when they made the contract such a loss or
damage is likely to occur from the breach of it.

11.9.6 That the loss or damage sustained by reason of breach is neither remote nor
indirect.

11.9.7 That the injured party did take precautions to mitigate the losses to the maximum
extent possible.

11.9.8 When all the above are fulfilled, the injured party is entitled to receive
compensation for any loss or damage from the party who has broken the contract.

12.0 COMPENSATION EVENT CONTRACT- PRICE –TIME LEGAL

POSITON
12.1 COMPENSATION EVENT

In any contract between two parties, the compensation event shall generally be
hereinunder.

150The owner/purchaser does not give access to site of work or does not hand
over the site as per agreed schedule.

151The owner / purchaser causes delay in furnishing facilities agreed, in

approving designs, drawings, technical specifications, inspection data etc, sub
contractors, su-suppliers, instructions required for execution work.

152The owner / purchaser instructs the contractor to carry out additional work,
substituted work additional tests which results indicates no defect.

153The owner / purchaser delays in making advance payments and other

subsequent stage payments.

154The owner / purchaser modifies the schedule of other contractors which

consequently affects the performance, like delayed inputs work fronts.

155The site conditions are substantially more adverse than could reasonably
assumed out of the data information furnished in the tender specifications and
even from information available publically and form a visual inspection at
site.

156Other contractor’ public authorities, utilities of the owner /purchaser does not
work within the agreed data.

157Any other constraints stated in the contract.

12.2 CONTRACT – PRICE TIME EXTENSION

1. If the compensation event if any, happens, it shall cause additional cost

and prevent the scope of work being completed within the agreed time.

2. The compensation admissible and time extension to the extent needed

to complete the entire work shall be assessed and settled.

12.3 LEGAL POSITION

Indian Contract Act – 1872

Section 53
 Liability of party preventing event on which contract is to take effect.

When a contract contains reciprocal promises and one party to the contract
prevents the other from performing his promise, the contract becomes
voidable at the option of the party so prevented and he is entitled to
compensation from the other party for any loss which he may sustain in
consequence of the non performance of the contract.

Section 54

Effect of default as to that promise which should be first performed

contract consisting of reciprocal promise.

When a contract consists of reciprocal promises, such that one of them

cannot be performed or that its performance cannot be claimed till the
other has been performed, and the promisor of the promise last mentioned
fails to perform it, such promisor cannot claim the performance of the
reciprocal promise, and must make compensation to the other party to the
contract for any loss which such other party may sustain by the non
performance of the contract.

12.4 Compensation

The compensation has to be worked out based on the event, default

occurred or caused.

13. PROBLEMS IN CONTRACT PERFORMANCE

Hindrance – Event Records

13.0 DELAYS, FAILURES BY PURCHASER – REMEDY

13.1 Generally dealys – failures caused by purchaser are in
158Approving the drawings
159Approving the billing schedules
160Approving the Quality Assurance Plan / PERT
161Providing input data
162Providing work front
163Making payments
164Resolving interface problems
165Resolving site problems
166Timely inspection
 167Issue of Material Receipt certificate / Material Verification certificate / IRR
11.10 If any delay is anticipated in the area of drawings billing schedules and quality
assurance programme, steps shall be taken to discuss directly and sort out the
problems.
11.11 The Purchaser has to co-ordinate with the contractors of other packages, so that
the Purchaser can provide the work front / input agreed.
11.12 If the delay is solely attributable to purchaser time extension shall be granted
straightaway to the extent required. If the Contractor demands, compensation will
be restricted to the following only.
168Increase in cost of Material and Labour cost.
169Overhead charges.
170Plant and machinery charges.
171Re-fixing the ceiling o price variation.
172Interest on loss of profit.
173Bank charges towards Bank Guarantee extension.
11.13 Hudson’s formula, as below can be adopted for all such cases. However it has to
be reviewed on case to case basis.

11.14 “OVERHEADS – AN ALLOWACNE OF 10 PER CENT WOULD BE ADEQUATE FOR

CONTRACTOR’S ACTUAL EXPENSES ON SUPERVISORY ESTABLISHMENT, FIELD
OFFICE AND SHARE OF HEAD OFFICE CHARGES, TRAVELING EXPENSES,
PUBLICITY, INTEREST AND INSURANCE OF DAMAGES TO PLANT AND INJURY
TO LABOUR.”

11.15 “PROFITS – WE BELIEVE THAT IN NORMAL CIRCUMSTANCES AN ALLOWANCE

OF 10 PERCENT OF THE PRIME COST AS CONTRACTOR’S PROFIT IS
REASONABLE.” The formula as stated by hudson in his book “Building and
Engineering Contracts,’ 10th edition , at page 599 as follows:-

Eriod of delay in weeks x H.O. Profit percentage x Contract Sum

Contract period in weeks x 100

13.7.1 The above formula will be found to be very useful in working out the extra “over
heads”
and the loss of profit of the contractor in case of delay in the completion of the
work due
to the employer’s default and breach of contracts.

13.2.0 DELAYS, FAILURES BY CONTRACTORS – REMEDY

174Delays in planning
175Delay in design engineering
176Delay in manufacture
 177Delay in Mobilisation
178Delay in settling sub-suppliers
179Delay in engaging Sub- Contractors wherever applicable
180Non adherence to quality standards
181Delay in adherence to time schedule
182Defective work / Rectification thereof
183Poor construction management

13.2.1 If the delay is entirely ad solely caused b the Contractor, the Liquidated damages
can be straightway levied. But if the contract is of major and critical nature and
the amount of Liquidated damages is heavy, the Contractor may slow down the
progress of work or even abandon. Then in that situation, it may be advisable to
Issue of Letter granting extension before the Contract Scheduled date to the extent
required but retaining right to levy Liquidated Damages,

13.2.2 LD is to be settled before making the final bill.

13.2.3 The project Co-ordination Committee shall analyse the cause of delay and settle
at
the closure of the contract.

13.3.0 DELAYS CAUSED BY CONTRACTOR AND PURCHASER:

13.3.1. As per activity / bar chart, progress must be constantly and periodically reviewed
and slippages / constraints shall noted then and there. Remedial measure by the
Purchaser as well as the Contractor shall be taken not to allow it to be escalated
further. The details must be marked in the bar chart. All such delays and
problems shall help o identify the delay caused b each party. Then the charts are
drawn out separately as delays by each and apportioned between them. This
delay apportioned form a basis for deciding the quantum of Liquidated leviable
and time extension there upon.

13.4.0 WORK EXECUTION PROBLEMS – REMEDIES

13.4.1 Work Execution problems identified

13.4.1.1 Technical aspects:

Delay in approval technical issues,

Change in scope of work,
Additional items of work or new items of work envisaged,
Substituted items of work
Delay in releasing / providing work fronts.
Delay in providing inputs
Hindrances at Work Sites,
Rate fixing
 Time extension
Any other issue

13.4.1.2. Commercial aspects:

Payment
Rate Fixing
Time Extension
Increase / Decrease in Contract value,
Extension of securities
Encashment of Bank Guarantees
Effects due to Force Majeure
Dispute / Claims – Compensation settlement

13.5.0 QUANTITY VARIATION:

13.5.1 In the case of Lump Sum Turn Key contract, any Quantity variation over the bill
of quantities shall not have any effect on price. The Contractor shall supply all
items for such quantities as needed for system completion.

13.5.2 In the case of Unit Rate Contract, there shall be quantity variation clause up –to
20% (Twenty Percent). So, for any variation under any item, up to the limits, the
price shall not be altered. If it is more than 20% (Twenty Percent), the rate shall
be agreed mutually based on the market rate.

13.5.3 A.H.R. / A.L.R. items shall be dully identified on conclusion of the Contract and
he officials / agencies responsible for execution of the work should be intimated
to exercise appropriate control on such identified items.

13.6.0 SCOPE CHANGE OTHER THEN QUANTITY VARIATION

13.6.1 In the case of Lump Sum Turn Key Contract, the design being the scope of the
Contract
and as a system is being designed, erected and commissioned, there shall be
freedom for
the Contracts subject to following design, standards, code and normal applicable
engineering practices subject to Stipulation in Tender specifications.

13.6.2 If the Purchaser makes a scope change during execution, such change shall have
implication in cost and time. It shall be decided with mutual consent.

13.6.3 In the case of Unit Rate Contract also, the rates for new items substituted items
etc., rates are to be settled as per guidelines mentioned hereunder.

13.6.3.1. The rate payable shall be determined by methods and order given below:
13.6.3.2 For items not existing in the bill of quantities or substitution to items in the bill
or quantities, the rate payable should be determined by the methods given below an in the
order given below:

13.6.2.1 Rates and prices in Contract, if applicable plus escalation as per Contract.

13.6.3.2.2. Rates and prices in the schedule or rates applicable to the Contract Plus ruling
percentage.

13.6.3.2 Market rates of materials and labour, hire charges of plant and machinery used
plus 10% (Ten Percent) for overheads and profits of the Contractor.

13.6.3.3. For items in the Bill of Quantities but where quantities have increased beyond
the variation limits, the rate payable for quantity in excess of the agreed quantity in the
Bill Quantity plus the permissible variation should be.

1843.3.1 Rates and prices in Contract, if reasonable plus escalation failing which
6.3.3.2 and 6.3.3.3. below will apply.

13.6.3.3.2 Rates and prices in the schedule of rate applicable to the contract plus
ruling percentage.

13.6.3.3.3 Market rates of materials and labour, hire charges of plant and machinery
used plus 10% (TEN PERCENT) for overheads and profiles of the
Contractor.

13.6.4. If there is delay in, the Purchaser and the Contractor coming to an
agreement on the rate, the rates as proposed by the Purchaser shall be
payable provisionally till such time as the rates are finally determined.

13.6.5. However, in the event of any delay in fixing the rate per unit or
disagreement, the Head of the Construction department shall fix a
provisional rate to enable work to be proceeded with and on account
payment effected.

13.7.0 DELAYS CAUSED BY FORCE MAJEURE

13.7.1 The duration of force majeure shall be clearly established by proper authority’s
notification / documentary evidence. Time extension shall be granted for the
duration of Force Majeure postponing the Liquidated damages application date
for delays caused beyond the extended date.

13.7.2 The shall no cost effects to any party.

13.8.0. DELAY IN PAYMENTS:

13.8.1 All payments shall be made as per agreed payment terms subjects to all
 technical acceptance and covered by complete documents submitted. If the
payment is delay beyond the period agreed, it shall be paid with interest for
the delayed period at bank prevailing lending rate.

13.8.2 Even in cases, where the full payment as accepted by Construction department
could not be made 75% (SEVENTY FIVE PERCENT) of the accepted bill value
shall be released by Finance department to enable the contractor to proceed and
progress on the work.

13.9.0. TIME EXTENSION AND EFFECT:

13.9.1 Time extension shall be granted only on bonafide request and not in a routine
manner. In case more than one Contractor are engaged on a Project and delay
occurs, the case should be analysed on a total perspective and the Agencies
responsible for the delay, including the consultant should be appropriately
penalized. There shall be provision in the contract to grant time extension by
the Purchaser to perform the obligation in the contract. Time extension may
need to be granted due to

185Causes by force majeure

186Causes by Contractor
187Causes by Purchaser
188Causes by Contractor and Purchaser

13.9.2. Wherever necessary, the Contractor shall request before the expiry of the
Contract period for extension of time specifying period up to which time
extension is required.

13.9.3 In all cases of time extension, suitable extension of Bank Guarantees shall be
ensured. Increase in Taxes and duties during the extended period shall be
allowed if delay is caused by Purchaser and if the delay is caused by the
Contractor, the liability shall be to the Contractor. But if the delays are caused
by both, the effect of tax liability shall be reviewed, discussed and settled fixing
liability on both parties.

13.10.0 HINDRANCE RECORD:

13.10.1 Events hat caused hindrance to proceed and progress with the work shall be
recorded daily and signed by the Contraction Department and the Contractor.
The Project Coordination Committee shall take these data for settling the issues.

A record of event shall be maintained as under with the signature of the Contractor and
the Purchaser against each case.

HINDRANCE RECORD REGISTER

Name of work: Value of Contract:
Name of Contractor Scheduled Date of Completion:
 Signature of the

Contractor Purchaser

13.11.0 Remedy

13.11.1 The Head of the Construction Department shall be vested with full and complete
Technical authority, Powers to make variation / deviations in the Technical
specifications, Quantity, Quality, Substitution if in his opinion it is necessary for
the technical requirement and to complete the scope of work. with Finance
Concurrence. Such powers shall be exercised with due care and subject to the
Technical and Quality requirements being met an without any undue benefit to
the contractor / Loss to N.L.C.A. well and clearly drawn out activity linked with
Time – bar chart, Pert /CPM Net work etc., shall act as a Monitor / shall help in
the monitoring activities.

13.11.2 A good progress fortnightly reporting system is to be drawn, adopted and

followed. The constraints if any, reported in the progress shall be liquidated
immediately and shall not appear in the next report.

13.11.3 In spite of best efforts, Pre bid conference, identity of mind etc., during
implementation of scope of work in a project nature of contract, disputes,
differences, changes, additions, omissions, deletion etc., may occur.

13.11.4 To assist the General Manager / Construction, a Project Co-ordination

Committee shall be constituted with due authority. This Project Co- ordination
Committee shall act expeditiously and in case of difficulty to resolve, prepare an
Impact Report .

13.11.5 Discussions can be held with the Contractors with a view to amicable settlement.

13.11.6 In case where it may be difficult to settle, such a case can be treated as
“Compensation Event” and 50% of payment as per the rate arrived at by Project
Co-Ordination Committee shall b e paid.

13.11.7 Decision Making

13.11.7.1. For any such situation, decisions shall be taken within 15 (Fifteen) days upon
occurrence.
13.11.8 Delegation of powers:

13.11.8.1 The General Manager / Construction is authorized to take decision and

implement the contract at the agreed terms. To accept variations up to 10% of
the contract value or Rs. 50,00,000/- (Rs. Fifty Lakhs) whichever is less, G.M/
Construction is authorized.

13.12.0 ARBITRATION

13.12.1 If it could not be settled be nay one of the methods, them the recourse shall be
through arbitration as per Arbitration and Conciliation Act 1996. Setting aside
the dispute to be resolved by the Arbitral Tribunal, the work shall be proceeded
with.

14.0 IMPACT REPORT

14.1 When the Project Committee finds it difficult to resolve any issue, Technical an
Commercial, based on reports received by site Engineers, Engineering / Finance /
Contractor / Inspectors / Expenditors, the Project Committee shall prepare and submit a
IMPACT REPORT (Model furnished hereunder) to the concerned for necessary
directions.

IMPACT REPORT
BY
PROJECT COMMITTEE
Report No……………… Date: ……………….
Packing Name: Contractor:
Contract Value: Time Schedule:
S.NO.
Description of problem
Reasons for delay
Impact on progress
Remedies suggested

Signature of Project Committee members:

Note : The report shall be generated immediately on occurrence and got cleared within 5
 working days.

15.0 GENERAL PROVISION – IN VARIOUS LABOUR ACTS

1.0 Contract Labour Regulation & Abolition Act 1970 -71

1.1 The contractor employing 10 or more workers is required to obtain the Labour
License from the Govt. authorities for the said period and purpose of the
work.

1.2 The contractor will follow the conditions stated in the license:

1.2.1 The contractor shall ensure that at no point of time the number of
workers employed by him exceeds the limit prescribed.

1.2.2 The contract shall employ the workers in the work authorized by
license.

1.2.3 The contract has to ensure that the license is renewed from time to
time before expiry of the date mentioned in the license etc.

1.3 The contractor is required to maintain the following registers:

1.3.1 Attendance register from number 16: Attendance to the marked on

daily basis
1.3.2 Wage register form umber 17/18
1.3.3 Wage Slips form number 19 required to be given to the workers
 every month.
1.3.4 Wages Deduction register form number 20
1.3.5 Advance register form number 21
1.3.6 Fine register form number 2
1.3.7 Overtime register form

1.4 The contractor is required to give a notice regarding the date, day, pace of
payment of wages & the rate of payment & hours to work of Personnel /
labour department.

1.5 The contractor is required to disburse the monthly wages to each of the
worker in presence of a representative.

1.6 The contractor is required to maintain Form number 13 containing the date of
joining & signature of the worker & the employment card in form number 14
for all the workers.

1.7 The contractor is required to file a half-yearly return (June & Dec) in the form
number 24.

1.8 The contractor is required to maintain all the above mentioned records at the
sight office and no point of time the contractor will be allowed to take these
records out without prior permission.

2.0 Minimum Wage Act & wage Rules – 1948

2.1 The contractor is required to ‘Maintain’ an Inspection Book.

2.2 The contractor has to provide Attendance card to all the workers.

2.3 The contractor shall pay the Minimum wage rate (Basic + DA) declared by
the state Government, from time to time in regard to the category of workers
in Unskilled, Semiskilled & Highly skilled worker etc.

2.4 The contractor shall make payment of wages on 7th of every month in
presence of representative if the 7th happens to fall on weekend or on holiday
the payment has to be made before 7th.

2.5 The contractor is required to pay overtime wages @ twice ordinary rate of
wages of the worker where a worker has worked for more than 9 hours in a
day or for more than 48 hours in any week.

3.0 Workmen’s Compensation Act Employees’ State Insurance - 1923

 3.1 If the contractor is not covered under employees state insurance ESI than he
has to provide valid insurance coverage to all the workers & supervisors
working at the site for the duration of the contract.

3.2 Where employees state insurance ESI is applicable; the contractor shall
comply with the provisions under said Act.

4.0 Equal Remuneration Act & Rules 1976

4.1 The contractor is required to maintain Form number D register showing he

numbers of Male & Female workers employed and the rate of wages paid.

5.0 Provident Fund and Rules 1952

5.1 The contractor before starting work shall submit a copy of provident fund
allotment letter to Personnel / Labour department.

5.2 The contractor shall furnish the nomination particulars concerning the
member and his family on Form number 2 to the PF commissioner.

5.3 The contractor shall keep contribution card in Form number 3A in respect of
every worker number in his contract.

5.4 The contractor shall submit within 15 days of the close of each month a return
in form number 5/10 of the workers who become members of the found for
the first time during the proceeding month/ leaving service of the contractor
during the proceeding month.

5.5 The contractor shall maintain an inspection notebook for an inspector to

record his observations during the visit to the establishment.

5.6 The contractor shall forward to the provident fund commissioner within 25
days of the month a copy of the wages payment register for the month
showing the amount recovered form the wages of each worker towards the
Provident Fund the account number thereof, the amount contributed by the
employer to such fund.

5.7 The contractor shall also submit to the provident fund commissioner within
one month of the close of the period of contract, a consolidated annual
contribution statement in Form number 6A indicating the total amount of
recoveries made during the period of contract from the wages of each worker
and the total amount contributed by the contractor in respect of each such
worker for the said period.

5.8 If the contractor defaults in the payment of any contribution then the principal
 employer is authorized to recover the damages by the way of penalty.

5.9 The contractor to submit copy provident fund challans to Personnel /Labour
department every month.

6.0 Child Labour: -1986

6.1 In furtherance to Child Labour (Prohibition and Regulation) Act, 1986. No
contractor will employ any worker who is less than 18 years of age.

6.2 In case of any dispute of age of any such worker and in the absence of a
certificate of age of such worker the Medical authorities shall decide the same.

7.0 Bonded Labour: 1976

7.1 As per the provisions of Bonded Labour System (abolition) Act, 1976 no
contractor or service provide shall employ bonded labour in any of the
contract.
8.0 Factory – Act 1948
8.1 The contractor shall adhere to working hours as governed by the provision of
the Factories Act a Rules such as.

8.2 Working hours, holidays, overtime.

8.3 Leave provisions.
8.4 Health measures.
8.5 Safety measures.
8.6 Welfare measures
8.7 Display notices register, returns.
8.8 The contractor shall provide Photo-I Card to its labour in the Form – 36 per
the requirement under Factories Act.
9.0 Other Requirements:

9.1 The contractor shall maintain appropriate record of employment of labour.

The employment letters shall clearly spell out the terms of employment.

9.2 The contractor shall follow the labour employment policy as may be
prescribed by he respective government from time to time.

9.3 The contractor shall follow and adhere to Gratuity, Bonus, Leave En-
cashments etc, as applicable as per the provisions of statute.
 9.4 The contractor shall make appropriate arrangement for supervision of his
labour.

9.5 The contractor shall submit a copy of above documents on monthly / half –
yearly or yearly basis to the personnel / labour dept.

9.6 The contractor will attend meetings, when they are called upon to do so.

9.7 Based on the number of person insured, License and provident fund coverage
by the contractor; gate passes will be issued to him.

16.0 DISCHARGE OF THE CONTRACT

The discharge of the contract means completion of the contract in all respects. It is
generally achieved by any one of the following.

By accord perform and satisfaction.

By an agreement.
By novation.
By impossibility of performance.
By insolvency.
By bankruptcy.
By breach.
By termination.

Each one of the above has its corresponding consequences on the contract and on the
parties to the contract.

16.1 By accord, perform and satisfaction

It is the best and most desirable means of discharge of the contract. By this both the
parties to the contract have performed their obligations set and agreed in the contract and
are satisfied by achieving their rights. Thereby both the parties feel satisfied that they
have carried out their jobs, acts, obligations well in time and thereby caused no
inconvenience to each other. In fact this kind of discharge of contract by both the parties
enriches their pride and prestige.

16.2 By Novation

Novation means the extinguishment of the terms of an earlier contract and creation of
another with another stranger equally competent in the legal sense and technically
capable. It is essential for the principle of novation to apply, there must be full mutual
consent of all the parties concerned. The new party may enter into the same contract duly
amended wherever necessary so that the rights and obligations remain unaltered or
changed. Thus the new party takes the position of the party who has agreed for novation.
By novation, the contract with the other party get discharged.

16.3 By an agreement

Before a contract is fully performed, the parties to the contract may discharge it on terms
mutually agreed upon. Such an agreement for the discharge of the contract shall also set
forth, the terms of settlement of work, bills, payments, accounts and guarantees.
Principles of fairness and natural justice may prevail. There shall be no further
obligations or rights anymore once contract is discharged by an agreement.

16.4 By impossibility of performance

As a general rule a contract can be discharged if by a subsequent change in law or act by

which renders it illegal or impossible to perform. It also include a change in the
circumstances that the performance under the new conditions will be substantially
different from that contemplated by the contract. It happens mostly in the international
contract due to change in the diplomatic relationship or declaration of war or any special
government embargo restraining any commercial trade / business between the two
countries. Impossibility of performance arising from such position subsequent to the
contract generally discharges the contractor from liability.

16.5 By insolvency

When either owner or the contractor becomes insolvent the contract will be discharged.
Therefore it is necessary in the bid specification to call for a solvency certificate to prove
and take care of such a situation. In the case of discharge of the contract by insolvency,
dues if any shall be claimed from liquidator while excess, if any received shall be passed
on to the liquidator. The insolvency of the contractor puts an end to any agency fixed
earlier as it is borne out of the contract only,.

16.6 By bankruptcy

It is almost similar to insolvency. The contract gets discharged. The contract is

determined. It is the duty of the bankrupt to pass on all information.

16.7 By breach

The breach of a contract is the failure or refusal to perform it. Any such breach of
contract by anyone of the party to the contract gives the other party an immediate cause
of action and a right to damages as compensation for loss following from the said breach.
By breach, the contract is broken and is discharged as it renders, the contract purposeless.
If such a breach of the contract is proved, a claim for damages is admissible in law.
Damages are awarded as a pecuniary compensation for the injury which the party suffers
as a result of the breach by the other party. But law does not recognise the liability for
damage which are remote. Indirect losses and consequential damages are not considered.

16.8 By termination

If a contract is terminated consequent to failure to perform the contract, the contract gets
discharged. The relationship created between the parties to the contract entered into is
just broken by the act of termination. The contract is determined.

17.0 DISCHARGE AND CLOSURE OF CONTRACT

17.1 General

A Contract is entered into between two parties for certain agreed scope of work,
time schedule and other terms and conditions. Due to design changes, site
requirements, non availability of certain items, components, changes in taxes,
duties etc. and force majeure or condition amendments to the contract would
have been issued on the basis of agreements reached in those areas.

17.2 Therefore, work would have been completed as envisaged in the contract with
amendments if any to contract bills would have been raised and settled. All
outstanding issues, like the final settlement of bills, recovery of cost of owner
supplied materials, plant and machinery tools etc., off loaded items if any, taxes,
duties, would have been settled and the contract would have been completed in all
respects, physical and financial. The guarantees would have been discharged
except the performance guarantee.

17.3 Under the circumstances, the obligation rights set out in the contract between the
parties to the contract shall have to be discharged once for all except
performance of the equipments plant and machineries erected, during the agreed
warranty period.

17.4 Discharge procedure

17.4.1 The following steps have to be followed to issue a discharge and contract
closure certificate by the Owner.

17.4.2 Step - I

The contract department shall clearly obtain a certificate from the construction
department and finance department for the respective role responsibility entrusted
to these departments.

17.5 Construction department

17.5.1 The construction department shall ensure and clearly certify that the scope
of work agreed in the contract with amendment had been completed in all
respects adhering codes and standards.

17.5.2 That the equipment, plant, machinery erected, tested, commissioned had
been taken over after the successful performance tests.

17.5.3 That the spares, maintenance tools of all kinds have been supplied,
received, inspected, accounted and taken over and numerical account
maintained.

17.5.4 That the essentiality certificate issued for the procurement of materials /
construction equipment have been utilised properly.

17.5.5 That the short supplies, damaged items have been identified, replacements
obtained.

17.5.6 That the claims lodged with the insurance have been settled.

17.5.7 That all the statutory provisions have been compiled with.

17.5.8 That all the plant & machinery if any loaned / handed over on hire basis
have been taken over.

17.5.9 That all the surplus materials / construction excess / owner supplied
materials have been identified, accounted and duly dispensed off.

17.5.10 That all the temporary structures put up by the Contractor have
been disposed off.

17.5.11 That the liquidated damages, if recovered have been settled.

17.5.12 That claims if any on any aspects of the Contract have been
settled.

17.5.13 That all the contractual obligations have been successfully

completed.

17.6 Finance department

17.6.1 The Finance Department shall ensure and clearly certify

17.6.2 That the advance payment if any made had been duly adjusted

17.6.3 That all the work / job bills claimed have been paid.
 17.6.4 That recovery if any had been effected

17.6.5 That the claims in respect of duties, taxes have been settled.

17.6.6 That the last payment have been cleared and settled

17.6.7 That no dues are outstanding from the Contractor

17.6.8 That I T remittance if any have been paid

17.6.9 That the Customs duty deposited have all been adjusted and settled.

17.6.10 That the Letter of Credit opened has been duly adjusted.

17.7 Contract department

17.7.1 The Contract Department shall ensure that all the bank guarantees have
been duly discharged.

17.7.2 That the Bill of Lading and Bill of Entries in the case of imports have been
verified and tallied.

17.7.3 That the Foreign Exchange release have been utilised.

17.7.4 That there is no claim / report from outside agencies / statutory bodies etc.

17.7.5 That there is no suit or arbitration case initiated.

Step – 2
17.8 A no claim certificate from the Contractor. The format is at
Annexure – I. A no claim certificate is to be obtained from the Contractor.

Step – 3
17.9 Contract closure and discharge certificate

17.9.1 On the basis of the Certificate from all the departments, the Contract
Department shall issue to the Contractor a CONTRACT CLOSURE
AND DISCHARGE CERTIFICATE as on Annexure – II.

17.9.2 The no claim Certificate to be obtained from the Contractor as well as

Contract Closure and Discharge Certificate to be issued by the owner shall
be issued by the holder of the Power of Attorney only.
 ANNEXURE - I

Refer para 17.8 of the guidelines on discharge and closure of contract

From

To

Sir,

Sub: Closure and discharge of Cont. No……………….

and amendments to it - no claim certificate.

We, have entered into the, a Contract for the Scope of work of
……………..and the Contract has been assigned No…………

Amendments have also been issued.

We have completed the entire Scope of work as in the Contract read with
amendments in accordance with the terms and conditions set out in the said
Contract. GM / Construction has taken over the plant, machinery, equipments
erected and the spares supplied.

All our material accounts have been settled including all issue in respect of the
said Contract and the Contract deemed to be closed.

Thanking you,

Yours faithfully,

Place : ( Power of attorney bidder of

the
Date : Company )
 ANNEXURE - II

Refer para 17.9.1 of the guidelines for discharge and closure of contract

From

To

Gentlemen,

Sub: Closure and discharge of Contract

No…………….and amendments to it – Certificate.

Ref: Your Letter No……………………..

We hereby certify that the Contract No……………with its amendments issued, is

discharged and closed in all aspects.

We shall not entertain any claim, on any account, on any aspect in this regard.

We thank you very much for the participation in the project and co-operation
extended to the commissioning of the project.

Please acknowledge the receipt of this letter.

Thanking you,
Yours faithfully,

For
GM / Contracts.
 TAXES AND DUTIES

1.0 WHAT IS EXCISE ?

1.1 The Latin term ‘ Excids ‘ means cut-off and the word Excise owes its origin to
this term. In ancient India a tax or a tool was collected, but the modern excise
duty was evolved when a 53 duty ad-volarem was levied on cotton yarn in the
year 1894. Progressively and ambit of excise was increased when duty on motor
spirit was imposed in 1917, on kersosene in 1922, on silver in 1930. The year
1949 was a land mark in the growth of excise levies. Several new items were
brought within the scope of excise levy. In the early 1960s chemicals, dyes,
metals, etc. were brought within the fold. At present there are more than 5000
Headings of various commodities spread over 96 chapters in the Central Excise
Tariff.

1.2 Excise duties account for about 40% of the total tax revenue for the government.
It is collected at the source itself. They serve to regulate domestic production and
distribution. Excise taxation helps in the allocation of resources to the social
needs and it serves to channelise production and investment activities in
accordance with the country’s Socio–Economic priorities.

It is with the Socio–Economic objective that heavy duties are imposed on low
priority luxury goods and relief and concessions in duty granted to industries in
priority sector, small scale and cottage industries. Considering the increased
needs of revenue, in a developing economy as in our country the tax base has
been widened year after year with the result that nearly the entire range of
manufactured goods has been brought within the excise net.

2.0 EXCISE DUTY

2.1 The Constitution enables levy and collection of excise duty. The Constitution
also states that no tax shall be levied or collected except by the authority of the
Law.

2.2 The Central Excise Act prescribes duty of Excise on goods which are produced or
manufactured in India. The duty leviable on manufactured goods shall be
collected at the time when goods are cleared from the factory. The two terms
occur in Excise terminology are goods, manufacture.
2.3 GOODS

2.3.1 The term ‘ Goods ‘ is defined as ‘ All materials, commodities and articles ‘.

2.4 MANUFACTURER

2.4.1 Manufacture clearly means in engineering parlance, conversion of raw materials,

consumables into a finished product by some process. It changes in most of the
case, shape, appearance, dimensions, properties etc. and brings out a new product.
Manufacturer also includes any process incidental or ancillary to the completion
of a manufactured product. Manufacture implies a change but every change is not
manufacture. Something more is necessary and there must be such a
transformation that a new and different article must emerge having distinct name,
character or use. Mere application of labour on an article does not amount to
manufacture.

2.4.2 The most important points to be examined are:-

1. Whether a ‘manufacture’ has taken place

2. Whether the manufactured article could be called ‘Goods’ in the above
context
3. Repairing is not a process of manufacture
4. Repairing does not amount to manufacture
5. Assembling of various parts into an Article would amount to manufacture
6. Affixation of trade or brand name cannot be treated as a process of
manufacture.

3.0 Excise Duty on the basis of ad valorem rates, are generally collected on the value
of the Goods. This is resorted to because excise duty at ad valorem rates has a
close nexus to the supply and demand of a commodity which is determined on the
value of this commodity.

3.1 Sale at factory gate: If a company can establish that a price exists at the factory
gate irrespective of the quantum of sales made through distributors, the factory
gate price will have to be taken as assessable value different prices can be charged
for different class of buyers and each such price will be the normal price.

3.2 SALE THROUGH RELATED PERSONS

The Central Excise provides that when the goods are sold through or by related
persons the assessable value will be the price at which such goods are sold by the
related persons.

3.3 ON CONTRACT PRICES

When sales are made under agreement or contract, prices mentioned in the
 contract is found reasonable on purely commercial basis. The declared sale price
in the contract will be the assessable value.

3.4 CONTROLLED PRICES

Statutory prices fixed by Government can be accepted as normal price.

4.0 SELF REMOVAL PROCEDURE

4.1 Every manufacturer can obtain special permission to move goods on self removal
basis of the goods produced from excise authority.

4.2 In such a case proper documentation must be kept and duty paid periodically.

4.3 In the context of Self Removal Procedure a manufacturer is required to maintain

the following accounts.

4.3.1 Daily stock account of excisable goods

4.3.2 Store room entry book

4.3.3 Register of raw materials and component used

4.3.4 Personal Ledger Account

4.3.5 Account of duty paid goods retained in the factory premises for use in the factory

4.3.6 Account of duty paid materials received for the manufacture of other excisable
goods

5.0 REPORT & RETURNS

5.1 A monthly report consisting, opening stock, quantity manufactured, quantity

removed, value of the goods so removed, closing balance and the total duty paid
on the goods are sent to the authorities.

5.2 Quarterly report for specified raw materials.

5.3 Monthly report of excisable goods used without payment of the whole or part of
the duty for special industrial purposes.

6.0 SALES TAX

6.1 The term “ Tax “ has been defined as a rate or sum of money assessed on the
person or property of a citizen by Government for the use of the Nation or State,
taxes are imposed upon persons or property to raise money for public purposes
 and are enforced by the authority of the state for the support of the Government
and for all public needs. The essence of taxation is compulsion. It is imposed
under statutory power without the tax payer’s consent and the payment is
enforced by law. The essential characteristics of tax are that it is not a voluntary
payment or donation but an enforced contribution.

6.2 It is absolutely necessary to levy taxes to meet the expenses incurred by the
Government in rendering the services.
6.3 Sales Tax, according to the constitutional power given is leviable on the sale or
purchase of goods by a dealer. Goods means movable property. Tax is leviable
only when the sale is effected. Sale is a bilateral transaction that means there
should be two parties to a sale transaction i.e. a seller and buyer.
6.4 The question of profit or loss is immaterial in Sales Tax. Sales Tax is leviable on
goods mentioned in the act.
6.5 For levying Sales Tax there must be three things – viz. Dealer, Business and
Goods.

Dealer being an individual, company or association who indulges in the business

of buying or selling goods. Goods means movable property. Business is an
activity intricately connected with trade, commerce. For a sale there must be the
following elements.

= Parties competent to contract

= Mutual understanding agreement
= Goods or property to be transferred.

There is no “ sale “ unless all these elements are present in a transaction.

7.0 CENTRAL SALES TAX ( CST )

7..1 Sale or Commerce, takes place in the course of inter-state, it is taxable under the
CST Act, 1956. This is Parliamentary enactment. For liability under this Act, is
4% only. A sale should occasion movement of goods from one state to another.
Here, both the seller and the buyer should be registered dealers under the Act and
the transactions are channelised through registered dealers. Whatever may be the
goods CST rate is the same provided, the buyer furnishes a declaration in “ C “
form to the seller.

8.0 SALES TAX IMPLICATIONS

8.1 Distinction between a ‘ Works Contact ‘ and a ‘ Supply Contact ‘.

8.1.1 This distinction arises mainly in the context of Sales Tax liability. Any contract
involving a simple sale of goods means payment of Sales Tax on the contract
 price. However, in a contract executed in the nature of ‘ works ‘, where a
specialised job is done by the contractor, with or without his own materials, if the
wording of contract is such that the supply and works portions are indivisible, no
sales tax is payable on the contract price, but will be treated as works contract and
such tax shall be applicable.

8.1.2 The award of a contract job for painting, including supply of paints, can be termed
as a works contract and no sales tax is leviable by the contractor, either for the
contract work or for the materials supplied by him. However, materials purchased
by the contractor are subject to payment of sales tax by him to his supplier. This
sales tax is deemed to be included in the contract price. The laying of cable
including the supply of cables can also be classified as above.
8.1.3 Even though these cases have been cited here as simple illustrations, one is bound
to come across more complicated cases in one’s experience. The important thing
to remember, however, is that in all cases where it is intended to award a works
contract, the working of the contract as well as the price schedule mentioned
therein should be carefully chosen so as to leave no room for ambiguity as to its
interpretation as a works contract.

8.1.4 A ‘ Works Contract ‘ can be defined in India as contract in which there are
supplies of materials and the erection of them. It cannot be divisible are but
indivisible.

8.1.5 A supply contract, on the other hand, is purely a contract of sale and purchase.

8.1.6 In construction projects of large plants and machinery, to be erected it is a turnkey

contract to indicate that the scope of works includes all activities pertaining to the
project such as engineering manufacture, design, supply, erection, testing and
commissioning, is entered into so that a complete unit or plant is handed over by
the contractor, a plant that can be brought into production, as it were, by the turn
of a key. A turnkey contract then is essentially a ‘works contract’ as a complete
integrated plant is handed over by the contractor to the owner and not merely the
materials plant and machineries for the same. Ownership of title of goods is
passed on to the owner after the plant has been erected, billed and commissioned.

9.0 CENVAT

9.1 Modified value added tax known as “ Modvat “ was enacted in 1986 and is
governed by Modvat Scheme 1986. It has generally been adopted and followed
by a similar scheme introduced in Great Britain. It grants credit for the excise
duty paid and suffered on the inputs, raw materials used up in the manufacture of
a finished product. The finished production is itself subject to excise duty when
it is sold out. The Principle and object of this Modvat Scheme is minimise duty
tax and its cascading effect in the price of the finished product. This scheme
therefore will reduce the total duty burden on the finished product. It also
stipulated that the benefit so accrued shall be passed on to the end user consumer.
 It is not a gain or profit or income to the manufacturer.

9.2 When any finished product is to be manufactured, it needs lots of inputs like
chemicals, raw materials, various bought outs etc. When these are purchased
from the open market by the manufacturer, the excise duty payable as per tariff
are paid by the manufacturer and then these items are collected. These items are
utilised for the manufacture of the finished product. When this finished product is
sold, again excise duty as per tariff is charged and paid. Therefore, the value of
the finished product goes upwards including the duty and the duty already
suffered on the input raw materials. Therefore credits on such duty paid, already
suffered can be availed under the Modvat Scheme on the duties paid on inputs,
raw materials etc. which are not finished products.

9.3 To avail this modvat credit or claim it later, lots of documents have to be
produced to the Excise authorities. Generally, the raw material will be procured
in bulk to avail the discount, competitive price and availability in the season. It
suffers duty at the time of purchase. When the manufacturing job is undertaken
based on the supply order, required quantity of raw material will be allocated.
There may be wastage also. So, while claiming Modvat, the proportionate E.D.
suffered on the raw material is to be allocated. Therefore, it may be difficult to
produce the Gate Pass for the allocated quantity for the particular manufacturing
job. It will be more difficult if there are so many such raw materials.

10.0 To minimise the project cost and reduce tax element, the contract job can be
grouped separately as one supply contract and another service contract, but to
meet the entire scope of work.

11.0 OCTROI

11.1 Octroi, a entry tax levied on the entry of goods into municipal area state boundary
for use, consumption or sale. Municipalities are authorised to levy the tax by
State Governments. Some states are following the Octroi but few states have
abolished it.
 VALUE ADDED TAX (VAT)

12.0 INTRODUCTION

12.1 Value Added Tax (VAT) came into force form 1st April 2005. VAT is a far
reaching tax reforms and replaces the Sales Tax. VAT shall help and provide
single market conditions with all the states and union territories. Goods can be
transported without additional levy of taxes. It shall help with economic growth.
The process of goods shall be cheaper in prices. With the introduction of VAT all
different rates of sales tax adopted by various states will all vanish and uniform
tax structure will prevail hereinafter.

12.2 VAT replaces the sales tax at state level in India. VAT has only 4 (four) rates as
against many rates by various states sales tax.

12.3 IDENTIFICATION – Registration

There shall be 11 (Eleven) digit number identification of tax papers. The first two
digits shall represent the state and other nine numbers followed, shall be allotted
by states. Every company business concern, dealer, trader etc. already registered
for sales tax shall automatically become registered under VAT from 1st April 2005

12.4 VAT Rates

There are three rates fixed as on date (i.e) 1% (one percent), 4% (FOUR
PERCENT) AND 12.5% (Twelve and half percent).

The rate 4% is applicable and payable on basic necessities like medicines, drugs
all industrial and agricultural raw materials declared goods, capital goods under
this rate largest number of common goods are covered.

The rate 1% is applicable and payable on gold, silver ornaments, precious and
semi precious tones.

There are certain goods with 0% percent VAT

12.5 TURNOVER

The turnover for purposes of VAT is the sum total of values of supplies effected
in India.

VAT liability is due and payable when the goods have been supplied / delivered.
An invoice/bill/cash receipt is raised and issued against the supplies of goods and
when payment is received.

12.6 DOCUEMNTS
 The entire system is based on proper genuine documents for each transaction, a
bill or cash memo or invoice is raised / issued. The documents are books which
reveals all data, details and information such as

Name and address of the seller

Date and Serial Number, Registration number of VAT
Description of goods
Quantity
Rate, total amount
VAT changed
Discount if any,
And total value and total amount
Business community had devised supplied printed forms for use.

12.7 TAX – INPUT – OUTPUT

If any person or business concern is under VAT, then whenever sale of any
goods/ products is made, it attracts tax. This tax is output cost of product / goods.
But the purchase of raw materials / inputs which shall also suffer tax – called
input tax on the input cost.

The output cost thus suffer tax on tax (i.e) tax on raw materials – input purchased
and Value Added towards finished output product/ goods. The tax VAT paid on
inputs can be given credit by these process setting off tax on inputs vat system
avoid tax on tax. Thus it bring art output product cost cheaper in the market.

12.8 VAT applicability

VAT is applicable for all manufacturers, sellers, wholesale seller, distributors,

stockiest trader, merchants who all are dealing with taxable goods /products.

12.9 VAT when due

VAT becomes due and payable when goods / product have been delivered on
invoice issued.

12.10 VAT return

The law stipulates, that the VAT returns to be filed regularly on or before 7 th day
of every month.

12.11 Advantages
Set off provisions on the input tax
Other taxes like turnover tax, surcharge abolished
Tax structure in four rates only
End product price will be cheaper & thereby enriches the business
Self assessment
More transparency
Higher revenue generation
Economic growth
 NEGOTIATIONS

1.0 GENERAL

1.1 The Word “ Negotiation “’ derived from Latin and in Civil Law means trading
or deliberations leading to close and arrive at an agreement. Negotiation,
therefore, involves discussion between the parties where alternative choices are
available on the issue subject to negotiation.

2.0 WHAT DOES IT MEAN

2.1 Negotiation means meeting of the minds of more than one person on any subject
matter. Such meeting of minds takes place in all walks of life - with
neighbours, friends, servants, bosses, colleagues, employers, employees,
managers, workers, supervisors, between Governments and so on. But all such
negotiations on any matter, is difficult and a delicate task. The art of negotiation
is by itself cannot be learnt in a class room or by reading books, but by conscious
personal efforts. Every negotiation thereby, will be training round wherein
particular party comes to know many areas. Tactics adopted, strategies followed,
skill, presentation, behaviour aspects. Every negotiation shall possess special
skills like thorough knowledge of the matter under discussions, ability to
constantly review, assess the performances, identify the weakness and strength
and willing to correct the mistakes and therefore every negotiation shall be part of
learning towards improving the skill.

2.2 EVERY NEGOTIATOR WITH HIS SKILL, POWER, PERSONALITY,

KNOWLEDGE AND ABILITY CAN BENEFIT HIS COMPANY

3.0 NEGOTIATORS

3.1 Qualities

3.1.1 The quality of the person on the negotiation has a very direct and distinct effects
and shall bring the good success.

3.1.2 Commitment is one of the strongest powers of the buyer in the negotiations.
Commitment to one’s own organisation, person to person commitment and
commitment to achieve the goals set are the strength of the Negotiator.

3.2 Personality

3.2.1 He is an effective negotiator if he is acceptable to all. Towering personality, good

command of language, good listener, understanding the views of the other
members, capable of co-ordinating with the team members, broad business
 experience, knowledge about the job / product, shrewdness to quickly forecast the
events, tactful in planning strategies, person of understanding, pleasing manners,
respect for others’ views and above all a person who can keep all the time on
healthy, homely and friendly atmosphere are the few essential qualities of a good
and successful negotiator.

3.2.2 He has to employ subtle wit and healthy humor to create a situation to relieve
tension, towards relaxed, friendly and cordial discussions with spirit of
understanding.

3.2.3 This is a gift which may be either natural or cultivated but certainly a weapon of
great potency with a wise and capable purchaser.

4.0 AREAS OF NEGOTIATIONS

4.1 Quite often it is commonly felt that negotiations are left to prices only. But it is
not so correct. There are large number of areas whereon negotiations are needed
which will then benefit the company in its product, quality, prices.

The areas are:-

189Technical Aspects
190Quality
191Quantity
192Price
193Delivery
194Guarantee
195Payment terms
196Performance
197Transport
198Insurance
199Inspection
200After sales services
201Buyer – Seller relationship

5.0 NEGOTIATION GAME

5.1 Negotiation can be easily compared to any game played by two parties. Such
party tries its best to win its point over the other in the game it can be finally,
declared as winner and runner. But in the contract Negotiation it is not so. Both
the parties have common goal to reach on understanding with happiness and come
to a settlement instead of leaving it to a breaking point. Both the parties have
 role to play with an understanding with a spirit of give and take attitude not with
rough and rigid attitude. Each party appreciates the view point of the other party
in the issue under negotiation. When the negotiations are concluded both the
parties feel happy and come out with feeling of winning position.

5.2 The buyer – seller relations are quite strengthened during the negotiations. It can
be expressed as under:

-+ ++

-- +-

Generally, ++ position is attempted by both the parties and in most of the cases it is
achieved.

6.0 NEGOTIATION PROCESS

6.1 Generally anyone on the negotiation process, both the seller and buyer tries his
best to impose his view points duly stressing the relative advantage and always
attempts to justify the same. Therefore, it is necessary to plan in advance the
aspects for negotiations in the offer / quotation, claims, areas of dispute as against
specification and determine the priority and due justification. The points on
which due bargain is necessary and how far it can be achieved, least sacrificing
the interest of the organisation are to be aimed and achieved.

6.2 Planning

It is necessary to study the strength and weakness of the offer as well as the
specification as per Tender documents. Data on performance of the seller in
earlier cases, on price, deliveries, quality, warranty aspects are to be collected,
analysis of the orders on hand with the seller, study on the balance sheets,
production programme etc. may be helpful. All the above data if collected and
studied can be used at the appropriate time during the negotiation. Points for the
negotiation shall be studied and priorities sorted out.

6.3 Selection Supporting Team

 If one feels he will not be in a position to negotiate on all aspects viz., technical,
commercial and techno-commercial he can choose the supporting members. The
selection of the supporting members must be made carefully so that it helps in the
process of negotiation and does not weaken it. Such co-opted members must be
aware of the case and must be in a position, really to contributing towards the
negotiation. He should be knowledgeable in the field and shall restrict himself to
that area only wherein he is familiar and shall not interfere in an area not known
to him.

6.4 Environment and Seating

Physical environment plays a very important role and very largely helps in the
process of negotiations. Pleasant surroundings in a hall / room with suitable
ventilation, lighting and decorations aids the process. Suitable spacing,
movement area also are necessary. Some refreshments during the course of
negotiations definitely keeps the spirit homely and indicates the amount of
hospitality shown. It will be the large interest of the process, to avoid and keep
away from other activities so that people feel that due concentration and attentions
paid to the negotiations fixed on the set date and time.

6.5 Climate and atmosphere

A homely and friendly atmosphere must be created for entering into negotiations.
A warm welcome to the group, some enquiries about their travel, accommodation
and some friendly talks and enquiry about known common friends, company
executives and the company’s group etc. may definitely create a feeling of
happiness and satisfaction. An understanding and feeling we are one with them
are to be created.

6.6 Process

The view points for negotiation as sorted out are to be politely and carefully
opened for discussion causing no irritation. Infighting and deadlock on any issue
are not the objective of the negotiation and shall defeat the very purpose. Getting
bogged down on a particular issue shall be avoided with creative and imaginative
skill and with reference to situation prevailing at that time. The leader of the
negotiating team shall take control over the process and shall case out the tension
built up on any issue. The leader may even circumvent such issues. At such a
situation, a skillful negotiator may even change the point to some other and revert
back to this later. A skillful negotiator may change over to topic of general and
common interest to break the monotony and revert back later when the situation
improves.

6.6.1 If the process is dull and monotonous, a short spell of recess or coffee – break
may help to proceed further satisfactorily.
7.0 NEGOTIATION FOR ADDITIONAL ITEMS, INCREASE / DECREASE
IN SCOPE, CHANGE IN TIME SCHEDULE & OTHER TERMS

In the process of negotiation in respect of addition or deletion in the scope, agreed

time schedule and other conditions, it will call for a little more care and
understanding as two parties to negotiate the Purchaser and the Seller or
Contractor on whom the purchaser we have already placed orders or concluded
contract. In case of such negotiations on the such terms, greater amount of
understanding of the problem of each other is most important and the spirit of
give and take must be there as at that time the work is more important than any
changes.

8.0 CONCLUSION

The process of negotiation shall be successful if the negotiator adopts and follows
the above suggested methods and points taken up for negotiation shall be reached
a settlement with an understanding and happiness.
 NEGOTIATION FOR CAPITAL GOODS PURCHASE:

1.0 Procurement and installation of capital goods from within and outside the country
calls for great care in selection of the bidder and equipment. These are one time
capital purchase and if at any time it fails to meet the parameters designed and
guaranteed output, it will be costly to replace or repair them. The direct loss on such
action and the production loss shall be very huge and shall throw the firm
completely out of gear.

1.1 Therefore very great care is necessary in all areas of specification, qualification
requirements, negotiation and selection of the equipment and its source of supply.

1.2 The tender documents are to be carefully prepared, both on technical and
commercial aspects so that the intending bidder do submit proper and response bid
meeting these requirements.

1.3 Still, there may be deviation on both technical and commercial aspects, needing to
be sorted, with the sole view to get the best technical acceptable equipment meeting
all the technical specification and parameters and life time performance at the
required level guaranteed.

1.4 Such an end objective can be achieved only through proper system of tendering and
negotiation process.

2.0 SPECIFICATION.

2.1 The technical specification shall be different from equipment to equipment and its
accessories. There will be data sheets for each one to be filled up by the bidder. On
detailed technical examination of the details furnished in data sheets, it will be
possible to identify the suitable one meeting the technical specification.

2.2 However the commercial specifications shall be more or less same in respect of all
such capital goods procurements. There will be additional conditions in case of
goods being imported.

3.0 THE COMMERCIAL SPECIFICATION

3.1 The commercial specifications are drawn with a view to control the time,
deliver, cost guarantee and certain protective safety and legal clauses against
any possible mal-performance of the contract. It is to ensure the reciprocal
promises are performed well.

The commercial terms broadly include the following:

202 Scope of work.

203 Commissioning / Deliver dates
 204 Time-Essence of the Contract
205 Price and Price Variation
206 Bank Guarantee for Performance
207 Bank Guarantee for Advance Payment
208 Payment Terms
209 Insurance
210 Transport
211 Excise Duty/ Sales Tax/ Octroi, Income Tax, & Service Tax
212 Customs Duty
213 Exchange Rate
214 Liquidated Damages
215 Warranty-guarantee for warranty
216 Force-Majeure
217 Suspension of work
218 Defence of Suits
219 Power to vary or omit
220 Facilities to be provided
221 Termination of Contract
222 Arbitration
223 Limits of Contract
224 Discharge of Contract
225 Legal Jurisdiction

3.2 Each one of the above terms have a definite effect on the performance of the
contract and in particular on time, scope and price and other liabilities.

3.3 Generally, the following form part of the tender documents

1) Notice Inviting the Tender

2) Tender – Technical Specifications
226 3) Tender – Commercial Specifications
2274) General / Special Conditions
5) Tender Drawings.

4.0 There are likely to be deviations to the specifications and these are to be discussed
and sated out so that ‘CONSENSUS AD IDEM’, identity of mind is reached.

5.0 Changes arising during the performance of the contract and implications there on, in
respect of all areas can also be subject to negotiation. But at that time the process of
negotiation is a bet difficult, as the much work have proceeded with. I also, it
should be objective of the purchaser to get the job done through the same
contractor/supplier, to meet all other oblations in the contract.

6.0 Negotiation is the best process to arrive at an reasonable an acceptable to ares of

differences/deviations.
 BANK GUARANTEES

1.0 PERFORMANCE BANK GUARANTEE

1.1 The Performance Bank Guarantee can be defined as a Guarantee under which the
Bank undertakes to pay on “ Mere Demand “ to the extent of a certain amount of
money. It is an autonomous and independent undertaking without any proof or
fulfillment of any other condition. It can be, therefore, concluded as an
unconditional, irrevocable / undertaking to pay on ‘ Mere Demand ‘. The
Performance Guarantee can also be described as an Indemnity to the Beneficiary
against non-performance or faulty performance of a Contract. Almost all the
Performance Guarantees are ‘ First Demand Guarantees’. The salient stipulations
in these guarantees are that a Notice of Demand is considered as ‘ Conclusive
Evidence ‘ of occurring of a default in performance of the contract. In fact the
present status of the performance guarantee has originated from International
Transactions which has also been adopted as usage for Inland Commercial
Transactions.

1.2 It is defined by a prominent British Banker’s an undertaking which a bank will

honour in accordance with the terms in relation to documents which are correct on
their face. The only document on which the Bank will honour its commitments is
a ‘ Notice of Demand ‘. Hence the performance guarantee can also be described
in character as a form of a Promissory Note payable on demand as well as an
irrevocable confirmed Letter of Credit since the underlying principles governing
these transactions are similar in nature and having the similar effect. No doubt,
all the three transactions are different in nature, but the liability accrued under any
of these transactions is of a Commercial Nature. It would be necessary to
understand how and in what manner performance guarantees are executed.
Initially, this being a guarantee indemnifying against the breach of non-
performance by a performing party it is based upon a contract entered into
between on parties, one is performing party and another is a beneficiary party.
The performing bank is a third party and its role is that of a indemnifier for the
loss or damage occurred due to the breach of non-performance by the performing
party. The contract between the beneficiary and performing party have, as usual,
all the ingredients of a valid contract i.e. there is an offer to perform by
performing party and acceptance of performance by the beneficiary party. Then
liability of performing bank under this guarantee would be operative after the
execution of the guarantee with accepted terms and delivery thereof either by the
 performing Bank directly or through the performing party to the beneficiary. It is
pertinent to note that since the Performing Guarantee assumes the role of a
promissory note payable on demand mere execution would not be sufficient to
make the Performing Bank liable unless the said instrument is delivered. The
Performing Bank would execute such guarantee only against a counter guarantee
executed in its favour by the performing party along with creation of suitable
security. The performing bank would stand duly discharged under the said
guarantee either against the payment made by the bank on demand or invocation
of the guarantee or by the afflux of time i.e. after the expiry of the time upto
which the same guarantee remains in full force and effect. Thereafter, the
performing bank stands duly discharged.

1.3 The utility of Performance Guarantee is high in the modern days of multipurpose
transactions of performance contracts. It is therefore, to ensure either to the seller
for receiving the price or to the buyer for receiving the goods purchased or for a
beneficiary under a contract of the performance. This mode ensures the payment,
the supply or the performance, as the case may be.

1.4 The principles under-lying this are more on the basis of Good Faith and Principles
of Equity. It may particularly be noted about under-lying princess of Good Faith
and Equity taking into account the peculiar nature of the performance of the
liability created thereunder. As already stated that since the Performance
Guarantee is ‘ On Demand Guarantee ‘ and the notice of Demand is considered
as “ Conclusive Proof “ of the breach or non-performance as well as the liability
having come into operation the performing bank is under an obligation fully to
make the payment. The bank as a paying Institution under a Guarantee has
neither any right or authority to consider or even call for the veracity of the claim;
but to honour the claim forthwith without any demur.

1.5 Further the Performing Bank is also not having any right or authority to either
challenge the statement of the beneficiary or even call for a proof of non-
performance. The Performing Bank as stated above accepts a mere notice of
Demand as a ‘ Conclusive Proof of the occurrence of the event and the liability
under the guarantee having come into operation and the Performing Bank is under
an obligation to make payment without demur. This is a pitfall and the
beneficiary is likely to take the advantage, whether due or not due, to pressurise
the Performing Party to come to certain terms. Mere invocation of a Guarantee
would establish the claim of the beneficiary who would receive the amount
guaranteed to the detriment and the loss of the Performing Party. Mere dispute
on trivial issues or difference of opinion on major issues even if not judicious but
since the beneficiary has the command in hand-by putting the-undue pressure of
the-threat of invoking the Performance Guarantee.

1.6 In this regard apart from the under-lying principles of the performance guarantee
and the performing bank’s unequivocal issues, irrevocable undertaking to pay
merely on demand does not leave any remedies in the hands of the performing
 party. In series of litigations not only before the Indian Courts but also the
English Court for obtaining temporary / permanent injunction or restrain order
against the beneficiary from invoking and claiming the amounts under the
performance guarantees, it has been observed and directed by the eminent Judges
that in case of a performance guarantee which undertakes to pay on demand they
are not in favour of granting such restrain orders, as such a grant of injunction
shall totally defeat the commercial business. The eminent Judges like Justice
Kerr and Lord Denning have clearly laid down that a performance bond
stands on the same footing that of a Letter of Credit and the bank will honour it
according to its terms unless it has clear-cut notice of fraud. Any dispute between
the buyer and the seller must be settled between themselves but the Bank must
honour the undertaking. Lord Justice Denning has described the performance
guarantee as virtually a Promissory Note payable on demand. It will be observed,
therefore, that unless and until there is a clear – cut notice of fraud by the
beneficiary and that the same has come to the notice of the Bank the liability
under a performance guarantee is unimpeachable.

1.7 It is, therefore, very clear that the performance under a guarantee cannot be
avoided without the production of necessary evidence since mere allegation of a
fraud shall not create a justifiable action for injunction and the undertaking given
under a performance guarantee is required to be fulfilled.
1.8 It is, therefore, necessary to understand and appreciate by a customer to the bank
while entering into such contractual obligations where performance guarantee
bonds are requisitioned the implications of such unilateral rights in favour of the
beneficiary. It has been the experience of the bankers that the customers rush to
the Bank at the last moment with a draft of Guarantee submitted by the
beneficiary for execution by the bankers within a short span of time. Even the
banker would not have sufficient time and opportunity to examine the adverse
features as well as the determination clause stipulated under such guarantees. The
obvious result is, therefore, would be that even while the negotiations are being
carried on between the contracting parties, the beneficiary could not hesitate
invoking the guarantee and put an additional pressure on the performing party to
have the advantageous conclusions. Though, in large number of Performance
Guarantees bonds are irrevocable and one sided terms for the performance,
theonly safe-guard which is required to be incorporated under such guarantees
would be about the termination of such guarantees and discharge of the liability
thereunder.

1.9 It is absolutely obligatory and important to incorporate a time limit on the

operation of the guarantee and the discharge of liabilities on the expiration of
time. Such stipulation also should be unconditional and irrevocable. Just as the
right to payment and receive the guaranteed amount is unconditional,
corresponding right of discharge there under should also be unconditional. This
may serve as some protection for whatever worth, it is not only to the performing
banker, but also the performing party. Generally the bank guarantee is expected
to be valid till the end of the warranty period agreed in the contract between the
 performing party and beneficiary.

2.0 BANK GUARANTEE FOR ADVANCE PAYMENT

2.1 The advance payment bank guarantee is given by the performing Bank in lieu of
part payment of contracted price to be payable as an advance to the performing
party. Such an advance payment is generally stipulated in the Contract and is to
be secured through a bank guarantee as it is not against any payment for work
done.

2.2 There could be provision for a proportionate reduction of the value of the bank
Guarantee on the basis of work done and accepted and at regular intervals.

2.3 Invariably it is observed that a pertinent and very important stipulation that the
liability of the performing party to perform the terms of contract to be conditional
to beneficiary releasing a percentage of the contractual amount agreed upon is
overlooked. In fact, in order to protect not only the interest of the performing
bank but also the performing party it is necessary that such guarantee should
stipulate that the liability under the guarantee shall come into operation and force
only on receipt of the advance payment payable as per the contract and received
by the performing party from the beneficiary. One can go a step ahead in order to
secure specific protection to be included in the contract that the performance of
the contract shall also be subject to the receipt of advance payment by the
performing party against the advance payment bank guarantee produced by it and
accepted by the beneficiary. In the absence of this there is a possibility that the
liability of the performing Bank as well as the performing party would come into
existence on execution of the guarantee even if the advance payment has not been
received.

3.0 BID BANK GUARANTEE

The bid bank guarantee are furnished along with the bid. It is to establish the
financial soundness of the bidding party and its earnestness to execute the job in
the event the party is successful in the tender and awarded with the contract. This
guarantee has a limited liability to the extent that the same would come in
operation only on the tender being accepted and not otherwise. It has been
observed that the advantage thereof is taken by the beneficiary. In requesting
them to be extended from time to time under the promise of acceptance of the
tender. The Beneficiary enters into a dialogue with more than one tenderers since
the guarantees are kept alive. The Beneficiary taking advantage of this situation
always tries by extending these temporary guarantees. The amount tendered by
the customer to the bank as margin or security also gets locked up for indefinite
period. In such circumstances loss of interest on the amount locked up is also
caused.
4.0 As stated above a Performance Guarantee is described not only as Promissory
 Note payable on Demand but also a confirmed Irrevocable Letter of Credit. It
has assumed the characteristics of negotiable instrument in a narrow sense with a
narrower scope. It may not be negotiated by endorsement and transfer but it can
be assigned as Debt Receivable.
5.0 A Performance Guarantee indemnifies the beneficiary against the loss to the
extent of 10% or 20% of the contractual amount. Normally, these guarantees do
not contain a stipulation that against a part performance the liability under the
guarantee also should stand discharged pro-rate. In the absence of such
stipulation it always happens that even for a small or fringe default after the
performance of the major portion of contract, the entire amount under a guarantee
is demanded. This would be unfair and inequitable. This important aspect of
proportionate reduction in the liability under performance guarantee should be
stipulated in case where the performance period of contract is long involving a
very large amount.
6.0 The performing banks while executing such guarantees must also examine very
carefully the terms of such guarantees. At no stage the performing bank should
agree to stipulate that the guarantee is subject to the terms of the contract entered
into between the parties. Since the undertaking to pay merely on demand would
be irrevocable and binding on the performing bank and in case such payments are
effected, the performing Bank would be faced with a very serious problem of
having not fulfilled the obligations of examining the terms of the contract. It may
transpire that the claim never come into existence on the alleged breach or non-
performance was outside the purview of the terms of the contract. In such cases,
as per Section 145 of the Contract Act, if the bank had been negligent in not
examining the terms of contract while making the payment under the said
guarantee it cannot claim reimbursement of this amount so paid from the
performing party. The mischievous ideology of the word ‘ negligence ‘ would
vitiate the right of reimbursement of the performing bank which has performed its
duty under the said guarantee since the liability under a performance guarantee is
independent by itself even though the same would have been subject to the terms
of the contract. Therefore, the performance guarantee like an irrevocable Letter
of Credit should not have any stipulations except to pay on demand. Under a
Letter of Credit the Bank deals with documents and not the goods under
performance guarantees the, Bank should deal with documents in form of a ‘
Demand ‘ and not in the goods as per terms of the contract. This is a safeguard
which every performing banker must ensure.

7.0 It is, therefore, suggested that while finalising the Contract stipulating a
performance guarantee, the format thereof should be very carefully examined.
All the aforesaid issues have got to be taken into account otherwise a shrewd
Beneficiary would always take advantage of unilateral terms of performance
Guarantee to a wrongful claim when preferred, payment cannot be avoided. The
courts also would not come to the rescue since it is universally accepted principle
that these undertakings are the life and blood of trade / commerce and any
interference by Court of Law would seriously harm the trade at the national as
 well as the international level.

7.1 Moreover, a Banker would always look to the confidence reposed in a Banking
Institution, A Bank Guarantee is as good as cash, Any steps taken by a Banking
Institution in order to thwart any attempt by Beneficiary to recover the money
under such guarantees would adversely affect not only the goodwill and
reputation of the Bank but also the confidence reposed in the Bank. Perhaps for
future Business the multi-national organisations and even foreign banks may
refuse to accept guarantees executed by such Bank. This deterrent effect elude
any Banking institution from taking any adverse steps and even if the performing
Bank is convinced about unauthorised claim of the Beneficiary and also would
like to perfect its customer the obligation has to be fulfilled. Since the basic
characteristic of a performance Guarantee is of unique nature the performing
party has to be very careful while finalising the terms of contract.

8.0 The Bankers’ Guarantee is not restricted to the Internal Business but also to the
International Contracts. The basic principles involved are common. There are no
laws or regulations directly governing this particular and peculiar type of
transaction, there are rules and regulations which are the outcome of various
judgements, directives and rules given by eminent Jurists. It can be said that in
the absence of any direct legislation each issue arising out of various transactions
is mainly governed by various rules, acts and laws.

9.0 The bank guarantee documents should be discharged as soon as the purpose for
which it is executed is completed and satisfied. When a guarantee is ceased to be
valid in accordance with its own terms and conditions or that of these rules,
retention of the documents embodying the guarantee does not in itself confirm
any right upon the beneficiary and the documents should be returned to the
guarantor without delay. This is a very sound principle followed almost by all the
countries being a common rule of law.

10.0 It is, therefore, suggested that at the time of accepting a stipulation of tendering of
performance guarantee the performing party as well as the performing Bank must
examine the important aspects in the format of the guarantees so as to recognise
and understand the risks involved. The bank guarantee is a very vital instrument.

TIME SCHEDULE AND LIQUIDATED DAMAGES

1.0 PREAMBLE
A Contract Agreement between the parties is concluded on the basis of an offer, and
acceptance, with mutual consent and with identity of mind “CONSENSUS AD IDEM” of
the parties to the contract. Among various terms, conditions clauses, specification, the
time for completion of the scope of work/job as agreed between the parties shall be
incorporated in the contract. Generally the time schedule shall be essence of the contract
and any delay shall have adverse/serious effect on the contract and cost thereon.
Therefore with a view to strictly adhere to the time schedule and not to allow it to lapse
on any account, certain controls are necessary to be built in the contract itself. The time
schedule shall also fix up indirectly the limits within which all the agreed terms,
conditions etc. can be operated upon, except the warranty obligations or the defect
liability.

2.0 TIME SCHEDULE

2.1 The contract shall include a clause time schedule stipulating clearly as to when
the work is to be commenced and be completed. Normally such a time schedule
shall be the essence of the contract and shall also be a vital clause. In engineering
contracts, all the activities shall be identified and time required for such
activity/mile stone shall be estimated and total time required is determined and
fixed. Many cases bar charts, PERT charts shall also be attached to the contract.
ON the basis of the overall schedule, work schedule on monthly basis and weekly
basis are drawn up for execution, follow up and review and remedial action.

2.2 Adherence to the Time Schedule

All efforts and endeavor shall be made by the parties to the contract to rigidly
follow the programme, time schedule. Progress of work shall be reviewed jointly
and slippage noticed shall be analysed. The cause of slippage must be identified
and remedial measures taken by way of additional mobilisation of funds,
manpower, machinery, materials, tools etc. All attempts shall be made to catch
up the shortfall or slippage and progress as per target achieved.

1.3 In major projects involving huge investments, there are four agencies involved in
the job. They are Owner, Consultant, Equipment Manufacturer and erection
Contractor. If the project is conceived on a turnkey contract basis, it may be a bit
easy as a single contractor is totally responsible for all the activities and they may
be under this contractor’s direct control. If it is system turnkey contract, packages
conveniently grouped on the basis of the manufacturing facilities created and
available, it becomes more complex as many dependency will arise from the
various package Contractors to a particular Contractor to proceed and progress
with the work entrusted to him.
2.3.1 On the basis of the time schedule for the complete projects, individual time
schedule for each package to be drawn, carefully meshing it with the project
schedule, clear time schedule of inputs needed as interface between packages are
to be planned and schedule, prepared and finalised. The input from one package
contractor may be output of the other contractor. Therefore, the time schedule
should be drawn that the inputs are available at the time it is needed. Failure to
provide such an input may cause a direct delay to that contract package and may
cause a delay in providing the required input to the other package contractor as
well.

2.3.2 The time schedule so drawn up are to be adhered to. Each party to the contract
namely Owner, Consultant shall first duly understand its role and respect it and
play it in due time. But in real practice, all the three look to the contract, scope,
time schedule and other terms in the contract in an isolated manner with self
interest given top most priority instead of objectively looking and acting with co-
operation and understanding.

2.4 Delay by the Owner

• In concluding the Contract

• In acceptance of bank Guarantee
• In making payment
• In approving the PERT/Bar Chart
• In approving the sub-vendor, sub-supplier, sub-contractors
• In approving the drawings
• In furnishing engineering design, data
• In releasing the site / work front
• In providing construction equipment, if any
• In approving any change needed due to site condition requirement
• In issuing essentiality certificate for procurement of imported components to avail
duty concessions
• In issuing D/C Forms for C.S.T.
• In inspection at manufacturer’s factory before despatch
• In issuing despatch clearance certificate
• In opening Letter of Credit
• In inspection and verification of goods landed
• In arranging insurance policy
• In payment against bills
• In decision on any dispute / issues raised

2.5 Delay by the Contractor

• In the preparation and furnishing of design data

• In the procurement of raw materials
• In the manufacture of goods, equipments
• In the inspection call
• In the despatch of goods inspected
• In the information and data called for
• In furnishing any event that may affect the schedule

3.0 LIQUIDATED DAMAGES

When the time for completion of the scope of work agreed in the contract is the essence
of the contract and is deemed as vital and major factor of the contract, it must be
guaranteed financially as well. There should be a built in force or threat in the contract
itself, every time reminding the party to adhere to the time at all cost. It is implied that
the completion of the scope of work by the agreed time is a part of the consideration to
the contract. Therefore failure to adhere or meet the agreed time schedule leaves the
offending party liable to the other party for damage. Such a damage caused may be
extremely difficult to determine exactly and a usual commercial practice is to specify a
definite amount per day if delay or certain percentage of the contract value per week of
delay or certain percentage of the contract value per week of delay or part thereof, with
ceiling as percentage to the total value of the contract as a damage or injury which a
breach of contract shall cause.

3.1 It is a pre-estimated damage. Liquidated damage fixed at the time of entering into
contract as a damage or injury which a breach of contract shall cause.

3.2 It in a covenanted pre-estimated damage Section 55 of THE INDIAN

CONTRACT ACT 1872 says.
“ When a party to contract promises to do a certain thing at or before a specified time
or certain things at or before specified time and fails to do any such thing at or
before the specified time the contract or so much of it has not performed becomes
violable at the option of the promisee if the intention of the parties was that time
should be of the essence of the contract.”

3.3 The above can be full explanation and definition of liquidated damages, as agreed to
by both the parties to the contract. It is enforceable by law and must be fully justified
by the injured party and the burden of proof also rests with it.

3.4 Generally L.D clause shall be, towards delay caused by the contractor/ supplier L.D.
not as a penalty shall be leviable at the rate of certain % (Percent) of delay per week
or part thereof subject to a ceiling of the contract value.

4.0 OPERATION OF THE CLAUSE.

4.1 The L.D clause is a handy tool in the hands of the owner/ purchaser embodied in
the contract. It is against adherence to the agreed time schedule in the contract and is
to be treated as a deterrent only and shall not be applied just like that without
proper examination of the causes lead to the delay and proper justification and
genuine reason. As mentioned earlier, it is a pre-estimated damage, but the burden
of proof rests with the owner/ purchaser.
4.1.1 Before such a levy of L .D from the bills of the contractor, it looks reasonable and
fair to issue a notice in writing to the contractor, the intention to recover the L .D
with causes for delay attributable to him. It shall be like before imposing a
punishment, on whom show cause notice is given by the employer to the employee.
An opportunity is given to explain or put forth his views/ problems.

4.2 It should be noted that L .D amount from a Contract is not a source of revenue to
the owner/ purchaser, but to the contractor it is amount against the work done by
him. It is also to be clearly borne in the mind of the owner/purchaser the end
objective of getting the work completed through the same contractor to achieve the
goal i. e. commissioning the project and getting return on investment. Levy of L.D.
amount, consequent to the failure to adhere to the time schedule agreed in the
contract may appear correct and in the line with the terms of the contract, but it will
have far reaching direct consequences in the further operation of the contract. It will
cause great liquidity, funds flow problem to the contractor besides causing great
amount of frustration, loss of good will and break in the contractual relationship. All
these will have a negative effect on the progress of balance of work to be completed
and will cause, purchaser has exercised his right but the contract gets broken. So,
the other party to the contract may or may not perform the balance of work and may
reopen all the terms, conditions and prices,

4.2.1 The party claiming the compensation as such must prove the actual loss. If it fails
to prove the actual loss in such a case, it cannot be held entitled to the named, in
the L .D. clause, simply because such a sum is mentioned therein.

4.3 Progress achieved against target set, should be reviewed at regular periodical
intervals to check the progress achieved is commensurate with the time lapsed.
Shortfall, if any, noticed, shall be made good by such remedial measures as may be
necessary. Causes that lead to the delay have to be analysed and areas of
deficiency identified and suitably reinforced with extra labour, material,
construction machinery, money supervisors, managers etc. Owner should also
render help if needed in other areas custom duty, excise duty, sales tax, insurance,
transport and other logistic support. Both the parties to the contract should look the
contract bilateral, respond readily to find solutions to the problems, instead of
looking it an isolated way. The aim and real objective shall be to complete the
work within the agreed time schedule.

4.3.1. The inputs needed must be rendered at the time to enable the contractor to keep
up the schedule.

4.4 A total complete review and if warranted time extension to be granted to the extent
required to complete to complete the job and L .D shall then be applicable for the
delay caused beyond the extended period. Such a positive approach, the contract
gets extended kept alive and all the terms, condition and prices shall also be valid
and operable.
4.5 Even in case where the review is not possible or may take more time, a mere time
extension to the extent required may be granted retaining the right to levy L .D.
after detailed review. Even in this case, the contract is kept current.

4.6 It shall be clearly understood, that L .D. amount and levy thereon is not a source of
revenue to the purchaser. The clause itself is a deterrent one and not a punishable
one.
5.0 THE IMPLICATION OF THE TIME EXTENSION.

5.1. Generally, the time extension to the contract is granted upon the request by the
contractor and on analysis. Then all the terms and conditions and prices agreed in
the contract shall remain unchanged and unaltered. In most of the contract it shall
be as stated above.

5.2 But in major contracts of a long duration such a time extension may have an affect
on the price and extended stay of personnel at site and deployment of construction
machinery during the extended period. It would be a fair approach that the
implications are discussed and negotiated and settlement reached. Price variation
ceiling can be removed and adequate compensation arrived at towards the overstayal
of the site personnel in case it is established that the delay is not attributable to the
contractor.

5.3 All guarantees need to be got extended suitably.

6.0 In major contract it becomes a complex issue and may be difficult to arrive at a
suitable equitable settlement to the contracting parties. Therefore, it is very much
necessary, the time schedule is kept up and strictly adhered. It shall be the most
healthy sign for the contracting parties.

6.1 In case the schedule date agreed in the contact is not adhered and lapsed, it may be
difficult to terminate the contract. Finding other contractor to carry on with the
balance work shall be difficult, shall cause more cost and time over run. It will he
very difficult to assess that work done at site, preparatory work and design and
drawing activity carried out up to the schedule date. The scope of the balance work,
assessment entering to fresh contract will cost more, and shall have commercial
and technical problems in respect of guarantee etc.

6.2 Therefore, it is very clear, purchaser had to continue with the same contractor to
carry out the balance of work left as on the schedule date by suitable allowing him
to continue by a letter of authorisation.

6.3. The L. D. which has become due on that date should not be levied, but should be
settled after the completion of the work and all issues caused the delays property
analysed with an open and free mind. After the work is completed, there may not
be pressure but free time shall be available to discuss, analyse and settle all these
issues.
6.4 The L. D. should be settled like any other recovery in the final bills of the
contractor. This, approach will help to job during the extended period without any
frustration.

7.0. Again referring to Section 55 of Indian Contract Act, to keep the contract with its
agreed terms, conditions prevailing and applicable, a due notice has to be issued
with contractor. When time schedule agreed upon not adhered to, time extension is
granted to complete the balance of work retaining the right to levy L .D after
review. It shall be the best way to continue the work and the liquidity of the
contractor also not affected.

7.1 SECTION 55 OF THE INDIAN CONTRACT ACT

EFFECT OF FAILURE TO PERFORM AT FIXED TIME,
IN CONTRACT IN WHICH TIME IS ESSENTIAL.

When a party to contract promises to do a certain thing at or before a specified time,

or certain things at or before specified time, or certain at or before specified time,
the contract, or so much of it as has not been performed becomes, voidable at the
option of the promisee, if the intention of the parties was that time should be of the
essence of the contract.

7.2 EFFECT OF SUCH FAILURE WHEN TIME IS NOT ESSENTIAL

If , in case of a contract viodable on account of the promisor’s failure to perform his

promise at the time agreed, the promisee accepts performance of such promise at any
loss occasioned by the non-performance of the promise at the time agreed, unless, at
the time of such acceptance, he had given notice to the promisor of his intention to do
so.

8.1. The statement at 4.1.1 is therefore in line with the Section 55 of the Indian Contract
Act.

9.0 LIQUIDATED DAMAGES FOR FAILURE IN PERFORMANCE

9.1. Certain performance parameters are agreed in the contract for the equipment to be
designed, manufactured and erected. These parameters are to be guaranteed by the
contractor and shall be achieved. During the performance tests, these parameters
are to be established and actually achieved. Failure to achieve the same and up to
certain tolerance level the equipment can be accepted and taken over, subject to
Levy of a liquidated damages lump sum amount per unit of measurement of the
parameter.
9.2. Such an LD amount had already been fixed up and stipulated in the contract.

9.3. This kind of LD is independent of LD for time delay.

 INSURANCE ASPECTS

1.0 INTRODUCTION

1.1 An element of risk in all types of Engineering Projects. It is ever present in the
world of commerce, business and industry be it during the manufacture, transport,
construction, erection, maintenance or during operational stage. Plant &
Machinery connected with any project are constantly exposed to loss or damage
to operation of fortuitous circumstances and therefore, they need protection
against the adverse consequence of risk.

1.2 Community, as a whole is endeavouring constantly to reduce, eliminate risk so as

to avoid adverse effect of risk on property. But the risk cannot be reduced or
eliminated altogether and here the system of Insurance has a vital role to play.
The system of Engineering Insurance depends on its success on a proper
assessment of the probability of the occurrences of various risks to which the
plant and equipment connected with the project, are exposed constantly and which
may cause severe loss or damage to property with various adverse effects on the
society as a whole.

1.3 Whether as an individual or a corporate body, a small businessman or a simple

contractor, their property is always exposed to various risk and, however, careful
one might be to avoid risks, an unforeseen mishap or a natural calamity such as
fire, flood or earthquake, may strike unknowingly which is neither desired nor
expected.

1.4 Capital or consumer goods are produced in one place or in one country whereas
users or consumers are located in some, other parts of the country or elsewhere in
the world. Therefore, there is a need for transportation or transit of such goods by
land, sea, air. Sometimes cargo is also transported by aircraft, depending upon
its size or how soon the consumers require it. During this process of
transportation, the cargo is exposed to various hazards be it by theft or pilferage
or breakage or by damage deterioration.

2.0 Generally contracts are concluded for various works like design, engineering,
manufacture, supply of goods alone; supply & transport; storage and erection
commissioning and sometimes on turnkey basis; works contract, civil engineering
contracts etc.

2.1 Each contract stipulates certain specific conditions as to how the goods are
supplied- for example- Ex-works; Free on Road / Rail ( F. O. R). Free on Board
( F.O.B). Free along side (F. A. S) Cost & Freight (CF); Cost, Insurance &
Freight (C.I. F) Post Parcel (VPP); Air Parcel and so on. Each of these have a
specific significance and importance. So whatever may the type of contract be, the
essence of it is that the goods manufactured to design standards are to be safety
 transported through any mode of transport, stored, erected adequately covering
them under all risks. To ensure the coverage against all kinds of risks, insurance is
necessary.

3.0 RISKS INVOLVED

The risks or perils under which good are to be manufactured fabricated, transported,
erected are as defined below:

Fire
Lightning
Smoke damages.
Riots
Strike
Earthquake
Storm
Tempest
Flood
Gale
Explosion
Combustion
Impact
Accidents
Landslide
Electrical like short- circuiting. Self heating etc;
Perils of the sea like storm, collision, sinking etc.
Acts of thieves- and so on.

On account of any one of these perils or consequence to any of them damage or loss to
goods may occur. Men working at different areas also are subject to such perils like fire,
explosion, impact, accidents etc.

4.0 CONSTRUCTION / ERECTION.

A construction/ erection site is very much exposed to many hazards as above. In addition
it is also exposed to perils like collapse structures, failures due to mechanical/ electrical
faults. There may be a number of suppliers/ contractors involved., associated in turnkey
contracts. Simultaneously works of civil, electrical & mechanical engineering,
transportation, handling movement of machines are organised to keep up the target and
schedule. Thus, all the equipments and men working in these areas/jobs are exposed to all
kinds of risks and perils. So, besides aiming at providing and ensuring all kinds of safety
appliances and specifications of safety methods, it is absolutely necessary to cover all
kinds of such risks so that in the event of such an occurrence the consequent damage,
claims to the extent admissible can be lodged and obtained to meet the repairs/
replacement and compensation to be paid.

4.1 So it becomes necessary to ensure safety of men and material in any area of
manufacture, fabrication, work etc.

5.0 TYPE OF INSURANCE.

1. Ware house to ware house insurance.

2. Marine Insurance
3. Inland transit insurance
4. Fire Insurance
5. Storage-cum-Erection Insurance.
6. Comprehensive Insurance
7. Workmen Compensation Insurance
8. Comprehensive Insurance-
9. Comprehensive General Liability Insurance
10. Miscellaneous Insurance.

5.1 Decisions in regard to the following are required for finalising the Insurance
arrangement:

1. Names and addresses of Insurer in whose favour the policies are to be issued.
2. Sum insured details.
3. Period of insurance and testing period required.
4. Sum insured for following additional covers:
228Escalation
229Clearance and removal of debris
230Insurer’s own surrounding property
231Construction Plant &Machinery
232Express freight, overtime & holiday rates of wages.
233Third party liability.
234Extended Maintenance cover.

6.0 ESSENTIAL PRINCIPLES OF INSURANCE.

6.1 Who can insure.

In order to obtain an insurance policy, it is essential that one has a financial interest in the
goods. If one purchased the goods from overseas, naturally one stand to lose heavily in
case of a loss occurs during the transit and, therefore, he can insure. A bank may also
have interest in the goods because they may have advanced the money. An insurance
claim can only be paid to a policy holder if he had a financial interest in the goods.
However, in the case of exports, the Exporter can take out a policy if the contract of sales
is C.I.F. i.e. the contract imposes a duty on the seller to insure.
6.2 How much to insure.

The insured value is very important as any claim settlement are effected by the Insurance
company having direct regard to this value. They also charge the premium on the insured
value. The sum assured are to be declared as the basis of the risks to be covered added as
mentioned under clause 3.0 above.

Two other points may please be noted.

1. Once a type of insurance cover has been selected and the policy has incepted, no
change in the scope of cover is possible.
2. Premium has to be paid before the Insurance can grant cover.

7.0 PROCEDURE FOR CLAIMS.

7.1 Survey

In the event of loss or damage which may involve a claim under a Marine Cargo policy,
immediate notice of such loss or damage should be given to and a survey report obtained
from the Insurance Co. or appointed Survey Agent whose name is mentioned in the
Policy.

7.2 Procedure in the event of loss or damage-Liability of Carriers, Bailees or other

Third Parties in case of imported goods.

It is the duty of the Assured and their Agents in all cases, to take such measures as may
be reasonable for the purpose of averting or minimising a loss and to ensure that all
rights against Carriers, Bailees or other third parties are property preserved and exercised.
In particular, the Assured or their Agents are required:-

1. To claim immediately on the Carries, Port Authorities or other Bailees for any
missing packages.

2. To apply immediately for survey by Carriers or other Bailees Representatives if any,

loss or damage be apparent and claim on the Carriers or other Bailees for any actual
loss or damage found at such survey.

3. When delivery is made by Container, to ensure that the Container and is seals are
examined immediately by their responsible official. If the container is delivered
damaged or with seals broken or missing or with seals other than as stated in the
shipping documents, to clause the delivery receipt accordingly and retain all defective
or irregular seals for subsequent identification.

4. To give notice in writing to the carriers or other Bailees within 3 days if delivery if
 the loss or damage was not apparent at the time of taking delivery.
7.3 Liability of Carriers, Bailees, other Third Parties for inland transits.

It is the duty of the Assured and their Agents in all cases to take such measures as may
be reasonable for the purpose of averting or minimising a loss and to ensure that all rights
against Carriers Bailees or other Third Parties are properly preserved and exercised.

In particular, the Assured or their Agents/ Consignees must.

1. Under no circumstances, give clean receipts to the Carriers in respect of packages

which are offered to them for delivery in a doubtful condition, except, under written
protest.

2. Take examined delivery from the Carriers of any packages which are outwardly
damaged or appear to have been tampered with and obtain a Certificate of damage
and /or Shortage from the Carriers. If the Carriers should refuse to grant examined
delivery, suitable remarks as to the condition of the packages and the contents
thereof should be made in the Railway Station delivery Book or on the negotiable
copy of the Consignment Note in case of despatches by Road/ Aircraft.

3. Take weighment / examined delivery of any packages which are in an outwardly

sound condition but deficient in weight, as Shortage from Carriers if deficiency in
weight is proved.

4. Issue notices of claim against the carriers.

7.4 The documents required for partial loss claims arising from Ocean voyage risks
are:

1. Original Policy/Certificate of Insurance duty endorsed

2. Bill of Landing
3. Invoice/ Packing list
4. Survey Report or other documentary evidence of loss.
5. Copies of correspondence exchanged with Carriers regarding claim field on them.
6. Lading account, Weight notes, Port Trust Remarks
7. Letter of subrogation.

7.5 The documents required for Total Loss claims are:

1. Original Policy/ Certificate of insurance duly endorsed;

2. All originals of the Bill of Lading;
3. Original invoice;
4. Protest of Master if loss is caused by casualty at sea;
5. Certificate of loss issued by Carriers or Port Trust Authorities regarding loss;
6. Correspondence exchanged with Carriers regarding claim field on them.
7. Letters of Subrogation and Power of Attorney duly stamped.
7.6 Inland Transit Claims (Rail)

235Original policy or certificate of Insurance duly endorsed;

236Invoice in original or printed copy thereof/ packing slip;
237Original certificate of loss or damage from the Carriers.
238Original R/R and or Non-delivery certificate (if goods are totally lost or not
delivered.);
239Copy of the claim lodged against the Railway and copies of all correspondence
exchanged with them;
240Letter of subrogation duly stamped.
241Special Power of Attorney duly stamped;
242Letter of Authority; addressed to the Railway Authorities signed by the Consignees
in favour of the consignors.
243Letter of Authority addressed to the Railway authorities signed by the Consignors in
favour of the company;
244Letter of undertaking from the claimant, in cases of non-delivery of consignment,
agreeing to take back the goods and refund claim amount, if the missing goods are
traced.

7.7 Inland Transit Claims (Road)

245Original Policy or certificate of Insurance duly endorsed;

246Invoice in original or printed copy thereof/ packing list;
247Original certificate of loss or damage from the Carriers;
248Original consignee’s copy of the consignment note for partial loss.
249Copy of claim lodged against the Carriers and copies of all correspondence
exchanged with them.
250Letter of subrogation duly stamped.

7.8 Air Cargo Claims.

1. Original Policy or Certificate of Insurance duly endorsed;

2. Invoice in original or printed copy thereof/ packing list;
3. Copy of Airway Bill;
4. Original certificate of loss or damage from the Carriers.
5. Copy of the claim lodged against the Carriers and copies of all correspondence
exchanged with them.
6. Letter of subrogation duly stamped

7.9 Survey Procedure & Claims settlement

Depending upon claim of loss, the procedure followed are as under;

7.9.1 Based on monthly statement without survey reports- applicable for cases other
than shortage in sound cases.
7.9.2 Self survey to be carried out by the Insured’s Engineer – the necessary
documents are to be submitted along with report.

7.9.3 Joint Survey report of Insured’s Engineer and Insurer’s Engineer along with
relevant documents.

7.9.4 Survey to be conducted by independent surveyor.

8.0 CARGO LOSS MINIMISATION & RECOVERY PROCEDURES.

8.1 The general experience of Marine Cargo Underwriters continues to be

unsatisfactory, mainly for want of proper care on the part of those who handle cargo
during the course of transit. The majority of the losses or damages are avoidable,
barring only a few, which are attributable to fortuitous causes. Insurance is a trust,
pooled out of public funds, subscribed by various insured in the form of premium
and the function of Insurers is to manage that trust at a reasonable margin of profit,
it, therefore, follows that if the demand on these funds by way of losses exceeds the
input of premiums, Insurer’s would be compelled to put up the rate of premium so as
to balance their account leading to an overall price hike which would be against
public interest. By taking remedial measures, losses can at least be minimised, if not
altogether avoided so that national waste is reduced and foreign exchange and all
available economic resources are conserved.

8.2 It may be noted that in Fixing insurance premium rates, the possible changes of
recovery from third parties, including the carriers, are taken into consideration and if
recovery rights are lost, resultant unsatisfactory claims ratio would warrant upward
revision of premium rates. Conversely, recovery from carriers can possibly result in
economical premium rates following favourable claims experience. A good many
losses arise from careless handling by carriers who are primarily responsible for safe
delivery of cargo entrusted to their care and custody. Therefore, unless they are made
conscious of their obligation and liabilities, they would perhaps not take adequate
care of goods entrusted to them. Liability under the policy of insurance only
succeeds and not supersedes the carriers’ liability. In other words, the Insured must
take all reasonable precautions to safeguard the prospect oft recovery from the
carriers.

8.3 It will therefore, be appreciated that with a view to achieving immusation of loss, the
insured should ensure the following.

8.3.1 Proper Packing

Packing should be such as would withstand the stress and strains of normal transit. If it is
apparent that the packing employed is not suitable or insufficient, improvement should be
suggested to the shippers, regard to the type of goods, transit and handling involved.
8.3.2 Proper Marking

The packages should be so marked that identification is made easy. It is necessary that
the gross and nett weights of the package are marked and a copy of the packing list is
kept inside the package.

8.3.3 Selection of Carriers Vessels / Vehicle

Shippers should be advised to utilise only which comply with the provisions of Institute
Classification clause and Shipments by “Flags of Convenience” should be avoided.
G.I.C. has evolved a system of approving vessels sailing out of a few Major Ports and the
officials authorised to accept risks must ensure that the vessel is an approved one.
Circulars approving Lines and / or vessel are issued from time to time, careful note of
which should be taken.

8.3.4 Supervision discharge of overseas cargo

The Loss Prevention Association of India have set up “Cargo Loss Minimisation Cells”
at Mumbai, Calcutta and Chennai Ports in order to supervise discharge of valuable and
delicate overseas cargo. Separate arrangements for supervision of discharge of similar
cargo at other Indian Ports are made as and when required. In addition to supervision of
discharge, the “Cell” will follow up early clearance, trace out landed but missing
consignments, recommend repair and recondition of defective and broken cases and assist
in arranging survey at docks. For valuable and sensitive Cargo, services of the “Cell”
should be utilised and for that purpose advance information pertaining to the consignment
in question including the name of the concerned clearing agent should be furnished to the
“Cell”. It should be ensured through the good offices of the Insured that
recommendations of the “Cell” are complied with by the clearing agents promptly not to
prejudice right of recovery under the policy. In such ports where the L.P.A. has no
office, specialised survey firms may be engaged for performing similar jobs. Engagement
of the “Cell” or Specialised Surveyors must be made in consultation with the Regional
Office.

9.0 PROMPT CLEARANCE FROM THE DOCKS & FOLLOW UP ACTION

9.1 For prompt clearance of the cargo from the docks, documents should be filed with the
Customs under “Prior entry” i.e. 15 days before the arrival of the vessel. Customs
formalities and assessment of duty should be completed beforehand, so that clearance
of cargo could be effected soon after discharge from the vessel. Prompt clearance not
only minimise the chances of theft and/or pilferage in the docks but also avoids
payment of heavy demurrage to Port Authorities. It should be kept in mind that the
cover for 60 days from the date of landing of the cargo from the overseas vessel is not
 an automatic cover. The inland transit, if any, involved should be completed within
this period and once the goods reach the interior destination before the expiry of 60
days the cover under the policy will cease automatically on arrival of the goods at the
final destination. In case of any delay in clearance of cargo, if it is found that the
delay is within the control of the consignees, the policy cover will cease from the time
the delay is manifested. The Insured should, therefore, approach the Insurers for
suitable extension on payment of additional premium before expiry of the cover.

9.1.1 When clearance is delayed for some reason or other, the consignment should be
kept in the lockfast / bonded warehouse. Defective packages should be
reconditioned to avoid further loss.

9.1.2 If the consignment or a part thereof is found missing, a “not found” application
should be made forthwith to the Port Trust and short landing certificate should be
obtained from them.

9.2 Loss must be reported to the Insurers immediately.

9.3 Claim for compensation should be submitted to the local steamer agents and Port
Authorities for the full value of the cargo found missing and claim notices must be
sent. The signed copy of Claim Notices and bills and original documents, like short
landing certificate landing receipt, survey report, suppliers’ invoices and packing slip
should be passed on to the Insurers on demand.

9.4 In case the missing consignment is traced out at a late date, the steamer agents
should be asked for an assessed delivery. The Insurers should also be requested for
holding a joint survey at the docks.

9.5 When the consignment is actually landed but found missing from the docks,
arrangement should be made to prefer a monetary claim on the Port Trust within five
days from the date of landing. Arrangements should be made to file a suit against the
Port Trust within the statutory period as may be applicable to the particular Port after
serving due notice.

9.6 When the packages have been landed uin broken/damaged/repaired condition,
application for survey should be made to the Steamer Agents within the statutory
period of three days from the date of landing of the cargo from the overseas vessel.
Copy of survey application must be endorsed to the Insurers to ensure joint survey, if
necessary.

9.7 Application should be made to the Port Trust to obtain landing receipts after payment
of nominal fees. If it is found that the consignment has been landed under defective
condition, then the carriers should be held responsible for the loss.
 LETTER OF CREDIT

1.0 Letters of Credit (L/C) also known as Commercial Documentary Credits play an
important role in the International trade of a country. Any transaction between
persons of two countries normally would involve difficulties like lack of knowledge
or lack of confidence between the parties to the transaction and uncertainty
regarding political situations prevailing in these countries etc. one way to overcome
these difficulties is to involve Banks in the transaction. This is done through Letters
of Credit. It provides a useful link between the buyer and the seller who are often
too far away from and not familiar with each other. The Exporters are personally
not acquainted with the Importers and if they draw bills after having despatched the
goods as per the order of the Importers, they would be put to loss if the Importers
default in accepting the bills or making the payment. To avoid such risk, they insist
usually that Letters of Credit have to be established before accepting the order and
effecting the supplies against the orders.

1.1 The International Chamber of commerce has also prescribed the rules what is known
as Uniform Customs and Practice for L/C. This International Chamber of
Commerce’s Uniform Customs and practices for L/C are the universally recognised
set of rules governing banker’s credit transactions, the back-bone of the
International Trade and Commerce.

1.2 A Letter of Credit (L/C) is a letter issued by the bankers at the request of the
Improper in favour of the foreign supplier informing him that it undertakes to
accept the bills drawn or effect payment in respect of the exports made to the
Importer under precisely defined conditions. The Contract between the bank
issuing the credit and the beneficiary must be considered binding the moment it is
communicated to the beneficiary. The bank must pay it if the documentary proofs
are in order and the terms of the credit are satisfied. Any dispute between the buyer
and seller must be settled between themselves but the bank must honour the credit.
That is to say the L/C constituted a bargain between Banker and one of the parties
to the transaction which imposed on the banker an absolute obligation, if
documentary proof is in order, to pay irrespective of dispute between the parties.
When the foreign suppliers receives such a documentary credit he knows that the
buyer had made arrangements for making the payments as soon as the goods have
been despatched and the prescribed documents handed over to the Bankers. The
buyers also, on the other hand, are ensured that the amount placed at the disposal of
the foreign bank, in favour of foreign supplier would be released only against the
documents specified in the Letter of Credit.

2.0 PARTIES TO THE LETTERS OF CREDIT

2.1 Applicant
One who requests the banker to issue a Letter of Credit
2.2 Opening Bank or Issuing Bank

The Bank issuing such a letter is called “Opening Bank” or “Issuing Bank”.

2.3 Beneficiary

Foreign supplier is whose favour the Letter of Credit is opened.

2.4 Advising Bank

The opening Bank sends a Letter of Credit to the foreign suppliers through its own
branch in the foreign supplier’s country or its correspondent bank. Such branch is called
“Advising Bank”.

2.5 Negotiating Bank

The foreign supplier draws a bill as per the terms specified in the Letter of Credit, and
negotiates it with the Bank who pays amount to him. Such a bank is called “Negotiating
Bank”.

3.0 APPLICATION FOR OPENING LETTER OF CREDIT

3.1 The Importer (Purchaser) approaches his Bank with his application for opening a
Letter of Credit in favour of his (overseas) supplier. This L/C application is required
to be made on the Bank’s prescribed form. The purchaser has to take into account
the payment requirements of the overseas supplier and the terms on which the credit
should be opened as stipulated by him and agreed to by the purchaser in the sale and
purchase contract. Obviously, therefore, in this L/C application, the purchaser
would spell out his requirements as to how and on what terms the Bank should open
the L/C and, these terms would depend upon his purchase contract with or indent or
the terms of his order on the overseas supplier.

3.2 In the Letter of Credit application form, the Purchaser is required to sign an
agreement to the following effect, in consideration of the Bank’s opening the credit.

3.2.1 He agrees that the Bank will have the pledge of the documents and goods covered
by the Credit.

3.2.2 He agrees to accept and/or pay on maturity the drafts, if any, drawn under the
Credit.

3.2.3 He agrees that the provisions and Articles of the Uniform Customs and Practices
for Document / Credits shall govern the Letter of Credit unless otherwise
specified by him in the application.
3.3 However, primarily, the Customer’s agreement embodies his obligation to reimburse
the Bank for payments made under the L/C, provided, of course, that such payments
are made in accordance with the credit terms. It if for this agreement portion of the
L/C application form that it is required to be affixed with the stamps as applicable to
an ordinary agreement. The Purchaser has to attach an exchange control copy of a
valid Import Licence to the L/C application form if the goods covered by the Credit
are subject to an import licence.

3.4 CONDITIONS GOVERNING THE OPENING OF L/C

3.4.1 Letter of Credit could be opened by the banks on behalf of their own customers
who have the Bank accounts with them.

3.4.2 They can be opened in favour of foreign supplier or a shipper of the goods.

3.4.3 The Exchange Control Copy of the Import Licence and the underlying purchase
contract should be submitted to the Bankers along with the Letters of Credit
application.

3.4.4 The L/C application should be verified for the correctness of the particulars, viz.
Description, quality, value including unit price and the terms of sale as per the
order as also the validity of the order.

3.4.5 Letter of Credit whether against Specified Import Licence or Open General
Licence should stipulate the conditions requiring that the Bill of Landing should
indicate the name and address of the Importer in India as well as authorised dealer
opening the credit i.e. the Issuing Bank.

3.4.6 Letter of Credit should also specify clearly the last date within which the shipping
must be made.

4.0 PROCEDURE FOR OPENING OF LETTER OF CREDIT

4.1 The purchaser’s Bank (opening bank) receives the Purchaser’s application for
opening the credit and after considering the proposal, opens its L/C in favour of the
overseas supplier (Exporter). The procedure followed and factors taken into
account by the Bank for opening a credit, are the Bank opens documentary letter of
credit on behalf of its Purchaser-Customer covering import of goods in India,
provided he is an “approved” customer and holds an exchange control copy of a
valid import licence.

4.2 In opening a Leter of Credit, the Bank undertakes a continent liability which would
materialise later as an '‘actual'’ liability usually in the form of a bill advance. In
 other words, it enters into a firm commitment for payment to the seller and after the
payment is made over to him, this commitment materialises in a bill advance to the
Purchaser-customer (buyer/applicant who ordinarily becomes the drawee of the
bill). The Bank has, therefore, to assess the customer’s proposal for opening a
documentary L/C by treating it as a request for the grant of a credit facility to him
against documents of title to the goods. The security for this credit facility is the
constructive pledge of documents of title to the goods for the import/purchase of
which the L/C is opened. It is for this reason that the Bank required to sign the
agreement of pledge in the L/C application form.

4.3 From the point of view of the import trade/exchange control, regulations, which
govern the import of goods in India and payment there against to the overseas seller,
the Bank becomes the joint holder of the import licence, when it opens an
irrevocable L/C but only to the extent of the goods covered by the credit. An
“exchange control copy” of a valid import licence is required because a L/C in the
Bank’s commitment to release foreign exchange against goods to be imported into
India. It is necessary for this very reason that the credit opening bank should be
authorised dealer in foreign exchange. As a joint holder of the import licence, the
Bank is able to honour its commitment to the foreign supplier against the import
goods covered by the credit. However, as per certain terms and conditions laid
down by the Import Trade Control before issuing the credit, the Bank scrutinises the
Customer’s application with a view to see that it does not impose unnecessary
obligations, that it is complete and precise in all respects and the terms and
conditions of the proposed credit are acceptable.

4.4 L/C is opened as irrevocable. This means that the persons who open cannot revoke
the L/C after it has been established and the bank would have the right to debit the
account or recover the amount as the case may be in respect of the value documents
negotiated against that L/C in case the documents conform to the terms and
conditions of the L/C without recourse to the opener.

4.5 Certain times suppliers may insist for a confirmed L/C. IN this case, the foreign
bank makes the confirmation for making the payment to the foreign suppliers in
respect of payment under the L/C. This usually involves bank charges which vary
from bank to bank and country to country.

5.0 Letter of Credit is opened with the following types of conditions in regard to the
Bank charges.

5.1 Bank charges at both ends are to the account of the Exporter.

5.2 Bank charges at the Importer end to the account of the Importer and the bank
charges abroad to the account of Exporter / Foreign supplier.

5.3 Bank Charges at both ends to the account of the Importer.

6.0 For Opening Letter of Credit the Bank livies Bank charges depending upon the
value of Letter of Credit on quarterly basis.
 STANDARD PRICE VARIATION FORMULAE
1.0 PRICE VARIATION FORMULA FOR MECHANICAL EQUIPMENT

Ex-Factory / FOB Price component at the equipment

The formula designed for calculating the price adjustment to be applied to the ex-factory /
FOB price component.

For Mechanical Equipment

ECI = EC(F + a A1 /A0 + b B1 / B0 + c C1 /C0 + d D1 / D0 = l L1 / L0 )

Where:-

EC1 = Adjusted ex-factory price component of equipment shipment wise.

EC = Ex-factory price component of the bid for equipment shipment wise.

F = Fixed portion of the ex-factory price component of equipment which will

not
Be subjected to any adjustment. It shall be taken as 0.15,

a,b,c & d = Co-efficients for major materials, involved in the ex-factory cost of
equipment.
The sum of such co-efficients shall lie between 0.50 and 0.60.

A,B,C&D = Corresponding published price of such a major materials.

1 = Co-efficient of labour cost. It lies between 0.25 and 0.35.

L = Labour Index.

Subscript 1= refers to indices as of (1) one month prior to the date of shipment, for
labour
and (2) three months prior to date of shipment, for materials.

Subscript 0= refers to indices as on 30 days prior to date set for opening of bids.

The summation of co-efficient for material and labour shall be 0.85.

2.0 FOR ELECTRICAL EQUIPMENT

The formula specified and explained in (1.0) above shall also hold good for price
adjustment purposes in the case of Electrical equipment, but with the following
modifications.

Fixed portion of the ex-factory price component of equipment not subjected to any
adjustment shall be taken as 0.20.

a,b,c&d = Co-efficients shall lie between 0.60 and 0.70.

A,B,C&D = Price indicies for the materials identified

L = Co-efficient of labour shall lie between 0.10 and 0.20

The summation of co-efficients for material and labour shall be 0.80.

3.0 PRICE VARIATION FOR ERECTION

Erection Components

The formula for calculation of the month/price variation of the cost for erection portion
shall be:

E1 = E0 (0.25 + aF/F0 + b EF/EF0)

Where

E1 = Adjusted erection price of each erection billing

Eo = Value of erection work done as established by the contract.

F = Indian Field Labour Index – viz. All India Consumer Price Index for
Industrial
Workers as published by Labour Bureau, Simla of the Government of
India.

EF = Expatriate Field Labour Index of the Foreign Bidder. In the case of Indian
Bidder, this will be same as F above.

a = Co-efficient of Indian Field Labour component of the erection value.

b = Co-efficient of Expatriate Field Labour component of the erection value.

NOTE :

1. In the case of Inian Bidder, ‘b’ shall be equal to Zero.

2. Subscript ‘o’ will correspond to 30 days prior to the date set for opening of bid and
 subsript ‘I’ will correspond to the month of billing.

3. The bidder shall indicate the values of ‘a’ and ‘b’ such that a + b+ 0.25 = 1 or 100%.

4.0 PRICE VARIATION FORMULA FOR CONDUCTORS

4.1 As per Cables and Conductors manufacturing association of India (CACMAI)

EC1 = ECo (0.15 + 0.65 A1/Ao + 0.15 B1/Bo + 0.02 C1/C0 + 0.03 L1/L2)

A = Price of EC grade Aluminium Ingots (Average)

B = Base price of 8mm/9mm wire of 0.76% above carbon

C = Base price of E.H.G.zinc

L = Labour Index.

Subscript 0 = Refers to the price for all items prevailing on the 1st day of the month
prior to
opening of bid.

Subscript 1 = For materials 90 days prior to date of despatch.

For labour 60 days prior to date of despatch.

5.0 PRICE VARIATION FORMULA FOR FUEL, OIL AND LUBRICANTS

CP F1 –F1o
VF = - - - - - - x W (- - - - - - - - - )
251F1o

Where VF = Variation in fuel, oil and lubricant cost i.e. increase or decrease in the
amount in Rupees to be paid or recovered.

CP = Index for EOL component – 10

W = Value of work done in Rupees excluding cost of owner supplied materials

used
for that work, during the period under reckoning. The cost of work shall
not include any work for which payment is made is made at prevailing
market rate.

F1 & F1o= Index number of wholesale price for group fuel, power, oil and lubricant
as
 published for period under reckoning and that valid on the date set for
opening of bids.

6.0 FOR CIVIL WORKS PRICE VARIATION

For all the formulae indicated hereunder

“R” shall mean the Total value of work done, during the period (month/quarter) for
which the PV is worked out. It would include the value of materials on which advance
has been granted, if any, during the quarter, less the value of materials in respect of which
the advance has been recovered, if any during the quarter. It will exclude value for work
executed under variations for which price adjustment will be worked separately or not
applicable based on the terms mutually agreed.

6.1 For Labour Component:

price adjustment for increase or decrease in the cost due to labour shall be in accordance
with the following formula:

VL 0.85 X PL / 100 X R X (L1 – L0) / L0 where

VL = Increase or decrease in the cost of work during the quarter under consideration
due to
change in rates for local labour.

L0 = The average consumer price index for industrial workers for the quarter preceding
1 month prior to the data of opening of Bids.

L1 = The average consumer price index for industrial workers for the quarter under
consideration.

PL = Percentage of labour component of the work.

6.2 For Cement

Price adjustment for increase or decrease I the cost of cement procured by

the Contractor shall be in accordance with the following formula:

Vc = 0.85 X Pc / 100 X R X (C1 – C0) /C0 where

Vc = Increase or decrease in the cost of work during the period under consideration
due to
change in the market rate of cement.

C0 = The market rate of cement of any Government Cement Company on the day 1
month
prior to the date of opening of Bids.
C1 = The market rate of cement of any Government Cement Company for the period
under
consideration.

Pc = Percentage of Cement component of the work.

6.3 For Steel:

Price adjustment for increase or decrease in the cost of steel procured by the Contractor
shall be in accordance with the following formula:

VS = 0.85 X Ps / 100 X R X (S1 – S0) /S0 where

VS = Increase or decrease in the cost of work during the quarter under consideration
due to
change in the market rate for steel.

S0 = The market rate of steel (Bars and Rods) of M/S SAIL on the day 1 month prior
to the
date of opening of Bids.
S1 = The market rate of steel (Bars and Rods) of M/S SAIL for the period under
consideration.
PS = Percentage of Steel component of the work.

Note: For the application of PV on Steel, Index of Bars and Roads has been chosen
to represent steel group.
6.4 For Bitumen Component

Price adjustment for increase or decrease in the cost of Bitumen shall be in accordance
with the following formula:

VB = 0.85 X PB / 100 X R X (B1 – B0) /B0 where

VB = Increase or decrease in the cost of work during the quarter under consideration
due to
change in the average official retail price for Bitumen.

B0 = The average official retail price for Bitumen at the IOC depot at Neyveli on the
day, one
month prior to the date of opening of Bids
B1 = The average official retail price for Bitumen at the IOC depot at Neyveli for the
15th
day of the middle calendar month of the quarter under consideration.

PB = Percentage of Bitumen component of the work.

6.5 For POL (Fuel and Lubricant) Component

Price adjustment for increase or decrease in the cost of POL (fuel and Lubricant) shall be
in accordance with the following formula:

VF = 0.85 X PF / 100 X R X (F1 – F0) /F0 where

VF = Increase or decrease in the cost of work during the quarter under consideration
due to
change in the rates for fuel and Lubricants.

F0 = The average official retail price of High Speed Diesel (HSD) at the existing
consumer
pumps of IOC at Neyveli on the day, one month prior to the date of opening of
Bids
F1 = The average official retail price of High Speed Diesel (HSD) at the IOC depot at
Neyveli for the 15th day of the middle calendar month of the quarter under
consideration.

PF = Percentage High Speed Diesel (HSD) component of the work.

Note: For the application of PV on Fuel & Lubricants, price of HSD oil has been
chosen to represent the Fuel and Lubricants group.

6.6 For Plant and Machinery Spares Component

Price adjustment for increase or decrease in the cost of Plant and Machinery Spares
procured b y the Contractor shall be in accordance with the following formula:

Vp = 0.85 X Pp / 100 X R X (P1 – P0) /P0 where

VP = Increase or decrease in the cost of work during the quarter under consideration
due to
change in the rates for Plant and Machinery Spares fuel and Lubricants.

P0 = The all India average wholesale price index for heavy machinery and parts for
the
quarter proceeding one month prior to the date of opening of Bid.
P1 = The average wholesale price index for heavy machinery and parts for the quarter
under
consideration e quarter under consideration.

PP = Percentage of Plant and machinery spares component of the work.

Note: For the application of this clause, heavy machinery and parts has been chosen to
represent the Plant and Machinery Spares group.

7.0 For Local material component

Price adjustment for increase or decrease in the cost of Local materials other than cement,
steel, bitumen and POL procured by the Contractor shall be in accordance with the
following formula:

VM = 0.85 X PM / 100 X R X (M1 – M0) /M0 where

VM = Increase or decrease in the cost of work during the quarter under consideration
due to
change in the rates for Local materials other than cement, steel, bitumen and
POL

VM = The all India average wholesale price index (all commodities) for the quarter
preceding 1 month prior to the date of opening of Bids
M0 = The All India average wholesale price index (all commodities) for the quarter
preceding 1 month prior to the date of opening of Bids

M1 = The average wholesale price index for ( all commodities) for the quarter
Quarter under consideration e quarter under consideration.

PM = Percentage of Local materials other than cement, steel, bitumen and POL of the
work.

The following percentages will govern the price adjustment for the entire contract.

1) Labour --PL ................%

2) Cement --PC …………%
3) Steel --PS …………%
4) Bitumen --PB …………%
5) POL --PF …………%
6) Plant Machinery spares --PP …………%
7) Other materials --PM …………%
Sub-total for which PV is applicable limited to 85%
8) Other components OH, Profit etc 15%
Total Price Component
 ARBITRATION

1.0 ‘Arbitration is one of the gentlemen, for the gentlemen and by the gentlemen” and
unless all concerned seriously believe in this philosophy of arbitration which is “An
Instrument of Peace – Alternative to Litigation” and honestly pursue it, it will lead us
to nowhere.

1.1 The Arbitration procedure can have quick results but the co-operation of the parties
under disputes is necessary. The parties should supply the required information for
completion of the proceedings in time and comply with the award of the arbitrators.
Once the award is given, as far as possible, there should not be further litigation as it
would defeat the vary purpose of the concept of arbitration.

2.0 CONSTRUCTION SECTOR CANNOT AVOID DISPUTES AND AS SUCH

MUST SEARCH FOR THE BEST WAY OF SETTLIN SUCH DISPUTES.

2.1 First Stage

We must adopt good arbitration clauses along with the intention to abide by the award
which primarily means to appoint impartial arbitrator. Separate system for settlement of
disputes arising out of building and engineering contracts must be evolved.

A good arbitration clause will be such which will be to inspire confidence amongst the
parties and ensure fair, impartial, equitable settlement and independent arbitration system
will ultimately reduce the workload of courts.

2.2 Second Stage

There must be provisions in the construction contracts for fair means of settlement of
disputes quickly and amicable as and when such disputes arise. Construction projects are
very high financial value having long durations and have tendencies to be prolonged
further due to various uncertainties. Alternative pre-arbitration disputes resolutions
procedure will go a long way in the improvement of the scenario.

2.3 Third Stage

There is need for specially trained construction cases arbitrators and construction cases
counsels who will like to concentrate on construction arbitration cases as full-time
matters unlike part time attention now being given in this arena. This is the only way to
expeditious settlements and reduced cost.

2.4 Fourth Stage

The parties to the contract must believe in the philosophy of settling through arbitration
after adopting fair arbitration clause and appointing fair arbitrator or arbitrators and after
giving fair fight through the principles of natural justice allowed by the arbitrator or
arbitrators. The parties must accept the award gracefully instead of challenging it.

2.5 The future of arbitration in engineering contracts in India depends on a perfect

system.

3.0 Construction sector as such cannot avoid disputes and for the best way of settling
such disputes shall be suggested through amicable settlement or through arbitration.
Good arbitration clause shall be provided in the contract along with intention to abide
by the award of the arbitrators.

4.0 APPOINTMENT OF ARBITRATORS

4.1 General

The arbitrator is a person chosen by the parties on the basis of their confidence in his
integrity and competence. The parties have full freedom in the matter of choosing
their arbitrators. No particular qualifications have been laid down by the Arbitration
Act for the person or persons who can be appointed as arbitrators. The parties can
appoint any person as arbitrator in whose judgement they have confidence.

4.2 It is said that an arbitration is as good or as bad as the arbitrator. Therefore, the
parties should be careful in choosing their arbitrators. In commercial disputes, it is
usual to appoint such persons as arbitrators who have requisite knowledge or
experience concerning trade customs or usages and the subject matter of dispute.

4.3 The selection of a competent arbitrator on the basis of his qualification and
experience would help a quicker resolution of the dispute, as an arbitrator so chosen
will be readily able to rasp the complexities of the case and it would avoid the costs
of obtaining evidence of expert witnesses. However, the most important
qualification of an arbitrator should be his integrity and impartiality. A person with
knowledge and experience will make an ideal choice.

4.4 The first step in the organisation of arbitration proceedings is the appointment of
arbitrators by the parties. The parties can do this by writing to the person or persons,
agreed to between the parties, requesting them to settle their disputes by arbitration
as per the arbitration agreement. They should also obtain the acceptance of the
arbitrators to so act, as the appointment of an arbitrator is not really effective or
complete until the arbitrator on his part has communicated or written to the parties
accepting the appointment.

4.5 Third Arbitrator

 The amendment issued to the Arbitrator Act in 1966 says the number of
arbitrators shall be in odd number. It can be 1, 3, 5 like that. All are sitting
arbitrators. Two arbitrators appointed have to fix up the third arbitrator. The
majority decision of any two of the three arbitrators is sufficient to make the
award.

4.5.1 The arbitrator is a Judge chosen by the parties who put their fate in his hands and
repose their confidence in him. Therefore, the conduct of the arbitrator should be
such as is not likely to adversely affect the confidence of the parties. An
Arbitrator’s conduct should always be above suspicion.

4.6 Arbitration is a quasi-judicial process and the arbitrator should decide the disputes
referred to him in a Judicial manner and not capriciously or whemsically. The
arbitrator should not misconduct himself or the proceedings.

4.7 The arbitrator should follow the arbitration agreement or the submission.

4.8 The first and foremost duty of the arbitrator taking up the reference is to satisfy
himself that there is a valid and subsisting arbitration agreement between the
parties referring the dispute for arbitration. He should study the arbitration
agreement or the submission very carefully so as to know what matters or
disputes have been referred to him. If the arbitrator goes beyond the authority
conferred upon him by the arbitration agreement, he acts without jurisdiction and
the award rendered by him will be of no legal effect concerning the matters not
covered by the arbitration agreement.

4.9 Arbitrator should not act as an advocate of the party appointed him.

4.10 Once the arbitrator is appointed by the party and undertakes to discharge his
duties as such, he becomes a judge in the case and is bound to act impartially and
with scrupulous regard to the ends of justice.

5.0 ARBITRATION AGREEMENT

5.1 The agreement for arbitration is the first step in the organisation of arbitration by
the parties. It gives jurisdiction to the arbitrator to decide the matters in dispute
between the parties to the agreement. It also determines what disputes between
the parties are referred to the arbitrator.

5.2 In order to give jurisdiction to arbitrators to make and award it is incumbent on

the party claiming arbitration to show that there is a dispute between him and the
opposing party arising out of or in relation to the contract entered into between
them and that there exists an agreement to submit the dispute to arbitration as
defined in the Indian Arbitration Act, 1940 / 1996.

6.0 PLEADINGS
6.1 The party applying for arbitration will first present its statement of claim to the
arbitrator together with the documents in support of the claim. The arbitrator will
notify the respondent named in the statement of claim by sending a copy of the
statement of claim and the accompanying documents and requesting him to
furnish him defence. The respondent will then submit his rejoinder or defence
setting out the reasons for his not accepting or honouring the claims of the
applicant.

6.7 In the statement of claim or defence the parties should not make their allegations
merely in general terms. They should furnish full and exact particulars regarding
their assertions. If the particulars furnished by a party are not sufficient to make
the facts clearly understood to the other party, the arbitrator may suo-moto or at
the request of such other party order the concerned party to furnish the requisite
particulars.

7.0 PROCEDURE TO BE FOLLOWED IN ARBITRATION

PROCEEDINGS

7.1 There is no provision in the Arbitration Act which lays down the procedure to be
followed by the arbitrator in arbitration proceedings. An arbitrator usually is an
ordinary person chosen by the parties themselves as their judge on the basis of
their faith in the arbitrator'’ sense of justice. The arbitrator, therefore, by his
education or his opportunities cannot be supposed to be very familiar with the
legal or technical procedures followed in courts of law for deciding cases. An
arbitrator, is therefore, free to follow such procedure as an ordinary man would
follow in deciding a dispute impartially subject, however, to the principles of
nature justice and the limitations if any contained in the arbitration agreement or
the statutory provisions. An arbitrator though free from the letters of procedural
law must nevertheless observe the fundamental principles of justice, otherwise it
would be misconduct sufficient to vitiate the, award. Even though there is no
personal turbitude on the part of the arbitrator if it is established that there was
such mishandling of the arbitration proceedings as to result in substantial
miscarriage of justice, the award made by the arbitrator would be set aside. The
Courts would not, however interfere with the award on mere technicalities unless
there is some thing radically wrong or vicious in the proceedings.

7.2 Presentation of evidence

7.2.1 The parties to a dispute have a general right to substantiate their allegations with
suitable evidence with a view to helping the arbitration for arriving at a just and
proper decision in the matter. The arbitrator would fix a time, date and place for
the bearing of witnesses, evidence and arguments, if any, offered by the parties.
The time, date and place for the hearings should be such as is reasonably
convenient to all concerned. As the arbitrator ought not to put the parties to any
 unnecessary expense, he should weigh in his mind the circumstances in each case
and try to arrange the most convenient time and place for the hearing of the
parties and their witnesses.

8.0 The parties should co-operate with the arbitrator in filing the requisite documents
or furnishing any other evidence. They should not seek unnecessary
adjournments and should carry out the orders of the arbitrator concerning the
arbitration proceedings without delay, so that the arbitrator may be able to settle
the dispute in the minimum possible time.

9.0 Arbitration no doubt is a quicker procedure than court proceedings, but in actual
practice it would be as quick or as slow as the parties want it. This means that
the quickness of the process of arbitration can be lost in practice, if the parties do
not partake in the proceedings with a co-operative attitude or if they take resort to
such technicalities of procedure as are witnessed in a court of law.

10.0 ARBITRATION AWARD

After the conclusion of the hearings, the arbitrators have to make the award in
writing and they have to notify the parties of the making and the signing of the
award. The award is then filed in the Court having jurisdiction for making it a
rule of the court. The award can be filed in the court suo-moto by the arbitrator
and it should be done with the authority of all the arbitrators where there are more
than one. The parties can also apply to the Court for directing the arbitrators to
file the award in the Court. They have however, to apply within a period of 30
days from the date of the service of the notice of the making and signing of the
award. After the award is filed, the Court will issue notices to the concerned
parties. The parties will get 30 days time to file objections, if any, to the award.
Where no objections are filed or if filed, have been disallowed, the Court will
pronounce a judgement according to the award and upon the judgement so
pronounced a decree will follow and no appeal shall lie from such a decree except
on the ground that it is in excess of or otherwise not in accordance with the award.
An award need not be filed in court if the part against whom the award is made
complies with it promptly.

11.0 SALIENT FEATURES OF ARBITRATION

11.1 The kind of arbitrator the organisation would need is a person with a wide
exposure to engineering construction work and contract administration, besides
the fundamental legal knowledge.

11.2 The advantage of referring a dispute to arbitration instead of to a court are the
following.

11.3 Speed: Arbitrators usually give their award in about 4 months’ time unless they
 take extension of period. Even if they take extension, the period will be still short
when compared to the long time generally taken by courts in law suits.

11.4 Cost : Arbitration is less expensive.

11.5 Convenience : Arbitrators will fix the hearing considering the convenience of the
parties also.

11.6 Informality : Except to the extent of observing the minimum legal formality
prescribed for arbitration proceedings, the hearing will take place in informal
atmosphere.

11.7 Expertise : The organisation will have the choice to appoint an arbitrator who
possesses the expertise to handle construction contract claims. In a court, this
choice will not be there. Moreover, a judge will hardly know the specialities of
construction business.

11.8 Privacy : Arbitration hearings take place at private premises where the public will
not have access, unlike a court where the entire proceedings will be exposed to
members of the public thereby divulging lots of business secrets and details which
might damage the business and reputations.

11.9 Finality : An arbitration award is final. It can only be challenged in a court of

law on questions of law and misconduct of arbitrators.

11.10 Award based on Agreement : While the hearing is still in progress, the parties can
resolve the dispute between them amicably and sign an agreement to give effect
to it. In that event, the arbitrators or the sole arbitrator, as the case may be, will
give an award based on such agreement.

12.0 GUIDELINES TO ARBITRATIONS

12.1 A few guidelines regarding, the choice of suitable arbitrators and proper conduct
of the arbitration proceedings by the arbitrators are indicated below:

12.2 It is desirable and useful for an arbitrator to have knowledge of the practice of
arbitration under the law. He should also have a general idea of the law of
contracts and the law of evidence.

12.3 If an arbitrator possesses experience and expertise in the subject matter of the
dispute referred to arbitration, it will help save time and cost in arbitration. The
necessity for calling expert witnesses to prove matters within his knowledge will
be obviated.

12.4 An arbitrator should act independently and impartially between the parties to the
arbitration from the time of his appointment to the making of the award.
12.5 He should not consider himself as an advocate of the party appointing him and
should act as a judge.

12.6 Constantly bearing in mind the interests of the parties an arbitrator should settle of
the dispute in the shortest possible time with minimum costs to the parties.

12.7 An arbitrator should not himself seek or advertise for his appointment

12.8 As far as possible avoid contacts with one of the parties to the dispute in the
absence of the other. If he has to meet one of the parties of necessity in the
absence of the other, he should notify the other party of it. He should forward to
the other party copies of all communications sent to him by one party.

12.9 During a hearing an arbitrator should not refuse to hear or examine evidence
which is in his opinion both relevant and admissible which either of the parties
wishes him to hear or see.

12.10 An arbitrator is not an ‘ amiable compositor ‘ or conciliator and his award must
be based upon the law as it applies to the matters in issue although some latitude
is permitted to an arbitrator both in the matter of procedure and in the matter of
admissibility of evidence. An arbitrator is usually selected on account of his
expert knowledge and experience in the subject matter of the dispute rather than
an account of any formal legal qualifications in certain cases may be desirable and
helpful.

COST OVERRUN - TIME OVERRUN

1.0 CONTRACT MANAGEMENT - AVOIDING TIME AND COST

OVERRUN

Every project sanctioned and under execution involves commercial, contractual,

legal obligations, rights, with the desired specific output, but with pre-determined
specifications, parameters, fixed limitation on cost and time. In the last say
decade, many projects have been sanctioned and under execution ‘ executed under
various Industrial sectors. But, most of them have resulted in cost and time over
run due to various factors, causes and reasons. The construction sector both in
 public and private is playing a vital and key role towards the contribution to the
economic growth of the country. It generally forms part of 40 – 50% of the
capital outlay of the national plan.

2.0 The detailed project report ( DPR ) IS PREPARED BY THE Planning and
Engineering Department posted with experienced and knowledgeable professional
in various fields / disciplines. This DPR shall contain sections such as
geological and meteorological data access to project site.

Civil Engineering part

Mechanical Engineering part
Electrical Engineering part
Instrumentation and Controls part
Procurement and Contract part
Construction planning, Scheduling part
Construction methodology, sequence
Performance Tests – Commissioning
Man power requirement part
Financial cost estimate, budget, cash flow part
System for progress review and monitoring and Control part.

All the projects construction / erection work are executed through Contractors
only.

3.0 Construction and erection can be looked into as system in which Owners,
Engineers, Consultants, Contractors, Suppliers, Manufacturers, Service Agencies
participate. Their areas of specialisation is varied and wide and interests are
different. All these participants have to be turned to understand and work for the
common goal and objective so that the construction / erection work is efficient
and effective.

3.1 The project execution can be conveniently grouped as pre-construction phase,

Construction phase and post construction phase.

3.1.1 Pre – Construction Phase

Package grouping of procurement of equipment, construction / erection work.

Preparation of detailed technical specification for equipments, designs and

drawings required package wise.

Preparation of detailed technical specification designing for construction /

erection works.

Scheduling of procurement ( of equipment and spares )

 Time Schedule for each package group – interfaces meshing; it with the project
Time Schedule.

Preparation of Commercial Specifications in general and in particular to each

package.

System of bid proposals, evaluation, award of Work - Contract entering into

contract management systems.

3.1.2 Construction Phase

Land acquisition – development

Civil Engineering work – plant and non – plant – building
Mechanical Engineering works – erection of main equipments –
Auxiliaries – services
Control – Instrumentation – works
Resolve the problems during construction
Monitoring the progress
Testing and commissioning
Final operations – Commercial operations

3.1.3 Post Constructions Phase

Defect liability obligations

Warranty obligations
Preparation of as built drawings
Preparation of operation and maintenance manuals – documentation
Reconciling the accounts and closure of project
Construction Phase Account
Reporting any variance.

4.0 PROJECT COST AND TIME - OVERRUN

4.1 The four manor components that have direct impact on the project
cost and time management shall be

Engineering and Technology

Contracts Management
Human resources
Financial support

4.2 While, cost on Engineering and Technology, Human resources and Financial
support is about 10% only in a project, greater attention is to be paid in the
Contracts managements part which is generally 90% of the project cost.
4.3 Ninety per cent ( 90% ) of the project sanctioned cost is committed
towards the procurement of equipments, construction, erection works and are
executed through Contractors. Therefore, greater possibility of time overrun and
cost overrun occurs only in these areas of construction through Contracts.

4.3.1 To avoid time overrun and cost overrun, the Contracts and Contracts
management assumes a greater key role. The philosophy of Contract
management system shall be on the basis of equity and fairness to the Contracting
parties and an attitude and approach of the owner and Contractor shall be as
members of the bilateral Contracts, drafted with ( i.e., ) identity of mind, working
together hand in hand, with good understanding and co-operation to achieve the
common agreed objective of satisfactory completion of the Contract as mutually
agreed terms and conditions.

5.0 The Contract Department of any organisation / Company is the one through which
initially the bidder get to know the profile of the Company, its culture, systems,
methods apart from the details furnished in the tender documents. More closer
interaction and relationship is developed towards the process of bid discussions
and finalisation of the package Contract. The award of the Contractor is also
issued by this Department Executive. Therefore, more acquaintance, familiarity
and rapport are developed, established between the Contractor and Owner through
the Executive of the Contract Department.

5.1 The intent of each clause, stipulation, in the Contract and Contract document are
well known to this Department. More often, therefore, the Contractor looks upon
the Executive of the Contracts Department to resolve the problems, disputes any
arising during the course of construction /erection and generally his ruling is
accepted.

5.2 Efficient Contract management shall accord top priority to early and quick
acceptable workable solution to the parties encountered with any dispute and shall
be towards the working of the Contract and proceeding with the work. Most
important and utmost concern shall be, that dispute resolving process / solution
shall not unnecessarily influence the construction / erection work andcause
delays.

6.0 Construction sector have to adopt a comprehensive effective system ofContract

management. The Contract and Contract documents must be fair to both the
Contracting parties sharing the risks of the Contract management, which should
be based on equity principle of natural justice. These documents should not be
loaded against the Contractor.
7.0 Risk sharing is more an efficient way of managing the Contract. The basic
objective of a contract is to ensure performance of the agreed task within the
specified frame works of cost, time, and quality. “Risks” reflect an element of
uncertainty of some kind, related to mutually agreed performances, including
related obligations.
7.1 In a very general meaning, the term risk can be defined as a factor influencing,
adversely the chance or probability of fulfillment of a mutually agreed task within
the specified frame work of time, cost, quality and performance of any of related
obligations, by any one of the party. Risks are an inherent feature in any contract.

7.2 For any contract work to proceed smoothly, it is essential that every possible risk
is identified and definite risks are divided between the owner and the contractor
on rational basis, at the time of inviting offers. The intending tenderer will
evaluate such risks which he has to undertake, prior to arriving at his bid.

7.2.1 Risks which the owner should bear are :

• access to work site

• changed conditions
• variation in quantities
• defective design and delay in drawings
• delay in payments and owner supplied materials
• escalation in cost of materials and labour
• risks due to acts of God – Force Majeure Conditions
• economic disasters

7.2.2 Risks which the contractor should bear are :

• inherent risks in the submission of bid

• contractors capacity
• availability of labour, material and equipment
• safety measures
• productivity

7.2.3 Risks to be shared are :

• infrastructure facilities
• increase in price other than materials and labour
• strikes, lockouts
• shortages of essential materials

7.3 Adopting fair balance contract conditions accompanied with acceptance of

respective risks by either party will certainly create an atmosphere of mutual trust,
throwing doors of expansion and innovation in methods of construction wide
open to take up more challenging works, in future.

8.0 While the impact of cost and time overrun is not very significant in other areas, it
is very significant in the project Contracts as 90% of the cost of the project is
executed through contracts.
9.0 COST OVERRUN

9.1 The cost overrun can broadly occur under two classified groups.

Causes due to external characters

Causes due to internal characters

9.2 Causes due to external characters

• Fluctuations in exchange rates between Rupee and other currencies.

• Change in Customs duty
• Change in Excise duty
• Change in Sales Tax, Octroi and other new regulations
• Change in the Bank rate of interest
• Increase in Cost of materials due to any order by Government.

9.3 Causes due to internal characters

• Inadequate investigation, project formulations

• Delay in land acquisition
• Delay in preparation of specifications, designs and drawings
• Project planning and scheduling
• Delay in creating the infrastructure needed for the project
• Delay in finalising the Award of Contract due to procedural delay/undue
influence brought on defective, incomplete specifications – calling for
revisions.
• Vagueness in the Contract terms, scope and specifications.
• Change in scope – additions/alternation/extra work after the work is awarded.

10.0 TIME OVERRUN

Time overrun can also be grouped as cause due to the Contractor and causes due
to the owner and external but not due to the contractor or owner.

10.1 Causes due to the Contractor

• Delay in planning, sequence activities

• Delay in the designs, engineering, drawings.
• Delay in placement of sub-order – sub-contracting
• Delay in transportation, clearing
• Delay in mobilising at site
• Delay/slow progress of work
10.2 Causes due to the owner

• Delay in approvals, to drawings, designs, inspection reports etc.

• Delay in providing inputs
• Change in scope of work, additions/alternations – amendments to contracts.

10.3 Causes due to external

Fore Majeure conditions in the manufacturing factory, and at site.

11.0 EFFECT OF COST OVERRUN AND TIME OVERRUN

11.1 If there is time overrun, there will be cost overrun too, but there could be cost
overrun without time overrun i.e. additional work carried out within the Contract
period or increase in duties, taxes within the Contract period.

11.2 Consequent to cost overrun, there will be increase in the Contract value, project
cost, and later interest on cost during construction period, and end product price.

11.3 Consequent to time overrun, there shall be increase in cost, due to escalation,
subject to ceiling, site establishment, office overheads, cost due to extension of
bank guarantees, insurance policy, interest during the overrun period.

11.4 In any case, there is an adverse effect on the Contract/project due to cost overrun
and time overrun, which will invite comments from all quarters.

12.0 THE CONTROL MEASURES

12.1 Cost Control

The project cost estimate should be realistic taking the current market trends, variations
likely during the project, period and also unforeseen problems. Certain cost must be
provided towards cost of inputs, changes in taxes, duties, omissions, design changes and
unforeseen items. These provisions will generally accommodate such items during the
actual project, construction period and thus shall take care of cost overrun.

12.2 Time Control

The scope of work for any contract proposal shall be drawn carefully without any room
for change. The inputs/fronts release must be identified and time schedule drawn. The
activities must be clearly identified and enough and sufficient time provided for. Total
time for the project worked out on the above basis should also provide time for
unforeseen problems. On the basis of the agreed time schedule in the Contract, time set
for each activity is defined and mentioned as to when it occurs. Control charts on the
basis of planned work, prepared and compared with actual to check delay, if any, due to
inadequate man power or shortage of material or funds. Delay caused in any activity
shall be examined, and remedied by extra man power, material or both and agreed
schedule adhered. A very close periodical review of the activities shall ensure a close
watch on the time schedule.

12.2.1 Selection of dependable, reliable agencies must be fixed up for logistic supports
on the basis of qualification requirements.

12.2.2 The scope of work must be studied and plan to execute it must be prepared and
mobilisation need drawn and followed up.

12.2.3 Approvals wherever called for shall be done within the agreed time set in the plan
or chart. What are the inputs needed and what point of time it is to be provided
shall be drawn out clearly and followed up.

12.3 To keep up the time schedule and adhere to, it is the responsibility of both the
parties to the contract. The inputs/release of fronts at site as per agreed time
schedule must be closely followed and provided. A close follow-up of the
progress achieved against target set must be made. A system of follow-up on
daily/weekly/fortnightly/monthly basis must be evolved and control progress
chart prepared and reviewed. The causes leading to delay must be identified and
quick remedial measures taken.

12.3.1 Executives on both the sides of the Contracting party shall be of project oriented
approach, in effectively remedying the slippage, with sound knowledge,
understanding and co-operation.

13.0 SUCH A METHOD, APPROACHES SHALL AVOID COST OVERRUN,

TIME OVERRUN AND MINIMISE THEM.
 LEGAL TERMS VERSUS ENGINEERING TERMS

1.0 Engineering construction terms- contracts- terms legal provisions – protections

1.1 All contracts agreement concluded implemented, discharged are governed by law of
the land. Towards various procedures, aspects, activities of a contract agreement, The
Indian contract Act, 1872 provides all legal provisions protections This Act, 1872 is
applicable to both the parties to the contracts agreement and contains 238 sections in 10
chapters, in the proper sequence This law of contract differ from other branches of law
as it does not lay down number of rights, duties, obligations which the law may protect or
enforce, but it contains rather number of limiting principles subject to which parties may
create rights, duties, obligation between themselves, which law will uphold.

1.2 In other words, the parties are free to fix up their own scope of work, terms,
conditions and other securities, within which performance is expected. so long as these
terms do not infringe some legal prohibition, parties are at liberty to make the rules,
procedure and system regarding the subject- matter of the contract agreement as long as
they are under mutual consent and agreement.

1.3 The law of contracts is to be regulate the transactions between parties in a fair,
equitable justifiable manner.

2.0 The legal terms, words and their meanings related to engineering meanings,
implications are explained.

Legal Terms-Meaning-definition Engineering terms- Meaning-definition

Offer
An offer means a proposal to enter into a
contract made by one party called offerer to
another party called offeree.
TO OBTAIN AN OFFER NOTICE
INVITING TENDER ISSUED.
A communication advertisement, notification
through any media.

With basic details with an intention to obtain

ACCEPTANCE
An acceptance shall mean the manifestation
by the offeree of his assent to the terms
mutually agreed terms of the offer by the
offerer.
CONSENSUS AD IDEM
Consensus as idem shall mean all terms,
conditions, drawings, specifications have
been clearly understood and identity of mind
between parties created.
offer/ quotation /bids from possible sources
/vendors/bidders.
Acceptance is issued by way of letter of
intent, letter of acceptance, letter of award,
supply order, purchase order, work order, job
order agreement, contract agreement.
Deviations to tender specification, counter
offer, proposal, shall be sorted out and mutual
understanding reached and all items agreed
through pre-award discussion, exchange of
letter or discussion held and minuted.
Legal Terms-Meaning-definition
PROMISOR
A person /firm/ company making a proposal
is called promisor .
PROMISEE
Promisee shall mean a person, firm, company
who had invited tender and later accepting the
proposal made by the promisor.
PROMISE
A proposal when accepted becomes a
promise.
CONSIDERATION
Consideration shall mean what a promisor
demands from the proisee as a price for the
promise. Consideration is contract without
which it is void contract and cannot be
enforceable in law.
CONVENANT
Convenant shall mean a binding and solemn
agreement to do or not to do or keep away
from doing a specific act.
FORCE MAJEURE
Force majeure shall mean on irresistible force
or compelling circumstances beyond anyone’s
control.
CAVEAT EMPTOR
Caveat emptor shall mean buyer / purchaser
beware.
Engineering terms- Meaning-definition
Against a tender issued, a proposal to
undertake the scope of work indicated, made
by a contractor, manufacturer, trader, agent,
company, firm, seller and any service
provider.
Another, party, buyer, owner, purchaser,
employer who accepts the proposal made and
enters into a contract agreement.
Promise is the scope of work ultimately
agreed between the parties on the basic of
mutual understandingand agreement between
them.
If the price, price basis agreed between the
parties towards performance of completion of
the scope of work agreed within the agreed
time schedule.
It is binding agreement between the parties to
the contract agreement to perform or
complete the scope of work agreed terms,
conditions, specification, drawings and price.
Force majeure- occurrence of an act beyond
the control of both of the parties to contract
agreement, preventing or disabling both the
parties to perform the respective obligation
agreed. Both the parties may suffer in time
and cost and no benefit accrues to anyone.
Generally time extension is granted to the
time schedule agreed without levy of
liquidated damages.
Under sale of goods Act, 1930, it is said the
buyer or purchaser be sure of the requirement
of item / goods proposed to be
bought/purchase, on its quality, make,
quantity Once the consideration that is the
price agreed , is paid and such good taken into
possession on any these aspect are not
available, unless otherwise its covered a
warranty obligations.
Legal Terms-Meaning-definition
COMPENSATION
Compensation shall mean anything as an
equivalent as to make assessment for the loss
or damage.
WARRANTY
Warranty means seller’s assurance to buyer
that the goods or property is or shall be as
represented and if not it will replaced ,
repaired, reconditioned at seller expenses.
GUARANTEE
Guarantee shall mean a promise to make
payment of debt, default.
SCHEDULE
Schedule shall mean a plan of procedure to
events.
Engineering terms- Meaning-definition
Failure to carry out or perform any activity
described in the agreement gives raise to
compensation both time and cost . Depending
upon the scope of work agreed in the contract
parties have set between them selves to
perform certain promise, reciprocal promise.
These shall be performed as agreed end any
failure may enter in the time / cost over runs
and may cause delay in achieving the return
on investments compensations for time delay
is covered by a liquidated damage clause.
Failure to meet the agreed parameters shall
also be covered by liquidated damage clause.
Other compensation are generally covered by
Hudsons formula and for few events, it has
to be determined on the facts it.
Warranty means the goods offered or sold is
manufactured adhering engineering codes,
standards, and is from design defects,
manufacturing defeats, design defects,
manufacturing defects, workman defects. And
shall meet the parameters agreed it is yet
another assurance, that the goods shall truly
represent as per technical specification
drawing, data sheets. In a project job it also
means the systems created shall perform to
the agreed rate of parameters.
Guarantee is a financial support and assurance
to meet the warranty obligations. In
engineering contract a third party stands for
payment if any for warranty obligations not
duly discharged it is generally from a bank
guarantee for performance or bank guarantee
for warranty.
Schedule shall apply to preparation of designs
& drawing . Approval of designs &drawing
procurement time
Activity
Work

Legal Terms-Meaning-definition
OBLIGATION
Obligation shall mean a legal duty created to
perform the act agreed upon.
CLAIM
A claim means assertion of a right to have
money paid.
WAIVE
It shall mean knowingly to surrender and
abandon a claim and a defence which might
have been legally made.
ASSIGNMENTS
Assignment shall mean transfer of claim right
of property through an instrument of deed
authorizing it.
DAMAGE
Damage is a loss or injury caused by the fault
of the another and shall also mean money
claimed by a party to compensate for it by
another party.
Erection
Construction
Billing
Dispatch
Engineering terms- Meaning-definition
It means to carry out every activity, work as
per agreed terms, conditions, prices, payment
following such engineering standards, code
specified and agreed upon between the
parties. Any failure to meet the obligation at
the set time shall constitute a breach on the
agreed terms.
It normally arises due to increase in scope of
work
Additional work
Substituted work
Delays caused in payments
Delays caused in dispatch clearance
In price variation in duties, taxes
If contract is extended interest on last
payment .loss of profits. Overhead changes
Depreciation charges. Insurance charges Idle
manpower, machinery, and others.
It means giving way the right provided and
agreed in the contract between parties say for
example waiver of inspection of a particular
goods, components, etc.
It means authorizing a part of work in the
agreed scope of work in a contract, getting it
done through an approved sub- contractor
and sub – supplier.
In engineering contracts towards failure in the
due performance of the scope of work, a
security deposit is retained or a performance
bank guarantee is obtained and in the case of
time delay likely, a provision by way of
liquidated damages pre-estimate provision
Is made in the contract.
Towards non-achieving the performance
parameters specified also a liquidated damage
s towards shortfall is stipulated.
DISPUTE
Dispute shall mean a difference occurred but
unresolved leading to claims, compensation.
THE INDIAN CONTRACT ACT, 1872
LAW OF CONTRACTS
Essential of valid contract
Between two persons/ parties.
Promisor – promise -promisee
Offer and acceptance
Consensus ad idem
Intention to create legal object and not
opposed to public policy.
Lawful consideration
Capacity of the parties – not a minor –
mentally retarded – debarred by law – certain
judiciary authorities
Free consent- not force.
Possibility of performance.
Dispute or difference may be cause due to the
interpretation of the terms, condition of the
contract, performance of the contract and
closure, discharge of the contact. It may lead
to claims to be worked out based on its nature
and settled through negotiations or arbitration.
Engineering construction/
erection contracts
It is entered into between two different
companies or two different parties or between
departments / company / buyer / seller /
Trader / Agent / Employer / employee
Contractor }scope of work {-Owner
Seller} -Buyer
Quotation – Tender / Bid submitted by the
tendered meeting all the requirements, terms,
conditions, prices and accepted into by the
department / Owner / purchaser / buyer.
Identity of mind – without any omissions,
deviations / counter but if any shall be
resolved and mutual understanding reached
The scope of work or the promise shall be to
create an asset (i.e.) construction of building,
bridge, factories, erection installation of plant
– ownership, transfers of goods.
The amount / price / agreed in the contract
shall be rupees and not in any other form
Capacity of a party to execute the scope of
work is determined- by stipulating
qualification requirements to take part in the
bidding.
The bidder and or purchaser shall not act
under force, compulsion to float a tender or
submit a quotation – offer and accept the one.
The scope of work shall be possible to carry
out with resources and shall not be imaginary
or prevented by law enacted.
There shall be an offer.
Essential of valid contract
Fairness in the process - transparency
SECTION -9
PROMISES, EXPRESS OR IMPLIED
Insofar as the proposal or acceptance of any
promise is said to be express . Insofar as such
proposal or acceptance is made otherwise
than in words, the promise is said to be
implied.
An offer means a proposal, bid, tender
quotation . to obtain it detailed specification,
tender documents, commercial, technical are
prepared indicating the scope of work, time
frame, performance and terms, conditions
under which it is expected to be performed.
There shall be a notice inviting tender through
communication media . The notice can be
international competitive bidding domestic
competitive bidding depending on the scope
of work.
Engineering construction/
erection contracts
Notice inviting tenders issued to give fair
opportunities to all intending bidder to
participate.
All tender / bids are opened in the presence
of bidder only
All deviations and other terms, conditions
prices are read out for sorting out the
deviation, communication are sent to all
bidders participated.
Scope of work will be defined in words and
also expressed in clear terms For any goods
ordered with express terms it also means it is
implied that the goods ordered shall be
manufactured according to codes, standards
deploying machineries quality control
measures proper supervision , with good
workmen with the required skill
It is implied terms that in the absence of any
special terms , conditions, specifications or
directions in the contract specifying the
manner in which work is to be done either
manufacture, construction, erection, etc.,
There is an implied conditions in all contract
for such works and labour, it shall be
performed as per standards, codes, workmen
like manner.
It also implies, inspection, checking, dispatch
clearance, it is implied preparation design,

SECTION -10
WHAT AGREEMENTS ARE
CONTRACTS
All agreements are contracts if they are made
by the free consent of parties competent to
contract, for lawful consideration and with a
lawful object and are not hereby expressly
declared to be void.
Essential of valid contract
SECTION -13
CONSENT DEFINED TWO OR MORE
PERSONS ARE SAID TO CONSENT
WHEN THEY AGREE UPON THE SAME
THING IN SAME SENSE.
SECTION -37
OBLIGATIONS OF PARTIES TO
CONTRACTS
The parties to a contract must either perform
or offer to perform, their respective promises,
unless such performance is dispensed with or
excused under the provisions of this Act or of
any other law.
detailed engineering drawings and their
approval.
All engineering contracts are concluded on
the basis of tender specification documents .
notice inviting tenders, offers, negotiation
consensus ad idem – acceptance all contracts
contain the scope of work , a lawful one price
or amount fixed a lawful consideration creates
transfer of title, creation of assets.
The parties to the contract are generally
company to company, department registered
contracts, public companies, all registered
under the Indian companies Act.
Engineering construction/
erection contracts
The offer or bid proposals submitted by any
tendered/ bidder against a notice inviting
tender means a sort of consent to carry out
the work as per the tender specification
documents.
But many times the offer may have same
deviation on technical as well as commercial
aspects. These are sorted between the parties
and an identity of mind reached .which in the
return means parties have agreed all terms,
conditions , specification, in the same sense is
no ambiguity or difference or deviation
between the offer and acceptance.
In sale contract of goods, consumable plant
&machinery , ready-made of the shelf items
are immediately handed on to the party. In all
such cases the obligation of the parties are
performed then and there with one party
delivering it and other party accepting it and
making the payment.
In major contracts including design,
engineering, manufacture , testing,
construction, storing, erection/ test in the
agreed scope of work cannot be implemented
immediately. As it involves lost of other
activities, events, the scope of work shall be
 performed after the reciprocal promises are
performed in all these cases the party offers to
perform their respective promise in a
particular method/ order.
For example, concrete cannot be laid unless
form work, reinforcements are ready.
Process pining cannot be created unless
support are ready.
SECTION -38 When a bidder / tender has made a proposal to
EFFECT OF REFUSAL TO ACCEPT any purchaser / owner / department and
OFFER OF PERFORMANCE where the proposal has not been accepted the
When a promisor has made an offer of tendered / bidder in such as situation is not
performance to the promise, and the offer has responsible for carrying out the work and
accepted, the promisor is not responsible for cannot claim any payment. In this case there
non- performance nor does he thereby lose his is no concluded valid lawful contract. It can
rights under the contract does thereby. also be a case where the tender itself has
been cancelled.
Essential of valid contract
SECTION -39
EFFECT OF REFUSAL OF PARTY OF
PARTY TO PERFORM PROMISE
WHOLLY
When a party to a con tract has refused to
perform or disabled himself from performing,
his promise in its entirety the promise may
put an end to the contract unless he has
signified by words or conduct his
acquiescence in its continuance.
SECTION -40
PERSON BY WHOM PROMISE IS TO BE
PERFORMED.
If it appears from the nature of the case that it
was the intention of the parties to any contract
that any promise containing in it should be
performed by the promisor himself such
promise must be performed by the promisor
in other cases the promisor or his
representative may employ a competent
person to perform it.
Engineering construction/
erection contracts
When a party to a contract fail to perform the
scope of work and refuse to carry out the
work in spite of many notices, the contract
and claim compensation
When a party to contract disables himself by
way of bankruptcy, insolvency, then the other
party may terminate the contract. But a party
fails to perform the scope of work but agrees
to perform later the party cannot but allow the
party to perform and can claim compensation
for damage.
If the parties fails to adhere to the time
schedule to complete the work but agrees to
carry out the work later the party will be
allowed to perform with levy of liquidated
damage
In a contract wherein the scope of work skill,
knowledge, expertise involved which is
available with the promsor only , it shall be
performed by the promisor only for example
painting in a particular way – music
performance by singer – repair work of with
particular technique- teaching a performed by
the promisor only who possesses the skill,
knowledge.
In engineering , construction, erection,
contracts, it can be performed by the sub –
contractor , sub- supplier also provided they
are qualified
In a composite contract , promise involves so
many activities from design to
commissioning.
Design detailed engineering manufacture of
critical items quality control are to be
performed by the promisor / contractor only
and others
Can be performed through sub- contractors,
agents.
Essential of valid contract
SECTION 50
PERFORMANCE IN MANNER OR AT
TIME PRESCRIBED OR SANCTIONED
BY PROMISEE.
The performance of any promise may be
made in any manner , or at any time which the department.
promise prescribes or sanctions.
SECTION 51
PROMISOR NOT BOUND TO PERFORM engineering , supply , construction , erection
UNLESS RECIPPROCAL PROMISEE
READY AND WILLING TO PERFORM.
Where a contract consists of reciprocal
promises to be promisor need perform his
promise unless the promise is ready and
willing to perform his reciprocal promise.
Engineering construction/
erection contracts
In all engineering contracts design,
engineering, supply construction erection
testing and commissioning the scope of work
can be executed in the manner as per
direction of the purchaser / owner /
There fore the parties to the contract agrees
on a bar or activity chart identifying various
events drawn to time schedule for each within
the overall time schedule to perform.
In all engineering contracts design
contracts there are lots of activities
dependent on each other and very few are
dependent. The activity dependent on other
activity cannot be performed unless such
activity is completed in due time.
A promise (i.e.)an activity can be performed
if only the other dependent activity namely
reciprocal promise is performed.
The contractor need not perform the activity
to be performed by him if other party is not
ready and willing .
For example one party ‘A’ to the contract
agreed to supply pipes for the work of the
other party ‘B’ to lay these pipes but the
party ‘A’ was not ready with the pipes . Then
the other party ‘B’ need not perform his
promise namely laying of the pipes and can
claim damage also .
Again the party A is willing to supply the
pipes later then the mutual agreement
between the parties reached then the other
party shall perform .
Essential of valid contract
SECTION 52
ORDER OF PERFORMANCE OF
RECIPROCAL PROMISES.
Where the order in which reciprocal
promises are to be performed is expressly
fixed by the contract they shall be performed
in that order and where the order is not
expressly fixed by the contract they shall be
performed in the order which the nature of
transaction requires.
SECTION 53
LIABILITY OF PARTY PREVENTING
EVENT ON WHICH CONTRACT IS TO
TAKE EFFECT.
When a contract contains reciprocal promises
and one party to the contract prevents the
other from performing his promises the
contract becomes violable at the option of the
option of the party so prevented and he is
entitled to compensation from the other party
for any loss which he may sustain in
Engineering construction/
erection contracts
In engineering contracts for construction,
erection generally involves many reciprocal
promises to be performed by the owner /
purchaser/ department , to enable the
contractor to perform his obligation the
reciprocal promises generally are handing
over the site of work approvals to design
drawing quality control assurance , inspection
and dispatch clearances . payment of bills
issue of materials plant and machineries,
supervision of works – acceptance thereon
providing input data for design, battery
limits, etc., loads / and facilities for
conducting performance tests.
In the overall time schedule, if the dates for
such performance of reciprocal promises are
fixed in advance either in the tender
specifications or in the contract or by a
mutually under standing with clearly drawn
minutes it all shall be performed in that order
only . it can be reviewed periodically and
changes if any , can be discussed and settled.
But if the for performing the reciprocal
promises are not fixed or determined in
advance it shall be then performed as per the
work requirements.
For example the department . employer/
purchaser had to provide a crane for
erection work as per contract but the date on
which the crane to be deployed had not been
fixed then the equipment is ready for
erection
All engineering construction, erection ,
contracts, have promises- reciprocal promises
to be performed by the parties in the proper
sequence. Failure or default, or delay in
performing any of the reciprocal promise the
other party cannot perform his obligations.
The various obligations/ reciprocal promises
order in which to be performed are definedin
the contract if for example the party fails to
make payment for the work done and
accepted, the other party can declare the
consequence of the non- performance of the contract avoidable which means the right
contract. legally to put an end to the contract as a
whole and claim compensation for the loss
Essential of valid contract
SECTION 53(CONT)
SECTION 54
EFFECT OF DEFULT AS TO THAT
PROMISE WHICH SHOULD BE FIRST
PERFORMED, CONTRACT CONSITING
OF RECIPROCAL PROMISES.
When a contract consists of reciprocal
promises, such that one of them cannot be
performed, or that its performance cannot be
claimed till the other has been performed and
the promise last mentioned fails to perform it.
Such promisor cannot claim the performance
of the reciprocal promise and must make
compensation to the other party to the
contract for any loss which such other party
may sustain by the non- performance of the
contract.
SECTION 55
EFFECT OF FAILURE TO PERFORM AT
FIXED TIME, IN CONTRACT IN WHICH
TIME ESSENTIAL
When a party to a contract promises to do a
certain thing at before a specified time or
Engineering construction/
erection contracts
caused. Similarly if the party fails to provide
the facilities agreed in the contract, the other
party can be declare it voidble and claime
compensation .
If the parties sgreed to perform, they can do
so with all their rights and obligations as
existed .
If a contract for design, engineering,
manufacture, supply, transport, erection
testing and commissioning of a generator
transformer, the reciprocal promise by one
party ‘A’ is to provide the transformer
foundation as per design data of the
transformer manufacturer. The foundation
work entrusted to another contractor ‘B’ The
time schedule for the readiness of the
foundation and placing the transformer are
mutually tried up between contractor ‘A’ and
‘B’ The transformer is ready in all respects,
but the foundation is not ready. So with this
position / situation transformer contractor ‘A’
cannot place it on the foundation and it cannot
be performed. The purchaser or owner cannot
claim the performance namely placing the
transformer on the foundation, but he must
make compensation for any loss caused to the
transformer contractor ‘A’ Such a loss in this
case, is the cost towards storage, preservation
of the transformer and delayed payment, loss
of the capital invested.
L.D. can be levied on the another contractor
‘B’ for not keeping ready the foundation in
due time .
All project nature of contracts there are
number of such activities linked with others,
They are generally called, inputs, work front
and customer hold point.
Generally contracts stipulate a specific date/
period for performance of an activity and its
failure to meet that justifying the other party
in treating the contract as repudiated in legal
parlance. In the event the contractor had
failed to adhere the time schedule, the
certain things at or before specified time the purchaser/ promise may put on end to the
contract or so much of it as has not been contract by serving a due notice with his
performed, becomes violable at the option of intention to do so and levy of liquidated
Essential of valid contract
SECTION 55 (CONT)
the promise, if the intention of the parties was availability of design, drawings all other site
that time shall be of the essence of the
contract.
EFFECT OF ACCEPTANCE OF
PERFORMANCE AT TIME OTHER
THAN THAT AGREED UPON.
If in case of a contract voidable on account of claime compensation.
the promisor’s failure to perform his promise
at the time agreed, the promisee accepts
performance of such promise at any time that
agreed the promise cannot claim
compensation for any loss occasioned by the
non- performance of the promise at that time
agreed unless at the time of such acceptance,
he gives notice to the promisor pf his
intention to do so.
SECTION 67
EFFECT OF NEGLECT OF PROMISEE
TO AFFORD PROMISOR REASONABLE land, area for construction work , water
FACILITIES FOR PERFORMANCE
If any promisee neglects or refuses to afford
the promisor reasonable facilities for
performance of his promise, the promisor is
excused by such neglect or refusal as any
non- performance caused thereby.
Engineering construction/
erection contracts
damages.
However, to keep continuity of work
facilities, resources, warranty obligations
generally even if the contractor had failed to
adhere to time schedule, the same contractor
is allowed to continue the performance of the
balance of work . In all such case a notice
shall be served to the contract to perform the
balance of work going extension of time
retaining the right to levy liquidated damages.
Thus the terms, conditions, prices / tates are
fully secured.
If the promisee that is owner/ purchaser
accept the promise at or after the time
schedule, the purchaser/ promise cannot
All project contracts, contains facilities to be
provided by the purchaser as agreed, such as
supply for construction work, power supply
for construction work, others like to
construction plant and machineries some
owner supply materials.
If the purchaser, neglect or refuses to provide
any one of them as per the agreed schedule,
then he cannot claim performance from the
contractor The contractor is excused by such
an action of refusal or neglect or by both by
the purchaser and the contractor may claim
compensation for money and both.
Essential of valid contract
SECTION 73
COMPENSATION FOR LOSS OR
DAMAGE CAUSED BY BREACH OF
CONTRACT.
When a contract has been broken, the party
who suffers by such breach is entitled to
receive, from the party who has broken the
contract, compensation of him. Thereby,
which naturally arose in the usual course of
things from such breach or which the parties
knew, when they made the contract to be
likely to result from the breach of it. Such
compensation is not to be given for any
remote and indirect loss or damage sustained
by reason of the breach.
SECTION 74
COMPENSATION FOR BREACH OF
CONTRACT WHERE PENALTY
STIPULATED FOR
When a contract has been broken, if a sum is
named in the contract as the amount in the
contract as the amount to be paid in case of
such breach or be if the contract contains any
other stipulation by way of penalty, the party
complaining of the breach is entitled whether
or not actual damage or loss is provide to
have been caused thereby to receive from the
party who has broken the contract reasonable
compensation not exceeding the amount so
named or as the case may be, the penalty
stipulated for.
SECTION 126
CONTRACT OF GUARANTEE, SURETY,
PRINCIPAL DEBTOR AND CRECITOR
A contract of guarantee is a contract to
perform the promise or discharge the liability
of a third person in case of his default.
The person who gives the guarantee is called
the surety the person in respect of whose
default the guarantee is given is called the
‘PRINCIPAL DEBTOR ‘ and the person to
whom the guarantee is given is called the
‘CREDITOR’ A guarantee may be either oral
Engineering construction/
erection contracts
This section 73 provides due to breach of
contract compensation which naturally arise
or the compensation pre- determined.
In the case which naturally arise are loss due
to under utilization of plant and machinery ,
loss of profit, loss due to components,
consumables procured for the work.
Which the parties knew when they made the
contract, is the liquidated damage at certain
percentage with ceiling and security deposit
or performance bank guarantee. Which are
built in the tender specification and in the
contract.
In all contracts, the purchaser/ owner expects
the scope of work to be completed
satisfactorily in all aspects and within the time
schedule agreed upon. To protect, these two
essential aspects, generally a control measure
is built in the contract itself by way of
security deposit or performance bank
guarantee to secure the completion of the
scope of work and a pre- estimated liquidated
damage causes since the parties even at the
time of bid proposal, these liability are
known, the contractor would have taken this
liability in his price offer being so fixed
determined in value, the actual loss need not
be established.
Performance bank guarantee is a contract of
guarantee between banker and purchaser.
The banker being a third party to the
contract, stands guarantee for the performance
by the contractor the contractor the entire
scope of work. In the event of any failure by
the contractor in the performance, the bank
guarantee can be enchased by the purchaser
and the banker is bound to pay the money
demanded without any demur or any recourse.
 or written.

LANDMARK JUDGMENTS-CITATION

GENERAL

Knowledge of case laws is very essential for executive towards defending The
arbitration case in the preparation of facts of the case, claim statement, counter-
statements, counter-claims, rejoinder and exhibits judicial precedent is the pattern, relied
upon which future conduct may be based. Overall position in respect of the operation of
the doctrine of the precedent of the case law in India is as under.

The law declared by supreme court of India shall be binding on all the courts with in the
territory of India.

The supreme court itself is not bound by its own decision.

Even a majority decision of the supreme court can be reconsidered.

In practice unanimous opinion of the supreme court enjoys better authority than major
decision.

All high courts are bounded by the decision of the supreme court.

Decision of High court in the state are binding on the lower courts in that state.

One high court in one state cannot bind another high court in another state . Their
decision have persuasive force only.

Before citing any judgment in support of the claim or counter-claim, full judgment must
be studied and compared with the grounds of claims/counter-claims.

After such detailed study only, the applicability and relevancy of that judgment to the
claim or counter-claim can be ascertained.

ISSUE: Loss of profit –claims-Admissible

Case law
SI. Judgment Citation
NO.
1. AIR 1977 Supreme Court – We thing that it will be just and reasonable to
1481 put this profit at 10 percent of the contract
V.R.Krishna Iyar and price which works out to R.s 1,25,000/-
A.C. Gupta- J.J. ◊◊◊◊◊◊
Civil Appeal No. 2262 of 1968
dt. 19.1.1977 We restore the award of r.s the award of r.s
 Mohd . salamatuallah 1,87,500/- made by the trial court on account
-Appllant of estimated profits.
v.s
Government of A.P
-Respondent.

2 AIR 1984 Supreme court- 1703
D.A. Desai, A.P. Sen and
V.Balakrishna Eradi- J.J
Civil appeal No. 2054 of 1973
dt. 25.7.1984
A.T. Brij Paul Singh & Brothers
- Appllant
v.s.
State of Gujarat
-Respondent
3 AIR 1999 Suprene court- 1031
v.n Khare, R,P,Sethi-J.J.
From madhaya oradesh civil
appeal No. 1209of 1992
Dt. 10.2,1999
Dwaraka Das
-Appallant.
Vs.
State of madhaya Pradesh
-Responden
4 2001 (2) raj 551/del
Delhi high court,
Mukul mudgal. –j.
S.No. 3439/1992
Decided on 20.12.2000
Aries construction co.
Vs.
Delhi development authority.
5 2000 (i) raj . 359 (del)
Delhi high court ,
M.S.A.Siddiqui-j.
Suit no. 1650 of 1994 and I.A.
No. 8682 of 1994 decided on
01.07.1999
Where in a works contract the party entrusting
the work commits a breach of the contract, the
contractor would be entitled to claim damages
for loss of profit which he expected to earn
by undertaking the works contract. What must
be the measure of profit what proof should be
tendered to sustain the claim are different
matters. But the claim under this head is
certainly admissible.
The contract act (9of 1872)section 73- damages
contract found to have been illegally rescinded
by Govt.- claim by the contractor for recovery
of amount as damages as expected profit out of
contract – cannot be disallowed on the ground
that there was on proof that he suffered actual
loss to the extent of amount claimed on
contract-(para-9)
The arbitration act. 1940-section 30 and 33-
damages on account of loss of profit- award of
contract for carrying out developmental work –
non- execution of work –no delay or default on
the part of claimant- undue delay of 28 months
due to lack of prompt action by respondent.
Even letter of closure by the respondent not
imputing any lapse on part of the claimant.
No evidence on record- arbitrator awarding
damages as loss of profit . objection filed by
the respondent dismissed- no ground for
interfere with the award – hence made rule of
the court.
The contract act, 1872 – section 73 and 74-
damages or compensation scope breach of contract-
held where a breach of contract has been committed,
the party not in default is entitled to recover
damages or compensations for the loss which has
been suffered as consequences of the other party
committing default. In awarding damages for the
 C.b. tanwar & co.
Vs.
Delhi development authority.
ISSUE: Bank guarantee independent contract court will not normally
Interfere – encashment.
Si judgment
No.
1 AIR 1980 DELHI 174,
V.S. Deshpande- c.j.,
Harish Chandra- j.
FAO (O.S.) No.36 of 1979dt .
1.8.1979.
Harprashad & co. ltd.,
- Appellant.
Vs.
Sudharshan steel mills
-Respondent.
2 Air 1981 SC 1426
Civil appeal No. 132/1980
Decided on 26.03.1981.
A.C.Gupta – A.P.Sen
- j.j
United commercial bank
-Appellant.
Vs.
Bank of India &others
- Responden
breach of contract, the party not in default should,
so far as it can be done by money, be placed in the
same position as he would have been performed.
The arbitrator has awarded a sum of Rs. 79, 365/-
by way of damages which resulted to the petitioner
from it having been prevented from making the
profit which would have accrued to it if the DDA
had performed its part of the contract within the
stipulated period.
(para - 8)
Headnote- citation
The contract Act , 1872, Ss 124 and 126 bank
guarantee absolute liability under. While the
law generally state is the liability arising out of
the unilateral contracts of commercial credits
such as letters of credit, bank guarantees and
performance bonds is absolute the intention of
the parties as gathered from a reasonable
construction of the language of the particular
contract must ultimately govern the decision
as to the arising of the liability there under.
(para -1)
Banking – recovery- commercial bank law and
order 39- rules 1 and 2 of civil procedure code,
1908- temporary injunction granted by high
court under order 39- rules 1 and 2 restraining
appellant bank from recalling a sum from
respondent bank on the instance of beneficiary
respondent2- appellant bank made payment of
goods supplied by respondent 2- payments
made under risers well as against letter of
guarantee executed by it – respondent 2 failed
to establish irreparable loss if injunction not
granted – there is nothing which could provide
justification for issuance of injunction high
court erred in granting injunction to respondent.
The obligation of the bank is absolute and is
meant to be absolute that when documents are
presented they have to accept the bill that is
commercial meaning of it.
A bank issuing or confirming a letter of credit
is not concerned with the underling contract
between the buyer and seller.
 (para - 44)
The machinery and commitment of banks are
on a different level . they must be allowed to
be honored free from interference by the
courts. Otherwise trust in international
commerce could be irreparably damaged.
3 AIR 1982 Delhi 78 Avandh behari The contract Act, 1872 (9of 1872)Ss 124 and
robatgi-j. 126- performance guarantee by bank-
Suit No.336a of 1980 guarantee- and conditional and irrevocable-
Dt. 13.2.1981 refusedby seller on take delivery and demand
Pesticides India by seller on bank to pay guarantee amount –
-petitioner. bank cannot be restrained from making
Vs. payment to seller under section 41 read with
State chemicals and Sch . 11 Arbitration Act (1940) S. 41 Civil PC
pharmaceuticals corporation (1968)- (para-1)
-Respondent.. The bank is not concerned with the rights and
wrongs of the underlying disputes.
(para-19)
4 AIR 1982 Delhi 357 The contract Act (9 of 1872) section 126
H.L.Anand –j. performance guarantee- banks obligation under
I.A.No.& 4316 of 1981 is absolute- judicial interference is obligation is
In suit No.1392a of 1981 rare- pending of arbitration proceedings
Dt. 8.4.1982 between the parties to original contract is no
Banwari lal radha mohan restraint to encashment of guarantee- judgment
-1 Appellant. in OMP 45/81
Vs. (Del) dissented from (i) constitution of India-
Punjab state co- operative supply art 226 (ii)
and marketing federation ltd, The Arbitration Act 1940, S20 (iii)banking
Chandigarh. guarantee. (para – 3,4,5,)
-Respondent Such guarantee even though having their
genesis in the primary contract between the
parties are nevertheless
“autonomous” and independent contracts and
a bank which gives a performance guarantee
must honour that guarantee according to its
terms.
(para-3)
The guarantee is an autonomous contract and
imposes an absolute obligation in the bank in its
terms and the bank was bound to pay when
called upon to do so as long as the terms are
completed with except in the case of obvious
fraud, of which the bank has notice. The
existence of disputes between the parties under
the primary contract or the possibility of a
reference of those disputes to arbitration or of

5 AIR 1986 Rajasthani
(jaipur bench)
D.L.Mehta. j.
m/s basent Rlymers.
-petitioner.
Vs.
State chemicals and
pharmaceuticals corpn. Of India.
- Respondent.
6 AIR 1986 Supreme court – 1924
from AIR/ 1986/ cal 6 A.P.Sen
and B.C.Ray – j.j.,
Centex (indya)ltd.,
-Appellant.
Vs.
Vinman impex,
-Respondent.
7 AIR 1991 Orissa-314dash- j.
National aluminium co. ltd.
Vs.
R.S.Builders (India)
the pendency of proceedings on such a
reference, have absolutely no relevance to the
obligation of the bank.
The contract act(9of 1872) section 124 and 126-
bank guarantee- it must be encashable like a
credit note- court will not normally interfere
a bank guarantee has a dual aspect it is not
merely a contract between the bank and
banaficiary by the third party.
(para -3)
such guarantee even though having their
genesis in the primary contract between
parties, are nevertheless and auto nomous and
independent contracts and bank must honour
that guarantee according to its terms.
It will not be out of place to mention that
banking system is the backbone of the economy
and it is necessary that there should be
confidence in the banking system itself
(para-4).
The contract act (9of1872) section 125 and
126, CPC (5of 1908) Q39R 1 guarantee
enforcement of- contract for sale of goods
between Indian buyer and foreign firm- failure
Of seller to forward original bill of lading-
delivery of goods by shipping company without
production of original documents on
unconditional wording of letter of indemnity
executed by purchasers, blanker and
countersigned by purchaser- purchaser
realizing huge sum by selling goods and not
paying anything to seller – bank cannot be
restrained from honouring guarantee
commitments. Of banks must be allowed to be
honoured free from interference by courts.
Otherwise trust in international commerce
would be irreparably damaged AIR 1981SC
1426.
Payment under bank guarantee .
Where payment under the guarantee is
dependent upon the committing of default by
the contractor in performing any term or
condition of the contract in the contract or in
payment of any money due to the owner then
the statement of the beneficiary would be taken
 at its face value unless the contract or
establishes that the stand of the beneficiary is
actuated by fraud, misrepresentation deliberate
suppression of material facts, etc. in the
absence of any such allegation and proof there
of the bank guarantee has to be honored by
the bank and it cannot refuse payment to the
beneficiary.
It was state that a bank guarantee is very much like
a letter of credit and the courts would do their
utmost to enforce it according to its terms.
(para- 4)
In view of the low noticed earlier, we would state
that the aforesaid type of bank guarantee has to be
regarded as independent of the same can be
without reference to claim or counter arising out of
the main contract between the parties.
(Para- 11)

8 AIR/2006/SC-1148. Bank guarantee must be honoured in

BSES Ltd., accordance with its terms, as the bank is not
Now reliance energy ltd concerned with the relation between the
Vs. employer and the contractor.
Fenner India ltd. Neither the banks is concerned with the
question whether any of them have failed in
their contractual obligation or not. Bank must
pay according to the tenor of its guarantee on
demand without proof or condition.

ISSUE: Arbitrator- derives authority from the contract – act within the limits of
the
Agreement- powers to grant interest.

SI. Judgment Head note- citation

No
1 M.P.Arbitractor. Madhaya pradesh madhyastham adhikaram
Tribunal, Bhopal adhiniyam- 1983- section 7- stoppage of work
Shri shirpurka and for 11.5 months- petitioner claimed 20% rise in
G.S. Palmitkar – the rates due to this petitioner’s claim entitled.
Members (Para 5.1)
Case 105 /1989 Section -7: claim for refund of security and
Decided on 25. 3.1994 earnest money due to stoppage of work- cannot
Govt . brothers be forfeited.
-petitioner. (Para-5.3)
Vs. Section -7 claim for loss of overheads, profit
State of M.P. and others loss of overheads 10% allowed
-respondent. (Para-7)

2 AIR 1992 Supreme court 732from The arbitration act (10of 1940)section 47and
AIR 1985 Orissa-182.
K.N.Singh – CJI,
P.B.Sawant,
N.M.Jeevan reddy- jj,
G.W.RAY
Civil appeal no.1403 of 1986
With c.a. 2586 of 1985
dt.12.12.1991.
Secretary – irrigation
Department – govt. of
Orissa - appellant
Vs, G.C.Ray – respondent.
3 Delhi (suppl.) arb. L.R 32
Delhi high court vijender jain – j. Section 30 & 33 - disputes referred to
Puri &company
Vs.
D.D.A. and another.
Suit no. 884 of 1993-
Decided on 24.7.1997.
Section 16 (3): power to grant interest as may
be deemed fit interest allowed 12% per annum.
(Para 9.1,9.2)
41- pendent elite interest- grant of interest . it
has to be presumed as implied term of
agreement. Arbitrator has power to award
pendent lite interest.
The interest act, 1978 sections 3 and 4.
A person deprived of the use of money to
which he is legitimately entitled has a right to
be compensated for the deprivation, call it by
any name. it may be called interest,
compensated for the deprivation, call it by any
name . it may be called interest , compensation
for damages – this basic consideration is as
valid for the period of dispute is pending befour
the arbitrator as it is for the period prior to the
arbitrator entering upon the reference. This is
the principle of f- 34 CPC and there is no
reason of principle to hold otherwise in the case
of arbitration.
When the agreement between the parties does
not prohibit grant of interest and where a party
claims interest and that dispute along with the
claim for principle amount or independently is
referred to the arbitrator he shall have the
power to award interest pendent lite.
The arbitration act (10 of 1940),
arbitrator – award – objections – reasoned
award- penel rate recovery clause 10 CC –
delay – pendent lite interest – award made rule
of the court .
Suit decreed.
Held – however, in relation to claim no. 29 (a )
(i) and claim no. 61 find force in the contention
of learned counsel for the objector that
arbitrator has not given any reasoning or has
referred any matter on the basis of the
arbitrator has awarded the sum in question in
relation to claim no. 2 (a) (i) and claim no.6 the
order of the arbitrator regarding claim no.2 (a)
(i0 and claim no. 6 is set aside. Rest of the
award is severable and the is made rule of the
court. The claimant/ petitioner shall be entitled
 to all interest at the rate of 15% after expiry of
six weeks, if respondent fails to make the
payment in terms of the decree till realization
(Para – 10)
4 1997 (suppl) Arb. LR 78 Delhi The arbitration act (10of 1940)- section 14,17,
high court sand 18 contract for construction work clause
C.M. Nayar – j. 25 of the agreement. Delay in handing over
Suit no. 2378 of 1992 sites- drawing – non – fulfilment of contractual
Decided on 29.11.1997 obligation – extra expenditure on various
A.S.Sachdeva & sons account pendent lite interest – clause 10 ©
Vs. disputes referred to arbitration award
Delhi development objections dismissed - award made rule of the
Authority court.
The arbitrator has jurisdiction to award
interest.
(Para – 15)
5 AIR 1999 SC 3275 (from patna) The arbitration act (10 of 1940) section 30 –
D.P. Wadhwa and jurisdictional error by arbitractor – contract
M. B. Shah-j.j. prohibited award of damages or compensation
Civil appeal no.507 of 1992 dt. – arbitract ignoring said conditions and
1999 awarding damages – travels beyond his
Sail jurisdiction – awaed illegal. (Para –
Vs. 15,22)
V.J.C.Budharaja It is settled law that arbitractor derives the
authority from the contract and if he acts in
manifest disregard of the contract, the award
given by him would be arbitrary one.
(Para -15)
Further the arbitration act does not give any
power to the arbitractor to act arbitrarily or
capriciously. His existence depends upon the
agreement and his function is to act within the
limits of the said agreement.
(Para - 16)
Arbitractor may have jurisdiction to entertain
claim and yet he may not have jurisdiction to
pass award for particular item in view of
prohibition contained in the contractor and in
such cases, it would be a jurisdictional error.
(Para 17)
It is axiomatic that the arbitractor being a
creator of the agreement, must operate within
the four corners of the agreement and cannot
travel beyond it. More particularly, he cannot
award any amount which is ruled out or
prohibited by the terms of the agreement.

6 AIR 1999 Supreme court, 3627
(From :rajasthan)
D.P. Wadhwa and
M.B.Shah- j.j.
Civile appeal no.1202 of
1992, dt. 20.9.1999.
Rajasthan state mines & mines &
minerals ltd., - appellant.
Vs.
v. eastern engineering enterprises
and anothere
- respondent
(Para -17)
(A) The arbitration act (10of 1940), section
30- non- speaking award- interference by
court – award can be set aside if it is beyond
jurisdiction of arbitractor.
(B) the arbitration act (10 of 1940), section
30- award - legally – claim prohibited by terms
of contract- arbitractor cannot grant even
though referred to him – such an award
would suffer from jurisdictional error.
The award made by the arbitrator disregarding
the terms of the arbitractor disregarding the
terms of the reference or the arbitration
agreement or the terms of the contract would
be a jurisdictional errors which requires
ultimately to be decided by the court. He
cannot award an amount which is ruled out or
prohibited by the terms of the agreement .
because of specific bar stipulated by the
parties in the agreement , that claim could not
be raised. Even if it is raised and referred to
arbitration clause such claim amount cannot
be awarded as agreement is binding between
the parties and the arbitrator has to adjudicate
as per the agreement. This aspect is absolutely
made clear in continental construction co. ltd
9AIR 1988 SC 1166) (supra) by relaying upon
the following passage from M/s. alopi
prashad vs. union of India (1960 )2 SCR 793:
(air 1960 SC 588) which is to the following
effect:
There it was observed that a contract is not
frustrated merely because the circumstances in
which the contract was made , altered. The
contract act does not enable a party to a
contract to ignore the express covenants there
of, and to claim payment of consideration for
performance of the contract the contract at
rates different from the stipulated rates, on
some vague plea of equity. The parties to an
executory contract are often faced, in the
course of carrying it out, with a turn of event
which they did not at all anticipate, a wholly
abnormal rise or fall in prices, a sudden
 depreciation of currency, an unexpected
obstacle to execution or the like. There is no
general liberty reserved to the courts to
absolved a party from liability to perform his
part of the contract merely because on
account of an uncontemplated turn of events,
the performance of the contract may become
onerous.
(i) the arbitrator could not act
arbitrarily irrationally, capriciously
or independently of the contract. A
deliberate departure or conscious
disregard of the contract not only
manifests the disregard of his
authority or misconduct on his part
but it may tantamount to mala fide
action.
(ii) The arbitractor is not a conciliator
and cannot ignore the law or
misapply it in order to do what he
thinks just and reasonable; the
arbitrator is a tribunal selected by
the parties to decide the disputes
according to (Para -44)

ISSUE : Express agreed terms and conditions- parties bound by them

- cannot be allowed to be departed.
Claims arising thereon - not admissible – specifically prohibited granting claims.

SI Judgment Head note- citation

NO
1 AIR 1955 SC 468 The contract act (1872)section 73 – contract
(Vol. 42 C.N.78) with government for supply of crores of pucca
From patna bricks according to schedule delivery at kiln
24th march 1955 site – default of government in removing burnt
Bose bricks, resulting in lacs of kacha bricks being
Jagannadhadas destroyed by rains – claims for price of kacha
Sinha – j.j. bricks against government – contract
Thawardas pherimal containing express stipulation that
- appellent government will not entertain any claim for
Vs. damage to unburnt bricks due to any cause
Union of India whatsoever – effect – government whether
- respondent. absolved from liability.
The appellant, a contractor, entered into a
contract with the dominion of the supply of
crores of pucca bricks according to a schedule.
Delivery was to be at the kiln site. Owing to the
default of the government in not removal from
the kilns according to contract, delay occurred
in the time table of the government for removal
with the result that lacs of kacha bricks were
destroyed by the default of kacha bricks were
destroyed by rains. As this loss was occasioned
by the default of the government, the
contractor claimed that he should be paid their
price. The agreement between the parties
contained an express stipulation that the
government “will not entertain any claim for
………….damage to unburnt bricks due to any
cause whatsoever”
Held that if government expressly stipulated,
and the contractor expressly agreed, that
government was not to be liable for any loss
occasioned by a consequence as remote as this,
then that is an express term of the contract and
the contractor must be tied down to it.
If he chose to contract in absolute terms that
was his affair. But having contracted he cannot
go back on his agreement simply because it
does not suit him to abide by it. Does not to
say that government is absolved from all it can
he held responsible for is for damages
occasioned by the breach of its contract to
remove the pucca bricks which it had
undertaken to remove.
(Para -9)
The contractor had a duty under section 73 of
the contract act to minimize the loss ;
accordingly he would have had the right to
remove the bricks himself the stack them
elsewhere and claim compensation for the loss
so occasioned.
(Para – 9)
Alternatively, he could have sold the bricks in
the market and claimed the difference in price.
But ordinarily he could not have claimed the

2 AIR 1992 Supreme court-232
from A.P. CRP2743 OF 1984
Dt 28.12.1985
T. kocho thommen and R.M.
Sahai –j.j.
Associated engineering co.
Vs.
Government of Andhra Pradesh.
3 Judgment
(1994) 3 supreme court
Case 521
B.P.Jeevan reddy and
B.L.Hansaria – J.J.
difference in price. But ordinarily he could not
have claimed compensation for damage done
to the kacha bricks unless he could have shown
that kind of damage ordinarily too remote, was
expressly contemplated by the parties when
the contract was made: section 73 of the
contract act. Here it contemplation and they
chose to provide against such a contingency by
making an express clause in their contract.
There can therefore be no doubt that the
contractor was not entitled to claim anything as
the price of kacha bricks on this account, as the
express stipulation relieved the government
from all liability under that head.
(Para – 10,20)
Head note :
The arbitration act, 1940, section 308 –error
Apparent on face of record arbitration
granting claim not covered by agreement. This
conclusion reached not by interpreting contract
but by merely looking at it – arbitrator
misdirecting and misconducting himself – it is
jurisdictional error- evidence on matter not
appearing on face of award- admissible.
The arbitrator cannot act arbitrarily, irrationally,
capriciously or independently of the contract.
His solo function is to arbitrate in terms of the
contract. If he has traded outside the bounds of
contract, he has acted without jurisdictions but
if he remained inside the parameters of the
contract and has constructed the provision of
the contract , his award cannot be interfered
with unless he has giving reason for the award
disclosing an error apparent on the face of it.
A conscious disregard of the law or the
provision of the contract from which he has
derived his authority, vitiates the award
(Para -27)
He cannot say that he does not care what the
contract sap. He is bound by it. (Para -25)
It has to be seen whether the term of the
agreement permitted entertainment of the claim
by necessary implication. It may be state that
we do not accept the broad contention of shri
nariman that whatever is not excluded
 Tarapore& co. specically by the contract can subject – matter
Vs. of claim by a contractor. Such a proposition
State of M.P. will mock at the term agreed upon.
Parties cannot be allowed to depart from what
they had agreed.
(Para -25)
4 1999 (3) arb. LR 335 (SC) The arbitration act (10 of 1940)
Supreme court of India Section 30 and 33 misconduct- jurisdiction of
D.P. Wadhwa and arbitrator- and any amount to misconduct and
M.B.Shah – J.J. mala fide – such award is illegal.
Civil appeal no. 507/ 1992 Conditions specifically prohibit granting claim
High court- decided on 1.9.1999 for damages for the breaches mentioned
Steel authority of India therein.
- appellant It was not open to the arbitrator to ignore the
Vs said conditions which are binding on the
Badharaja mining contractor contracting parties. By ignoring the same , he
- respondent. has acted beyond the jurisdiction conferred
upon him. It is settled law that the arbitrator
derives the authority from the contract and if he
acts in manifest disregard of the contract, the
award given by him would be arbitrary one.
The deliberate departure from the contract
amounts to not only to manifest disregard of the
authority or misconduct as his part, but it may
tantamount to mala fide action
(Para -15)

5 2003(2) CTC 65 Construction contract- while reading the clause

High court madras of the agreement, the court shall not either add
S.Jagadesan and or delete any condition into it than what is
D.Murugesan –J.J. mentioned therein, more particularly when the
l.suresh condition are not vague, but clear and
vs unambiguous.
p.ravi

ISSUE : Two contracts cannot be compared. No authority to rewrite the contract

SI Judgment Head note-citation

NO.
1 2003 (i) raj 2001 del. The contract act, 1872 –section 7 –acceptance –
Delhi high court scope –except in the eventuality of
s.mukerjee – j. unconditional acceptance it can’t be contended
vs that there arises any consensus ad idem
central ware housing corporation between the parties –offeree has to unreservedly
OMP/No. 265 of 2000 decided on assent to the exact terms of offer , so as to bring
18.11.2002. about a concluded contract .
Moolji jaitha & co. vs. seth kirodimal AIR
1961 kerala 21, relied on
HELD: In response to the communication of
the respondent dated 18.11.1996, the petitioner
had not only declined for 7 days but suggested
a time period of 10 days and moreover also
proposed that the penalty/ liquidated damages
should be brought down to rs. 200/- per TEU,
per day, both of which were in marked
contract to what was proposed by the
respondent by way of the revised proposal
(Para – 48)
This leaves on manner of doubt, that there was
on such unconditional or unequivocal
acceptance by the petitioner, as would bring
about a binding contractual stipulation between
the parties regarding 7 days being the
permissible outer limit of transit period for
kanpur – mumbai sector, or for imposition of
penalty/ damages at Rs.200/- per TEU ,per
day . (Para
-49)
Arbitration and conciliation act, 1996- section
34- adjudication of dispute manner of,
comparison of two different contracts , can be
compared by arbitrator- it is not open to
arbitrator to foist or lift a time commitment
from one contract and then implant the same in
another contract.
HELD: There are further illegalities also
which would vitiate the above findings in the
award, inter alia for the reason that two
different contracts, having two different rates/
scale of charges, cannot be compared. The
learned senior counsel for the petitioner out that
the rate in relation to the other/ subsequent
tender, was about 25% higher, and therefore,
had a built- in provision for suffering undue or
unwarranted penalty. Therefore , simply by
looking at one part of a subsequent tender , in
isolation, and without looking at the other

ISSUE : Earnest money deposit- in a tender – refund forfeiture.
SI Judgment
No.
1 AIR 2001 Madras 271 civil suit
No.160 of 1997 dt. 30.11.2006
Mrs. Praba sridevan – J.
Murali & co.
Vs.
State trading corporation of India
2 2003 (6) supreme 527 supreme court
of India from delhi high court civil
appeal no. 4123 of 1999 decided on
28.8. 2003 S.N.Variava and
H.K.Sema – J.J.
National high way authority of India
Vs. ganga enterprises
terms, it is absolutely illogical and illegal o
draw conclusions as has been done by learned
arbitrator which are therefore vitiated by
perversity .
(Para – 53)
I entirely agree with the said submission of
learned senor counsel for the petitioner. In
order to each tender, the tendering party
submits its price, as well as mix of terms and
conditions, with a view to commercially steal
the march over the rival the bidders. A number
of considerations may operate. To stay in
business, or to use the overheads already
available in the from of idle trailers/ vans,
etc., for any particular period, a party may even
like to work at a loss ,or to under cut so as to
wipe out a competitor. There are matters of
pure choice or policy of the party, acting in its
own commercial wisdom and understanding, it
is not for any court, and certainly not for an
arbitrator to foist or lift a time commitment
from one contract, and then implant the same in
another contract.
(Para -54)
Head note- citation
The contract act (9of 1872) section 74- earnest
money deposit (EMD)-refund – when
permissible – EMD taken to cover possible
losses- breach of contract – no legal injury / or
actual loss suffered – party entitled to refund of
earnest money deposit
(Para -4)
(i) constitution of India – article 226 –
writ jurisdiction – disputes relating to
contracts cannot be agitated under
article 226 of constitution of India
appellant had forfeited the earnest
money by invoking bank guarantee
when respondent had withdrawn the
bid offer – writ petition was liable to
be dismissed.
(ii) The contract act, 1872 section 5 –

3 2006 (4) supreme court cases 209.
arijit pasayat and tarun chatterjee –J.J
Civil appeal No. 4487 of 2003 dt.
20.12.2002. high court Bombay –
decided on 3.4.2006. State of
maharashtra
- appellant
Vs.
A.P. Paper mils ltd.,
- respondent.
tenders called for collection of toll
bid- security of rs. 50 lakhs by way of
bank guarantee and performance were
stipulated. Bank guarantee for bid
security realized when respondent
withdraw the bid.
High court allowing the writ petition hald
that offer was withdrawn before it was
accepted and this no concluded contract had
come into existence.
Appeal- withdrawal of offer brfore it was
accepted was a different aspect from
forfeiture of earnest/ security would not
effect and statutory right under contract act.
Impugned order allowing claim in writ was
unsustainable.
(iii) bank guarantee- contract of bank
guarantee is a complete and separate by
itself. If enforcement is in terms of the
guarantee, courts must not interfere with
enforcement of bank guarantee.
- Contract – auction- withdrawal of bid/ offer
during the period for which bid/ offer was to
remain open – for feature of earnest money/
security deposit on such withdrawal-
sustainability- respondent withdrawing its bid/
offer before end of (45 days) period for which
bids were to remain open, on ground that the
sale results had not been declared within period
specified. Therefore in the tender conditions
(that is within 30 days of submissions of bid)
Earnest money forfeited therefore by appellant
seller – sustainability.
HELD : Clauses 5 (iv ) and (v) of the contract
make it clear that once bid was tendered, no bid
could be withdrawn during the said 45 days
period therefore, since withdrawal was before,
expiry of said period, earnest money is to be
forfeited. Fact of non-declarations of final results
of auction was not relevant- contract act, 1872,
section 3 and 5.
(Para - 13)
ISSUE : Inclusion of fresh disputes while the claims – counter claims already
before the duly constituted arbitral tribunal- but award not passed.
Si Judgment Head note- citation
No.
1 Air 1985 delhi 132 prakashnarain – The arbitration act (10 of 1940) section 20
C.J. applicability of 0.2 R2 civil P.C. to arbitration
F.A.O.(O.S.) NO. 60 of 1981 dt. proceedings – AIR 1981 Delhi 230 – reversed –
8.8.1964 civil P.C. (50 OF 1908), 02, R2.
Delhi development authority, new During the pendency of the suit, however the
delhi plaintiff has a right to apply for amendment of
-appellent the plaint under 0.6. R17 in order to enlarge the
Vs. scope of the suit and if he so desires, raise
M/s. Allkarma – new delhi additional plea praying for a larger relief for.
-respondent. We are of the option that just as a court while
exercising its proves under 0.6 RI7 ,has the
jurisdiction to allow amendment, in the
arbitration proceedings as well the same
principles should be invoked.
(Para -14)
If by mistake, as in this case or otherwise, the
claimant omitted to raise some disputes but the
arbitration proceedings have not been
conducted, then by invoking the principles
analogous 0.6 R17 , the claimant can ask the
engineer member to refer additional disputes to
arbitrations.
(Para - 15)
Where however an award has not been made it
is open to a claimant to ask for more disputes to
referred to arbitration provided arbitration
proceeding are not yet over,. In such on event
if the authority competent to appoint an
arbitrator and to refer the disputes, fails to do
so ,the court has the jurisdiction to order the
filing of the arbitration agreement and to direct
the engineer member to refer the disputes to
arbitrations.
(Para - 16)
2 AIR1990 supreme court 53 The arbitration act, 1940, section 8 and 20 –
From – kerala claim petition – applicability of 02.R.2 CPC –
Sabyasachi mukharji Termination of contract giving raise to certain
B. C. ray –JJ. issues – claimant not raising them in the first
 m.f.a.Nos 291 and 304 of 1982 dt. claim petition – second claim petition raising
10.04.1987 remaining issues is barred.
K.V.George (Para -16)
Vs. The arbitration act, 1940, section 41, 8 and 20-
The secretary to govt., water and resjudicate – principles applicable to arbitration
power dept.. trivandram. proceedings claimant raising some of the issue
arising out of termination of contract in first
down petioner. He is precluded from seeking
second reference for remaining issues.
(Para 17,19)
In the instant case, the contract was terminated
by the respondent on April 26, 19… and as such
all the issues arise out of the termination of the
contract and they could have been raised in the
first claim petition filed before the arbitrator by
the appellant. This having not done, the second
claim petition before the arbitration raising the
remaining disputes is clearly barred.
(Para - 16)

3 AIR 1992 SC 1809 Civil appeal no. Arbitration act (10of 1940) S2 (a)- arbitration
10548, 10550 of 1983 dt. 20.12 2001 scope of inclusion of fresh items in statement of
Allahabad claims after reference of claims to arbitration –
M.N.Venkatachalliah and S.C. A not permissible. (Para -4)
garwal – J.J. The arbitration had presented the award but
Santosh singh arora while appeal against the award, the party
Vs. included additional fresh claims said to have
Union of India and others suffered
(Para -4)
It could certainly ask the arbitrator to permit
him to raise 5 more claims provided of course,
that the arbitration proceedings had not been
concluded.
4 AIR 1963 supreme court 90 (from Court consisting of five judges, held it was
Calcutta AIR 1959, 4th may open to the parties to enlarge the scope of a
1962) reference by inclusion of fresh disputes that they
B.P.Sinha – C.J. must be held to have done that when they filed
K.Subba rao, their statements, putting forward claims not
N.Raja gopala ayyangar dholkar covered by the original agreement that these
T.L.Venkataraman Aiyar- j.j statements satisfied the requirements of section2
Wavely jute mills and Kelvin jute co. of the arbitration act and that it was competent
ltd., to the arbitration to decide the dispute.
-Appellant (Para – 23)
Vs.
Attorney general of India
- respondent.
5 1997 (suppl) Arb. LR 523. delhi high Where an award has not been made, it is open to
court, a claimant to ask for more disputes to be
Anil dev singh – J. referred to arbitration proceedings are not yet
Suit No. 3214/ 92 & 1.A over.
No. 3091/93 (Para - 5)
Decided on 13.2.1997
Indian airlines- petitioner
Vs.
Lhody Brothers
-respondent.
ISSUE : No claim certificate given final bill paid and accepted claims for additional
work can preferred .

Si. Judgment Head note- citation

No
1 AIR 1988 Supreme court 1172 The arbitration act (10of 1940) section 20
From (1987) 1 Arbi LR application for reference- maintainability matters
22 (A11) to be taken into account- contractor executing
Sabyasachi mukhariji and construction work – accepting payment and
S.Ranganathan - J.J. giving no claim declarations. He however
Union of India subsequently claiming certain amount as due on
-Appellant. contracts and claiming reference to arbitrator by
Vs. govt. within three years- reference denied-
L.K.Ahiya rao & co. application was maintainable whether claim
- Respondent. subsists or not is abatable.
Held that it is true on completion of work, right
to get payment would normally arise and it is
also true that on settlement of the final bill, the
right to get further payment gets weakened but
the claim subsist is matter which is abatable.
(Para -8)
2 S.L.P. 13395 OF 1999 The arbitration act (10 of 1940) section 30 and
From calcutta high court 33 contract for construction work – final bill
Dt. 28.1.1999, accept ed without any objections- claim for
G.B. Pattanaik – J. additional work done – disputes referred to
Union of India arbitrator award – one item not referred –claim
Vs. no.2 set aside and rest of the award affirmed.
Popular builders, Calcutta. (Para -5)
3 2004 (i) CTC – 445 SC No claim certificate given under duress prior
N.T.P.C. ltd to final bill will not stop from raising
Vs. disputes.
Reshmi construction In the case of issue of no due certificate under
coercion under protest and without prejudice
contract does not come to an end for the purpose
of determination of rights and obligation of
parties. However party has to make out such
 case prove before the arbitrator.

ISSUE: Claims on price variation due to extended contract period- failure by

employer express covenant – Admissibility.

Si. Judgment Head note –citation

No
1 AIR 1960 SC 588 (V47 C91) The contract act, 1872, Ss 56,73
From puyals)20th January, 1960 Executory contract- uncontemplated turn of
S.K.Das events whether and when basis for relief –
K.N.Das Abnormal rise in prices – no. frustration of
K.N.Wanchoo contract – claim for payment at higher than
J.C.Shah – J.J. stipulated rate on basis of equity – not
Alopi parshad & sons ltd, sustainable.
Vs. A contract is not frustrated merely because the
Union of India circumstances in which the contract was made,
- respondent. are altered
(Para – 20)
The contract act does not enable a party to a
contract to ignore the express covenants
thereof, and to claim payment of consideration
for performance of the contract rates different
from plea stipulated on some vague plea of
equity
(Para - 21)
The parties to an executory contract and often
faced, in the course of carrying it out with a turn
of events which they did not at all anticipate – a
wholly abnormal rise or fall in prices, a sudden
depreciation of currency, an unexpected obstacle
to execution or the like. Yet this does not in
itself affect the bargain they have made. If, on
the other hand, a consideration of the terms of
the contract, in the light of the circumstances
existing when it was made, shows that they
never agreed to be bound in a fundamentally
different situation which has unexpectedly
emerged, the contract ceases to bind at the point-
not because, on its true construction it does not
apply in that situation .
(Para -21)
2 AIR 1980 Delhi 206 rajindr sachar Head note:
and S.B.Wed - J.J. Contract for electrification of DDA building
Metro electro co. Delhi providing payment of enhanced rates in case of
-Petitioner. rise in prices of materials and wages during
Vs.
Delhi development Authority – Delhi
-respondent.
F.A.O. (OS) No. 27 of 1976 dt.
21.1.80 against judgment of FS Gill j.
reported in AIR 1976 Delhi- 195
progress of work failure to complete the work
by prescribed date due to non- completion of
construction of building by DDA by stipulated
date – clause not attracted- award of damage
held proper.
The contractor claimed damages in the nature
of enhancement of rate of 22% over the quoted
rates and damaged reference of the of the
claim to the arbitration .
The arbitrator awarded on enhancement of 18%
over and above their accepted n the quantum of
work extended after December 1970
(Para - 1)
The increased rates claimed by the contract were
in respect of the work which he was to carry on
after the initial contract period of eleven months.
It is also clear that it was because of the fault of
the D.D.A in not handing over the site to the
contractor that the contract was unable to
complete the work. There was a breach of
contractor was a contract or was entitled to the
damages.
(Para -8)
A clause in contract between Delhi
development. Authority and the contractor who
had undertaken contractor who had undertaken
electrification of a building of the authority.
Provide for payment of unto 10% over and above
the tender prices of commodities used if during
the progress of work the prices of material and
labour rise. The work has to be completed by a
particular date the contractor could complete
only small part by the last date by which work
has to be completed as the construction of the
building was not made available to the
contractor for carrying out his work the
contractor claimed 22% over the quoted rates
and demanded reference to arbitration.
The claim allowed for 18% rise in the rates by
the arbitrator is made as value of the court.
(Para -11)
The chief engineering of DDA authority as
arbitrator awarded awarded 28%increase over
the quoted rates.
The single judge of the high court declared grant
of damages as error apparent on the face record

3 AIR 1985 supreme court 607
(from : Andhra Pradesh )
V.D. Tulzapurkar and
v. khalid j.j
civil appeal no.316 (n)
of 1971. dt . 6-2-1985
Hyderabad municipal corporation
- Appellent
Vs.
V.M. Krishnaswami mudhaliar and
another
-respondent.
4 From Madhya Pradesh SLP. (Civil )
13180 of 1985 dt. 7-3-1988
Sabyasachi mukharji and
S.ranganathan - J.J
State of Madhya Pradesh
- respondent
and set aside the face of record and set aside the
award ( AIR 1976 Delhi 195). On appeal –
under AIR- 1980 Delhi – 166 “in the result , we
allow the appeal we set aside the order of the
learned single judge in regard to claim no.1
and make the entire award including claim no. 1
for 18% rise, the rule of the court the appellants
are entitled to costs throughout appeal allowed.
(Para – 11)
The contract act (9 of 1872),Ss. 55, 73-
constitution of India, art 299- govt. contract –
work to be completed within one year –
contractor requested to spread over work for
two years or more due to less budget provision-
contractor not intimated by govt. regarding extra
payment – contractor on completion of work
can be granted extra payment at increased rates.
Where under the terms of the contract the work
has to be completed by the contract within a
period of one year but due to financial
difficulties – less budget having been provided
for in the said year the contractor was requested
by the authorities to spread over the work for
two years more, i.e. ., to complete the same in
three years more as suggested on condition that
extra payment will have to be made to him in
view of increased rates of either material or
wages and govt. did not intimate to the
contractor that no extra payment on account of
increased rates would be paid to him or that he
will have to complete the work on the basis of
original of work the contractor submitted his
final bill claiming 20 per cent extra over and
above the rates originally agreed upon between
the parties the government state that he was not
entitled to rates it was held that both in equity
and in law the contractor was entitled to receve
extra payment.
( Para – 2)
Head note :
The arbitration act (10of 1940)
SC30 -33 award – setting aside
Contract not completed within time- contractor
incurring extra cost – claims for extra costs-
objection by state govt. – consideration of extra
 Vs. claims – in the event of price escalation was
Continental constructions barred under specific clauses of contract.
Company Awarding of costs by arbitrator without
- petitioner considering objection by state govt. illegal.
3.3.15- clause 15 of the contract- time limit for
uncumstances whatever shall the contractor be
entitled to any compensation from government
on any account unless the contractor shall have
submitted claim in writing to the engineer in
charge within one month of cause of such
claim occurring.
While the work was in progress the contractor
was required to meet extra expenditure on
labour charges and materials due to revision in
wags scales and escalation of prices (Para-2)
The contract act does not enable a party to a
contract to ignore the express covenants thereof
and to claim payment contract of consideration
for performance of the contract at rates different
from the stipulated rates, on same vague plea of
equity. The parties to an executing contract are
often faced, in the course of carrying it out, with
a turn of event which they did not at all
anticipate, a wholly abnormal rise or fall in
price, a sudden depreciation of the currency, an
unexpected obstacle to execution on the like.
There is no general liability reserved to the
courts to absolved a party from liability to
perform his part of the contract merely because
on account of an uncontemance of the contact
may become onerous burdensome.
5 AIR 1989 supreme court – 1034 The arbitration act, 1940 – s 30 award setting
(from Kerala) aside of misconduct- delay in completion of
Sabiyasachi mukharji and work of building contract – arbitrator allowing
S.Ranganathan – J.J escalation in contract amount does not commit
Civil misc petition no. 26519 any misconduct- award could not be set aside on
Of 1988 in civil appeal no. 2032 of that ground.
1987 dt. 16.1.1989 In the instant case, the dispute was as to who is
P.M.Paul responsible for the delay, what are the
Vs. repercussions of the delay in the completions of
Union of India the building and how to apportion the
consequences of the delay the arbitration found
that there was escalation and therefore he came
to the conclusion that it was reasonable to allow
20% of the compensation under the claim. He
accordingly allowed the same.
 (Paras – 11, 12,13)
6 1997 (2) Arb. LR 417 Nothing is payable on account of escalation
Madhya Pradesh during original contract period of escalation
Arbitration Tribunal clause does not exist.
D.S.Chaudhary and When government or employer is at fault in
V.K. Jain – Members causing delay in completion of contract,
Case No. 28 of 1994 contractor’s claim for escalation for the period
Decided on 21.3.1977 of delay is permissible.
Ramakanth pondey & co. The petition claimed increase due to delay in
Vs. finalization of site . even the provision for price
State of M.P. adjustment in clause 2.40.1 in agreement art. A
had been deleted on the stipulated period of
construction was less than 12 months.
(Para- 11)
The government was at fault in causing delay in
completion of contract, the contractor’s claim
for escalation for period of delay would be
admissible – delay of 8 months attributable to the
respondent –the petitioner is entitled to
escalation for the delayed period
(Para – 12)

7 1997 (Suppl) arb . LR 78 The arbitration act, (10 of 1940) section

Delhi high court 14,17,18, - contract for construction work –
C.M. Nayar – J. clause 25 of the agreement- delay in handing
Suit no. 2378 of 1992 over site and drawings – non – fulfillment of
Decided on 29.11.1997 contractual obligation – extra expenditure on
A.S.Sachdeva & sons various account pendent elite interest – clause
Vs. 10© - disputes referred to arbitrator award
Delhi development objections dismissed- award made rule of the
Authority court.
Claim : due to delay in supply of drawings – idle
charges price increase labour materials – bricks,
steel pendent lite- intrest allowed
(Para- 15 , 16)
8 AIR 1997 supreme court – 980 Head not :
B.P. Jeevan reddy, Mrs. Sijata. The arbitration act ( 10 of 1940) S.30-
v. manohar –J.J. arbitration award interference – construction
Civil appeal no. 808 of 1997 – a.no. contract – express stipulation between parties as
913 of 913 of 1944 dt. 1.8.1996 to price being firm and not subject to any
bombay, escalation till completion of work- contractor
New India civil erection P.ltd was not entitled for escalation for work
-appellent completed after expiry of contract – award
 Vs. granting such amount beyond authority of
ONGC -Respondent. arbitrator.
The appellants claim on the account was resisted
by the respondent on the basic of the stipulation,
acceptance letter which clearly stated that the
price is firm and is not subject to any escalation
whatsoever ground till the completion of work.
(Para - 8)
9 AIR 1998 Kerala 314 Head note –citation arbitration act 910 of 1940)
Mrs. K.K.Usha , s.30 – setting aside the award grounds-
K.A. Mohammed shafi- J.J. agreement for execution of work within
State of kerala stipulated period- extension of time for
- appellant. completion of work by supplemental agreement
Vs. under terms of agreement contractor not
N.E. Abraham entitled to any enhanced rate – award in respect
-respondent. of claim of contractor for enhanced rate – liable
M.P.A.No.615 of 1987 to be set aside.
Dt. 5.2.1998. As far as claim (a) is concerned, the finding of
the arbitrator is as follows:-
“(a) the termination of the contract by the
respondents is upheld subject to the condition
that the claimant shall not be held liable for the
excess cost occasioned to them due to
rearrangement.”
Against claim (n) the finding is as follows:-
(n)the respondents shall pay claimant an excess
of 35% ( thirty – five per cent ) over the agreed
rates for all items of work done after the date of
completion originally fixed as per agreement
issued by the department fore this work”.
Since the termination of the contract by the
department was upheld by the arbitrator, it has to
be taken that the arbitrator has not accept the
contention raised by the contractor that the
delay in execution of the contract occurred due
to the launches and breaches of the
departmental authorities. The relevant clause
in the agreement relating to the rate applicable
are as follows:-
“ special conditions.
13. the percentage quoted by the contractor for
items or shall be inclusive of all charges for the
various t&p required for the proper execution of
the work and all other incidental charges
whether specifically mentioned herein or not.
On no account claims for extra rates will be
 allowed after tender is decided.
14. the quantities shown in the schedule ‘A’ are
approximate. The contract is bound to carry out
all excess over and above the agreed quantity
if found necessary during execution at his
agreed rates.”
The agreement between the parties was executed
on 20.4.1974. admittedly as per the terms of the
agreement the work had to be completed within
12 months. Since it was not over, supplemental
agreements were entered into from time to time
and the period was extended up to 30. 7.
1980.under the terms of the agreement the
contractor is not entitled to any enhanced rate.
The respondent has no case that as per the
terms of the main agreement or the
supplemental agreement he is entitled to revised
rate as contended in claim (n).
Therefore, we find that this is a case coming
directly under the dictum laid down by the full
bench of this court in 1992 (i) ker LT 240
(supra). In granting enchanted rate the
arbitrator has traveled beyond the terms of the
contract and has therefore misconduct himself.
The court below should have allowed the
objection raised by the appellants to the above
extent. We do not find any reason to interfere
with the award in respect of claim (a) or any
other claim granted in favors of the respondent.
7. in the circumstances we allow the appeal in
respect of claim (n). the judgment and decree of
the court below are modified to the above
extent.”
Order accordingly.

10 2000 (i) supreme court case 241. Head note:

G.B.Pattanaik, The arbitration act, 1940 – s 2 (a) escalation in
U.C.Banerjee and brijesh kumar –J.J rates for labour and materials held, can only be
Ramachandra reddy granted on basis of agreement mere grant of
Vs. extensions of time would not entitle contractor
State of A.P.and others in rates of labour and materials.
An arbitrator being a creature of the agreement,
either specifically or inferentially provides for a
higher rates to be awarded for any additional or
excess work done the contractor it would not be
permissible for the arbitrator to award for the so
called additional work at higher rate-(Para-d,e).