14. Construction Contracts | Delay, Damages and Remedies

This is the 14th post in Unit V — the earlier posts covered specific performance, infrastructure contracts, arbitration and mediation; this post pulls these together for one of the most litigated kinds of contract, the construction contract.

The Problem This Topic Solves

Building a house, a road or a bridge takes months or years and depends on weather, materials, labour and approvals. Delay, cost overruns and defective work are common, and each leads to a dispute about who pays. Construction contracts therefore carry many detailed clauses. A student needs to know how the general rules of the Indian Contract Act, 1872 and the Specific Relief Act, 1963 apply to them.

What a Construction Contract Is

A construction contract is an agreement under which a contractor builds, repairs or alters a structure for an owner, for a price. In law it is usually a works contract (a contract to carry out work, as opposed to a contract to sell goods). In State of Madras v. Gannon Dunkerley & Co., the Supreme Court held that an entire, indivisible building contract is not a sale of the materials used in it, because the contractor's agreement is to do the work, not to sell goods.

Common Types of Construction Contract

• Lump-sum contract — a fixed total price for the whole work.
• Item-rate (unit price) contract — payment according to measured quantities of work at agreed rates.
• Cost-plus contract — the owner pays actual cost plus an agreed fee or percentage.
• Turnkey or EPC contract — one contractor designs, procures and builds, and hands over a ready project.
• Build-operate-transfer (BOT) — the contractor builds and operates the project for a period and then hands it over; common in infrastructure.

Key Clauses

• Time for completion — the date by which the work must be finished. If time is of the essence (completion on time is a fundamental term), late completion allows the owner to treat the contract as broken under Section 55 of the Indian Contract Act.
• Extension of time — allows more time for delays that are not the contractor's fault.
• Variation — changes to the scope of work, with adjustment of price and time.
• Payment and retention money — payment in stages, with part of the price held back until defects are corrected.
• Performance guarantee — a bank guarantee that the owner can invoke if the contractor fails.
• Defects liability period — the contractor must repair defects that appear within an agreed period after completion.
• Termination — rights of either party to end the contract on specified grounds.
• Force majeure — relief when an extraordinary event prevents performance (next post).
• Dispute resolution — arbitration, and increasingly mediation.

Delay, Liquidated Damages and Compensation

If the contractor delays, the owner's remedy is compensation under Section 73. Many contracts include a liquidated damages clause (an agreed sum payable for each day or week of delay). Section 74 governs such clauses:

• In Fateh Chand v. Balkishan Dass, the Supreme Court held that Section 74 allows only reasonable compensation not exceeding the amount named, whether the clause is a genuine pre-estimate or a penalty.
• In ONGC Ltd. v. Saw Pipes Ltd., the Supreme Court held that an arbitral award that ignores Sections 73 and 74 in applying a liquidated damages clause for delay can be set aside as contrary to the substantive law of India.
• In Kailash Nath Associates v. Delhi Development Authority (2015), the Supreme Court explained that the party claiming must show that loss was suffered, except where the loss is impossible to prove.

Damages are also limited by the rule of remoteness in Hadley v. Baxendale, discussed in the note on kinds of damages.

Specific Relief in Construction Contracts

• Section 10 (after the 2018 amendment) — specific performance is now the rule, not a matter of the court's discretion, subject to Sections 11(2), 14 and 16.
• Section 14 (substituted in 2018) — lists contracts that cannot be specifically enforced, including contracts that involve a continuous duty the court cannot supervise or that depend on personal qualifications. The old restrictions that applied specifically to building contracts no longer appear.
• Section 20 (substituted performance) — after giving written notice of at least thirty days, the owner can have the work completed by a third party or its own agency and recover the cost from the contractor. The owner then cannot claim specific performance.
• Section 20A (infrastructure projects) — courts cannot grant an injunction that would delay or impede an infrastructure project; see the infrastructure projects note.

• A construction contract is a works contract; an entire building contract is not a sale of goods (Gannon Dunkerley).
• Time is of the essence only if the contract says so or the circumstances show it (Section 55); delay then lets the owner treat the contract as broken.
• Liquidated damages for delay: only reasonable compensation up to the named sum (Section 74; Fateh Chand); awards ignoring Sections 73-74 can be set aside (Saw Pipes).
• Since 2018: specific performance is the rule (Section 10); substituted performance is available after 30 days' notice (Section 20); infrastructure projects are shielded from delaying injunctions (Section 20A).

• Retention money and performance guarantees are security for the owner, and both are usually released in stages.
• A contractor who claims extra time for delay caused by the owner must usually follow the extension-of-time procedure in the contract.
• Exam trap: a liquidated damages clause does not give the owner the named sum automatically; some loss must generally be shown.

A Practical Example

A builder agrees to complete a house in 12 months, with liquidated damages of Rs 10,000 per week of delay. The builder is 10 weeks late for reasons within his control. The owner claims Rs 1,00,000. Under Section 74 the owner is entitled to reasonable compensation not exceeding that sum, and must generally show that the delay caused loss. If the builder abandons the work, the owner can give 30 days' notice and have the house completed by another contractor under Section 20, then recover the reasonable cost from the builder.

Quick Revision Points

• Works contract, not a sale (Gannon Dunkerley); types: lump-sum, item-rate, cost-plus, turnkey/EPC, BOT.
• Key clauses: time, extension, variation, retention, performance guarantee, defects liability, termination, force majeure, dispute resolution.
• Delay: Sections 55, 73, 74; Fateh Chand; Saw Pipes; Kailash Nath (2015).
• 2018 amendments: Section 10 (rule), Section 14 (substituted), Section 20 (substituted performance, 30 days' notice), Section 20A (infrastructure injunctions).