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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

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 3.2 Thereafter, the principal role in the Indian scene was played by three Presidency, viz., Mumbai, Chennai and Calcutta. 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: The disputes amongst company’s servants will be regulated by their own tribunals. The English people will enjoy their own religion and laws in the administration of the company. The local native authorities will settle such disputed cases in which English and Hindus or Muslims were parties. The Mughal Governor or Kazi of the relevant place will protect the English people from all sorts of oppression and injury. 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. PLAN 1772 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.

1. 2. 3. 4. 3.3

4.0 4.1


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. 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. 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. 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. 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. 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. 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. 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 Purchase / Sales Department on all these important legal acts namely: the Contracts /


The Indian Contract Act The Sale of Goods Act The Arbitration Act and Conciliation Act The Limitation Act 2.0

1872 1930 1996 1963

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. 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 10 11 37 40 50

Chapter II II IV

Items What agreements are contracts Who are competent to contract Obligations of parties to contract Person by whom promise is to be performed. Performance in manner of at time prescribed of sanctioned by promise.

51 52 53 54 55 67 73 74 126 2.2 2.2.1 VIII VI IV

Premised not bound to perform unless reciprocal promise ready and willing to perform. Order of performance of reciprocal promises. Liability of party preventing event on which contract is to take effect. Effect of default as to the promise which should be performed in contract consisting of reciprocal promises. Effect of failure to perform at fixed time in contract in which time is essential. Effect of neglect of promises to afford premised reasonable facilities for performance. Compensation for loss or damage caused by reach of contract. Compensation for breach of contract where penalty stipulated fer. Contract of guarantee surely principal debtor and contractor.

Sale of Goods Act 1930 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. 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. 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 5 6 11 12 18 31 32 42 56 Chapter II II II II III IV IV IV VI Items Contract of Sale how made Existing or future goods Stipulation as to time Condition and warranty Goods must be ascertained Duties of seller and buyer Payment and delivery are concurrent conditions Acceptance Damages for non acceptance



57 59 2.2.4


Damages for non delivery Remedy for breach on warranty

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.


The Indian Arbitration Act, 1996 Chapter III III III IV IV IV V V VI Items Number of arbitrators Appointment of arbitrators Grounds of challenge Competence of arbitral tribunal to rule on its jurisdiction Interim measure ordered by arbitral tribunal. Equal treatment of parties. Place of arbitrators. Expert appointed by arbitral tribunal. Form and contracts of arbitral award.

Section 10 11 12 16 17 18 20 26 31 3.0 3.1

LAW OF CONTRACTS Objects of Contract The purpose of Law of Contract is to ensure the realisation of reasonable expectation of the parties who enter into contract.


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.


Classification of Contracts Void Voidable Contract Contract

Executory Executed Unilateral Bilateral Implied Guarantee Contingent 3.4.

Contract Contract Contract Contract Contract Contract Contract.

Formation of a Contract. Agreement over an offer and an acceptance


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 3,7.1. 3.7.2 Terms Promisor: The person making a proposal is called the promisor. Promisee: The person accepting the proposal the promisee. When the person to whom the proposal is made signifies his assent

3.7.3. Promise:

thereto, the proposal to said to be accepted. A proposal when accepted becomes promise. 3.7.4. Consideration: promise . 3.7.3 Consideration is what a promisor demands as a price for his

Discharge of Contract. By accord and satisfaction By novation By an agreement By breach By impossibility to perform By waiver.

4 .0.

DEFINITION ACCEPTANCE SHALL MEAN THE MANIFESTATIONS BY THE OFFEREE OF HIS ASSENT TO THE TERMS MUTUALLY AGREED TERMS OF THE OFFER BY THE OFFERER. Agreement shall mean mutual understanding between the parties which creates obligations between each other. 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 shall mean a valid offer made against any tender enquiry, indicating terms, conditions and prices. Bidder shall mean a person/ party/firm/company/consortium who submits an offer / bid against a tender enquiry. Bill of Quantity shall mean the completed bill of quantities for various item descriptions forming part of the bid. 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.


Agreement Base data

Bid: Bidder: Bill of Quantities: Billing Schedules:


Codes and Standards shall mean such codes

Commencement data Commissioning

Completion Certificate /Final Acceptance certificate

Conditions: Consultant Contract period:

Contract price:



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 date shall mean the date specified in the Letter of intent/ Award / Letter of acceptance / contract agreement. Commissioning shall mean integrated activity of operation of all equipments, links in the system and carrying out the performance tests. Final acceptance certificate / Completion 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. Condition shall mean the conditions agreed between the parties and stipulated in the Contract agreement. Consultant shall mean the consultant /consulting firm, independent professional engaged by the employer / purchaser. Contract period shall mean the period / time schedule agreed in the contract during which period the contracted work shall be performed / executed. Contract price shall mean the price accepted in the contract between parties and adjustment if any during contract period. 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 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 shall mean any drawing, instruction written, directions explanations issued by the Employer/ Purchaser / Consultant. 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 shall mean a documentary proof of the availability of credit which can be operated by presenting documents called for Manufacturer shall mean a person firm / company who manufactures and / or produces Plant, Equipment, Component Spare Parts etc., Minutes of Meetings – MoM shall mean officially recorded statement of points / issues discussed between the parties and signed by authorized representatives. Month shall mean English Calendar month. Notice published by the Purchaser with the intention to invite offer/ bid for his requirements. 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 shall mean the price agreed in the contract between the parties towards the scope of work. Programme shall mean a plan of action agreed towards performance of the scope of work in the contract. Project shall mean the project specified in the tender documents and specification.


Letter of award

Letter of Credit


Minutes of meeting

Month Notice Plant

Price Programme Project

Provisional take over

Repel Revocation Risk Schedule Site Specification

Sub-contractor Sub- Supplier

Taking over certificate

Tender Test Time of Completion

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 shall mean refuse to accept or agree to or subject to. Revocation shall mean rescindment of withdrawal. Risk shall mean an act, / action, / hazard that causes injury or damage or loss to persons and or property. Schedule shall mean timed plan of action of event for a Project or work. Site shall mean the land acquired and set for the location of the project / work. Specification shall mean the Technical – Commercial specification including modification set in the tender / contract documents. Sub-contractor means a Contractor selected with the approval of Purchaser to supply certain items included in the scope of work. 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 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 shall mean the bidders’ offer with his terms, conditions, specification and prices to perform the scope of work. Test shall mean such test / tests stipulated or considered necessary by the Inspecting Officers. Time of completion shall mean the time /

Turn key


period stated / agreed for completing the scope of work specified in the contract. 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 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. 2. 3. Agreement Contract Offer or assent of the other to such act or abstinence, he is said to make an offer . 4. Acceptance to the 5. Void Contract Acceptance is the manifestation by the offeree of his assent terms of the offer. A contract not enforceable by law is a void contract. It is an agreement that is binding and enforceable but 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 parties 6b. Executed Contract performed. An executory contract is one in terms of which both the have not yet performed their obligations. An executed contract is one that has been completed or Mutual understanding Is an agreement enforceable by law. Agreement which creates obligation is a contract. When one person signifies to another his willingness to do abstain from doing anything with a view to obtaining the

6. Voidable Contract because of

6c. Unilateral Contract contract

Unilateral contract is a contract in which one party to the has performed his obligation at the time of contract and the obligation is outstanding only against the other.

6 d. Implied Contract parties-the orally or in

It is one which can be inferred from the conduct of the contract may not express the terms in so many words, writing.

6e. Contingent Contract something happen.

A contingent contract is a contract to do or not to do if some event collateral to such contract does or not Its performance depends upon something happening or Not happening some event. The event is uncertain future event.


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. Contract of Guarantee A contract of guarantee is to perform the promise or discharge the liability of a third person in case of default. Continuing Guarantee A guarantee which extends to a series of transactions is called a continuing guarantee. 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. The person making a proposal is called a Promisor. The person accepting the proposal is called the promisee. 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 . Consideration is what a promiser demands as the price of his promise. Private of contract is said to exit between two persons when

8 9.

10. Proposal

11. Promisor 12. Promise 13. Promise

14. Consideration 15. Private of Contract

there is a valid contract, enforceable between them. 16. 17. 18. Obligation Novation Revocation It is a legal tie which imposes upon a person the necessary of doing or abstaining from doing a definite act or acts. Contract substituted by a third party with the consent of the parties to the contract. 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. 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 shall mean transfer of claim, right of property as an instrument as deed authorizing it. Beneficiary shall mean a person / party / firm / company to receive the benefit Breach shall mean failure to adhere or perform the agreed term/promise. 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. 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


Assignment Beneficiary Breach Breach trust:

Capacity :


contract. Marital capacity is the capacity to enter into a valid marriage. 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 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. The assertion of a right to have money paid. It is used in special proceedings like those before administrative courts, or in bankruptcy. One who makes a claim The rules of law dealing with commercial transactions, including the law of contracts of business organizations, of principal and agent, of security etc., 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 item shall mean all terms

Caveat emptor

Claim Claimant Commercial Law


Consensus ad idem

Consequential Consideration Covenant

Damage Default Discharge Disclaimer

Dispute Duress

conditions, drawings, tender specification, offer etc., have been clearly understood and identity of mind created between parties. Consequential damages means the damages, claimed in a tort or breach of contract which do not normally follow from the tort or breach. Consideration shall mean what a promisor demands from the promisee as the price for the promise. 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 shall mean money claimed by a person to compensate for injury or wrong caused by the other party. Default shall mean failure to do something agreed upon as expected. Discharge shall mean release of the burden or relieve oneself from the obligation. 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 shall mean an unresolved claim among two or more parties. The use of force or threats to compel a person to make a contract or conveyance, or to commit an unlawful act. 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


Heirs Infringement Instrument Interpret


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 shall mean persons who are legally entitled to inherit through the natural course of law. Infringement shall mean break or impair or violate or fail to observe to the agreed term. A formal written document having legal effect, either as creating liability or as affording evidence of it. 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. 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.) 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 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



Latent defect

Liquidated damages

procedure, laches was used in equity as the approximate equivalent of limitations. 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 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. A general term for an order of any kind issued by a court; a direction or precept. The price which any commodity ore specific goods would obtain if sold at a given time without restriction, at public sale. 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. 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. 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.
Information or knowledge by whatever means communicated. Actual notice is such information that can be shown to have reached the person to be noticed.

Mandate Market price Memorandum Minutes



Novation Obligation

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 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.


Owner Patent right Power of attorney


Promise Promisee

It is a legal duty, however, created, the violation of which may become the basis of an action at law. 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. A person entitled to the privileges and rights of ownership and subject to its obligations. Patent right shall mean exclusive right granted / obtained to produce and sell a product so invented. / an invented product. 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. 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. A proposal when accepted becomes a promise and it means an oral or written agreement to do or not to do some thing. Promisee shall mean the person / firm /

Promisor Proof

company accepting the proposal is called promisee. The person / firm / company making a proposal is called a promisor. 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 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

Rate of exchange

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. 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 shall mean act by which violation of right is prevented or compensated for legal redress. The annulling of an existing stature, constitutional provision or regulation, by the body which originally passed it.

Remedy Repeal

Restitution Revocation Revoke Show cause

Sub-let Subrogation

Successor Title

Tribunal Undertaking

Restitution shall mean giving back to the rightful owner something that has been lost or taken away. The calling back of a thing granted or destroying or making void of some deed that existed. Revoke shall mean to withdraw an offer,. To terminate an agency, to cancel a license. 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. Sublet shall mean to let out the work to another. 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 shall mean one who succeeds an officer / 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. A general word equivalent to court, but of more extensive use in public and international law. 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 Violate Waive


Wear and tear Without prejudice

Witness (testis)

Having legal effect; binding according to law; vested with legal authority. To disobey as a law. To interfere with the rights of another especially when done forcibly. To ravish. 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 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. Words employed to describe the amount of surface destruction and other minor injury that ordinary use or an article is likely to cause. 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. 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.



1. 2.

Air way Bills / Air Consignment Notice Parcel Port Receipt

- is a receipt and not a document of title of goods. - Not a document of little. - is a document of title, a receipt from Shipping Co. for the goods and also legal evidence of a contract of carriage . - Bill of Lading normally issued in sets of two more, one may be a negotiable copy. If the packaging or goods appear damaged, the co. will specify this on the B/L to ensure he is not

3. Marine Bill of Landing (B /L)


Full set of B/ L.

5. Clean Bill of Lading shipping 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 7. Received for shipment B/L importer destination. 8. On Deck waves - Goods are loaded onto the deck and exposed to and weather. 9. Blank Endorsed the 10. House Airway Bill / contract of house bill of lading Air been Shipped. 11. Charter Party B / L - Goods carried by a chartered streamer due to legal - This is to transfer title to the holder thus releasing Seller’s claim to the Cargo shipped. Unacceptable as neither evidence title nor - This means the goods are in the hold of the vessel. No indication of loading on the ship and the does not know when the goods would reach

carriage. Can be accepted only if the carrier i.e., India certified on the AWB that the goods have

complexities this form of B / L is not acceptable. 12. it State B / L - This is one tendered to Paying Banker too late for to reach consignee before goods arrive at their destination. 13. Consular Invoice country authorities in Importer’s country to clear the goods. 14. Usance Bill after sight 15. Certificate of Origin country Indian Exchange Control Regulations. 16. 17. 18. Packing List - Details of which package contains. - A bill expressed to be payable months / days / / date. Issued by Chamber of Commerce in Seller’s certifying origin of goods. This is required as per - Exporter submits to the Embassy of Importer’s for them to stamp. Often to enable customs

Manufacturer’s / Suppliers - States that the goods are as per contract of sale. Quality inspection certificate. Analysis Certificate - Ingredients / proportions revealed by independent analysis of chemicals etc. Joint and several guarantee on the draft of a firm usually for the drawee where the guarantor

19. Aval person or 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 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. of

Bill of Exchange

- Document issued in a legal form precisely defined 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 actually 23. Charter Party vessel voyage. 24. FOB C&I CIF CIFC CIFCI Demurrage Free on Board F O B + Insurance C & I + Freight C I F + Commission C I F C + Interest - Confirmation of a producer that the goods have been produced by him in his factory. - Contract according to which the owner leases the to a charterer for a certain period or a certain


- Extra charge to be paid if vessel is not loaded or unloaded within the time allowed. - Receipt issued by a warehouse supervisor or port certifying that goods have been received by the

26. Dock Receipt officer shipping

company. 27. Franco levies. (Named place of delivery) which means that the seller must bear all transportation charges and duties upto the named - Free from duties, transportation charges and other Used also as delivery condition e.g. Franco

place. 28. Incoterms Commerce 29. prior Inspection Certificate Publication of the International Chamber of regarding delivery terms currently in use. - Confirmation that the goods have been inspected to shipment issued by neutral organisation. 30. Performance Bond financial the manner and within the time contractually agreed upon. 31. the 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. 6.0 1 2 3 4 5 6 7 8 9 10 11 12 Cad - Cash against documents. Shipping Terms Ex-Works Free Carrier (at a named point) Free on Rail or Free on Truck F.O.B. Air Port Free alongside Ship Free on Board Cost & Freight Cost, Insurance & Freight Freight / Carriage paid to Freight / Carriage and Insurance paid to Ex-Ship Ex-Quay International Abbreviations EXW FRC FOR FOA FAS FOB C&F CIF DCP CIP EXS (deliver goods on Board at Destination) EXQ Letter of Credit - A Letter of Credit ( L / C ) is a letter issued by Bankers at the request of the importer in favour of The performance bond is designed to provide assurance that the seller meets his obligations in

13 Delivered at Frontier 14 Delivered Duty paid EX – WORKS ( EXW ) ( Basic Price + Packing Charges )

(deliver goods on to quay at destination) DAF DDP

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.





B. 1.0

TOWARDS CONTRACT OFFER 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. 2. 3. 3.0 Get all the deviations sorted out carefully as it has a cost and time,. Avoid raising fresh issues. Equally do not agree for fresh issues - but if needed discuss and agree with additional cost and time.

PRICE NEGOTIATIONS 1. 2. Do not agree for any reduction / rebate in prices. 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.



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. 2. 3. 4. 6.0 Secure the order as of agreed terms, conditions and prices. Respect it and adhere to it and do not deviate it. Earnestly execute it, and discharge it with accord and satisfaction. Get pride and prestige to your company.

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.


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.


DURING THE CONSTRUCTION PERIOD 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Adhere and follow the scope - Technical specification in the contract. Execute the work as per approved drawings. Prepare a work schedule also indicating the inputs needed from the owner - discuss and get them approved. If the input any, delayed, keep a record in writing and ask for extra time and compensation if so needed. Any change asked for, immediately get it approved for the change in scope, price and time needed. Do not accept any oral request. 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. Do not agree on any issue, which is not clear - not in the scope. 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. In case of any unforeseen event, keep the Owner informed in writing. Keep the file and documents safely and in order. Always assume there could be a possibility of any claim later to be settled. It is desirable a sequence file is kept separately on all important letters a copy filed herein. Keep a record on time schedule – delays caused by each one. Till the final bill is settled and paid, always keep in mind, any issue may figure and may involve cost. Settle all material account and get the document signed. 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.





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.


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. 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. 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 multipurpose 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. 2. 3. 4. 2.1 Personnel Management Financial Management Production Management and Materials Management

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. 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. 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. 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. 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 malperformance 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. 2. 3. 4. 5. 5.0 Notice Inviting Tender. Tender - Technical Specifications Tender – Commercial Specifications General / Special Conditions Tender Drawings.


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 DEFINITEIntending to give rise to legal consequences and must be from a competent person qualified to make the offer. The Acceptance must be ABSOLUTE and UNCONDITIONALCorresponding 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.


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.


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 7.1 POST AWARD CONTRACT FUNCTIONS. 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 subcontractors. 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.



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.


• 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.


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 9.3.2 9.3.3 Within the limits agreed in the contract under variation clause, there will not be any change in the price. 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. 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 10.1 INTERPRETATION OF CONTRACT AND CONNTRACT TERMS. 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. 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. 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. Courts have held in many cases and interpreted the contract as under:

10.4 • • • • • •

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. 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. 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. Technical and Scientific words in the document, such meaning technically and scientifically applicable shall be the primary meaning. The contract must be considered as a whole in order to ascertain the true meaning and intention of the parties to the contract. 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. BREACH OF CONTRACT AND REMEDIES THEREON A contract is drawn and concluded on the basis of agreements reached on all


10.6 10.7 10.8 10.9

11.0 11.1

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. 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, subcontractors, 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. 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 11.7 Breach of the contract always entitles the innocent party to maintain an action for damages. 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



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.



13.0 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.


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 at The project Co-ordination Committee shall analyse the cause of delay and settle 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 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 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. The rate payable shall be determined by methods and order given below: 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: Rates and prices in Contract, if applicable plus escalation as per Contract. Rates and prices in the schedule or rates applicable to the Contract Plus ruling percentage. Market rates of materials and labour, hire charges of plant and machinery used plus 10% (Ten Percent) for overheads and profits of the Contractor. 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 and below will apply. Rates and prices in the schedule of rate applicable to the contract plus ruling percentage. 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. 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 13.7.1

DELAYS CAUSED BY FORCE MAJEURE 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. The shall no cost effects to any party. DELAY IN PAYMENTS: All payments shall be made as per agreed payment terms subjects to all

13.7.2 13.8.0. 13.8.1

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. 13.9.1 TIME EXTENSION AND EFFECT: 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: Name of Contractor Value of Contract: 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 For any such situation, decisions shall be taken within 15 (Fifteen) days upon occurrence.

13.11.8 Delegation of powers: 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……………… Packing Name: Contract Value: S.NO. Description of problem Reasons for delay Impact on progress Remedies suggested Date: ………………. Contractor: Time Schedule:

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 1.2.2 1.2.3 The contractor shall ensure that at no point of time the number of workers employed by him exceeds the limit prescribed. The contract shall employ the workers in the work authorized by license. 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 1.3.2 1.3.3 Attendance register from number 16: Attendance to the marked on daily basis Wage register form umber 17/18 Wage Slips form number 19 required to be given to the workers

1.3.4 1.3.5 1.3.6 1.3.7

every month. Wages Deduction register form number 20 Advance register form number 21 Fine register form number 2 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 Encashments 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.



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.


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 The contract is

It is almost similar to insolvency. The contract gets discharged. 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 17.1 DISCHARGE AND CLOSURE OF CONTRACT 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. 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 17.5.11 17.5.12 settled. 17.5.13 completed. 17.6 Finance department That all the contractual obligations have been successfully That all the temporary structures put up by the Contractor have been disposed off. That the liquidated damages, if recovered have been settled. That claims if any on any aspects of the Contract have been

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 17.7 That the Letter of Credit opened has been duly adjusted. 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 Step – 3 17.9 A no claim certificate from the Contractor. The format is at Annexure – I. A no claim certificate is to be obtained from the Contractor. 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


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 : the Date :

( Power of attorney bidder of Company )

ANNEXURE - II Refer para 17.9.1 of the guidelines for discharge and closure of contract


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.

1.0 1.1 WHAT IS EXCISE ? 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. 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 2.1 EXCISE DUTY 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. 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 2.3.1 2.4 2.4.1

GOODS The term ‘ Goods ‘ is defined as ‘ All materials, commodities and articles ‘. MANUFACTURER 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. The most important points to be examined are:1. 2. 3. 4. 5. 6. Whether a ‘manufacture’ has taken place Whether the manufactured article could be called ‘Goods’ in the above context Repairing is not a process of manufacture Repairing does not amount to manufacture Assembling of various parts into an Article would amount to manufacture Affixation of trade or brand name cannot be treated as a process of manufacture.



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. 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. 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.




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 4.1 4.2 4.3 SELF REMOVAL PROCEDURE Every manufacturer can obtain special permission to move goods on self removal basis of the goods produced from excise authority. In such a case proper documentation must be kept and duty paid periodically. In the context of Self Removal Procedure a manufacturer is required to maintain the following accounts. Daily stock account of excisable goods Store room entry book Register of raw materials and component used Personal Ledger Account Account of duty paid goods retained in the factory premises for use in the factory Account of duty paid materials received for the manufacture of other excisable goods REPORT & RETURNS 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. Quarterly report for specified raw materials. Monthly report of excisable goods used without payment of the whole or part of the duty for special industrial purposes. SALES TAX 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

4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.3.6 5.0 5.1

5.2 5.3 6.0 6.1

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 6.3 It is absolutely necessary to levy taxes to meet the expenses incurred by the Government in rendering the services. 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. The question of profit or loss is immaterial in Sales Tax. Sales Tax is leviable on goods mentioned in the act. 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.

6.4 6.5

There is no “ sale “ unless all these elements are present in a transaction. 7.0 7..1 CENTRAL SALES TAX ( CST ) 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. SALES TAX IMPLICATIONS Distinction between a ‘ Works Contact ‘ and a ‘ Supply Contact ‘. 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

8.0 8.1 8.1.1

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



8.1.5 8.1.6

9.0 9.1

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. 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. 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. OCTROI 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.



11.0 11.1

VALUE ADDED TAX (VAT) 12.0 12.1 INTRODUCTION 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. 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. 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

12.2 12.3

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

1.0 1.1 GENERAL 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. WHAT DOES IT MEAN 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. EVERY NEGOTIATOR WITH HIS SKILL, POWER, PERSONALITY, KNOWLEDGE AND ABILITY CAN BENEFIT HIS COMPANY NEGOTIATORS Qualities The quality of the person on the negotiation has a very direct and distinct effects and shall bring the good success. 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. Personality 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

2.0 2.1


3.0 3.1 3.1.1 3.1.2

3.2 3.2.1

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. This is a gift which may be either natural or cultivated but certainly a weapon of great potency with a wise and capable purchaser. AREAS OF NEGOTIATIONS 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 5.1 NEGOTIATION GAME 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


4.0 4.1

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 6.1 NEGOTIATION PROCESS 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. 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.


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.


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.

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. Therefore very great care is necessary in all areas of specification, qualification requirements, negotiation and selection of the equipment and its source of supply. 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. 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. Such an end objective can be achieved only through proper system of tendering and negotiation process. SPECIFICATION. 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. 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. 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.

1.1 1.2


1.4 2.0 2.1



The commercial terms broadly include the following: 202 Scope of work. 203 Commissioning / Deliver dates

204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 3.2 3.3

Time-Essence of the Contract Price and Price Variation Bank Guarantee for Performance Bank Guarantee for Advance Payment Payment Terms Insurance Transport Excise Duty/ Sales Tax/ Octroi, Income Tax, & Service Tax Customs Duty Exchange Rate Liquidated Damages Warranty-guarantee for warranty Force-Majeure Suspension of work Defence of Suits Power to vary or omit Facilities to be provided Termination of Contract Arbitration Limits of Contract Discharge of Contract Legal Jurisdiction 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. Generally, the following form part of the tender documents


1) 2) 3) 2274) 5)

Notice Inviting the Tender Tender – Technical Specifications Tender – Commercial Specifications General / Special Conditions Tender Drawings.

4.0 5.0

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. 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. Negotiation is the best process to arrive at an reasonable an acceptable to ares of differences/deviations.


1.0 1.1 PERFORMANCE BANK GUARANTEE 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. 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 nonperformance 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. 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. 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 nonperformance. 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. 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. 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. 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 2.1 BANK GUARANTEE FOR ADVANCE PAYMENT 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. 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. 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. 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. 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 nonperformance 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. 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. 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. 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. 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.





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 2.1 TIME SCHEDULE 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. 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.



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. 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 cooperation and understanding. Delay by the Owner


2.4 • • • • • • • • • • • • • • • • • • • 2.5 • •

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 Delay by the Contractor In the preparation and furnishing of design data In the procurement of raw materials

• • • • • 3.0

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 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. 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.


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.


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.

1.0 1.1 INTRODUCTION 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. 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. 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. 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. 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. 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. 2. 3. 4. 5. 6. 7. 8. 9. 10. 5.1 1. 2. 3. 4. Ware house to ware house insurance. Marine Insurance Inland transit insurance Fire Insurance Storage-cum-Erection Insurance. Comprehensive Insurance Workmen Compensation Insurance Comprehensive InsuranceComprehensive General Liability Insurance Miscellaneous Insurance. Decisions in regard to the following are required for finalising the Insurance arrangement: Names and addresses of Insurer in whose favour the policies are to be issued. Sum insured details. Period of insurance and testing period required. 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.


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. 2. 3. 4. 5. 6. 7. 7.5 1. 2. 3. 4. 5. 6. 7. Original Policy/Certificate of Insurance duty endorsed Bill of Landing Invoice/ Packing list Survey Report or other documentary evidence of loss. Copies of correspondence exchanged with Carriers regarding claim field on them. Lading account, Weight notes, Port Trust Remarks Letter of subrogation. The documents required for Total Loss claims are: Original Policy/ Certificate of insurance duly endorsed; All originals of the Bill of Lading; Original invoice; Protest of Master if loss is caused by casualty at sea; Certificate of loss issued by Carriers or Port Trust Authorities regarding loss; Correspondence exchanged with Carriers regarding claim field on them. 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. 2. 3. 4. 5. 6. Original Policy or Certificate of Insurance duly endorsed; Invoice in original or printed copy thereof/ packing list; Copy of Airway Bill; Original certificate of loss or damage from the Carriers. Copy of the claim lodged against the Carriers and copies of all correspondence exchanged with them. 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 7.9.3 7.9.4

Self survey to be carried out by the Insured’s Engineer – the necessary documents are to be submitted along with report. Joint Survey report of Insured’s Engineer and Insurer’s Engineer along with relevant documents. 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.


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.



9.1 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. 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.

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.


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 3.2.2 3.2.3 He agrees that the Bank will have the pledge of the documents and goods covered by the Credit. He agrees to accept and/or pay on maturity the drafts, if any, drawn under the Credit. 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 3.4.2 3.4.3 Letter of Credit could be opened by the banks on behalf of their own customers who have the Bank accounts with them. They can be opened in favour of foreign supplier or a shipper of the goods. 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. 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. 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. 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.

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 EC F not = = = Adjusted ex-factory price component of equipment shipment wise. Ex-factory price component of the bid for equipment shipment wise. Fixed portion of the ex-factory price component of equipment which will Be subjected to any adjustment. It shall be taken as 0.15, a,b,c & d = equipment. A,B,C&D = 1 L = = Co-efficients for major materials, involved in the ex-factory cost of The sum of such co-efficients shall lie between 0.50 and 0.60. Corresponding published price of such a major materials. Co-efficient of labour cost. It lies between 0.25 and 0.35. 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 A,B,C&D L = = = Co-efficients shall lie between 0.60 and 0.70. Price indicies for the materials identified 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 Eo = = Adjusted erection price of each erection billing Value of erection work done as established by the contract. Indian Field Labour Index – viz. All India Consumer Price Index for Workers as published by Labour Bureau, Simla of the Government of India. EF a b = = = Expatriate Field Labour Index of the Foreign Bidder. In the case of Indian Bidder, this will be same as F above. Co-efficient of Indian Field Labour component of the erection value. Co-efficient of Expatriate Field Labour component of the erection value.

F = Industrial

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 B C L = = = = Price of EC grade Aluminium Ingots (Average) Base price of 8mm/9mm wire of 0.76% above carbon Base price of E.H.G.zinc 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 W used = = Index for EOL component – 10 Value of work done in Rupees excluding cost of owner supplied materials 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= as Index number of wholesale price for group fuel, power, oil and lubricant

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 = L1 = PL = 6.2 The average consumer price index for industrial workers for the quarter preceding 1 month prior to the data of opening of Bids. The average consumer price index for industrial workers for the quarter under consideration. Percentage of labour component of the work. 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 = under Pc 6.3 = The market rate of cement of any Government Cement Company for the period consideration. Percentage of Cement component of the work. 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 Increase or decrease in the cost of work during the quarter under consideration 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 PS = The market rate of steel (Bars and Rods) of M/S SAIL for the period under consideration.

VS = due to

= 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 VB = due to = 0.85 X PB / 100 X R X (B1 – B0) /B0 where Increase or decrease in the cost of work during the quarter under consideration 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 6.5 = Percentage of Bitumen component of the work. 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 VF = due to = 0.85 X PF / 100 X R X (F1 – F0) /F0 where Increase or decrease in the cost of work during the quarter under consideration 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.


= 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 VP = due to P0 the P1 = = 0.85 X Pp / 100 X R X (P1 – P0) /P0 where Increase or decrease in the cost of work during the quarter under consideration change in the rates for Plant and Machinery Spares fuel and Lubricants. The all India average wholesale price index for heavy machinery and parts for quarter proceeding one month prior to the date of opening of Bid. = 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 VM = due to POL VM M0 M1 = The all India average wholesale price index (all commodities) for the quarter preceding 1 month prior to the date of opening of Bids = The All India average wholesale price index (all commodities) for the quarter preceding 1 month prior to the date of opening of Bids = The average wholesale price index for ( all commodities) for the quarter Quarter under consideration e quarter under consideration. Percentage of Local materials other than cement, steel, bitumen and POL of the = 0.85 X PM / 100 X R X (M1 – M0) /M0 where Increase or decrease in the cost of work during the quarter under consideration change in the rates for Local materials other than cement, steel, bitumen and

PM = work.

The following percentages will govern the price adjustment for the entire contract. 1) 2) 3) 4) 5) 6) 7) Labour --PL ................% Cement --PC …………% Steel --PS …………% Bitumen --PB …………% POL --PF …………% Plant Machinery spares --PP …………% Other materials --PM …………% Sub-total for which PV is applicable limited to 85%

8) Other components OH, Profit etc Total Price Component


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. 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. The arbitrator should follow the arbitration agreement or the submission. 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. Arbitrator should not act as an advocate of the party appointed him. 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. ARBITRATION AGREEMENT 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. 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. PLEADINGS


4.7 4.8

4.9 4.10

5.0 5.1




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. 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. PROCEDURE PROCEEDINGS TO BE FOLLOWED IN ARBITRATION




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. Presentation of evidence 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

7.2 7.2.1

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. 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. 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 11.1 SALIENT FEATURES OF ARBITRATION 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. The advantage of referring a dispute to arbitration instead of to a court are the following. Speed: Arbitrators usually give their award in about 4 months’ time unless they



11.2 11.3

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 11.5 11.6 Cost : Arbitration is less expensive. Convenience : Arbitrators will fix the hearing considering the convenience of the parties also. Informality : Except to the extent of observing the minimum legal formality prescribed for arbitration proceedings, the hearing will take place in informal atmosphere. 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. 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. 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 12.1 12.2 GUIDELINES TO ARBITRATIONS A few guidelines regarding, the choice of suitable arbitrators and proper conduct of the arbitration proceedings by the arbitrators are indicated below: 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. 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. 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 12.6 12.7 12.8

He should not consider himself as an advocate of the party appointing him and should act as a judge. 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. An arbitrator should not himself seek or advertise for his appointment 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. 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.


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. The project execution can be conveniently grouped as pre-construction phase, Construction phase and post construction phase. 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 )

3.1 3.1.1

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 4.1 PROJECT COST AND TIME - OVERRUN 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.


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. 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. 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. 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. 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. 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. 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.








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. 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. 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




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


Risks to be shared are : • • • • infrastructure facilities increase in price other than materials and labour strikes, lockouts shortages of essential materials


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. 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 9.1

COST OVERRUN The cost overrun can broadly occur under two classified groups. Causes due to external characters Causes due to internal characters


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.


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.


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.


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


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.


Causes due to external Fore Majeure conditions in the manufacturing factory, and at site.

11.0 11.1

EFFECT OF COST OVERRUN AND TIME OVERRUN 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. 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. 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. 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. THE CONTROL MEASURES Cost Control

11.2 11.3

11.4 12.0 12.1

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.

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 Offer An offer means a proposal to enter into a contract made by one party called offerer to another party called offeree. Engineering terms- Meaning-definition TO OBTAIN AN OFFER NOTICE INVITING TENDER ISSUED. A communication advertisement, notification through any media. With basic details with an intention to obtain 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.

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.

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.

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.

CAVEAT EMPTOR Caveat emptor shall mean buyer / purchaser beware.

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

Erection Construction Billing Dispatch

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.

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.

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.

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.

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.

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.

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.

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.

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.


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.

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.

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

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.

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

Engineering construction/ erection contracts SECTION 50 In all engineering contracts design, PERFORMANCE IN MANNER OR AT engineering, supply construction erection TIME PRESCRIBED OR SANCTIONED testing and commissioning the scope of work BY PROMISEE. can be executed in the manner as per The performance of any promise may be direction of the purchaser / owner / made in any manner , or at any time which the department. promise prescribes or sanctions. 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. SECTION 51 In all engineering contracts design PROMISOR NOT BOUND TO PERFORM engineering , supply , construction , erection UNLESS RECIPPROCAL PROMISEE contracts there are lots of activities READY AND WILLING TO PERFORM. dependent on each other and very few are Where a contract consists of reciprocal dependent. The activity dependent on other promises to be promisor need perform his activity cannot be performed unless such promise unless the promise is ready and activity is completed in due time. willing to perform his reciprocal promise. 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.

contract avoidable which means the right 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 contract or so much of it as has not been performed, becomes violable at the option of

purchaser/ promise may put on end to the contract by serving a due notice with his intention to do so and levy of liquidated

Essential of valid contract

Engineering construction/ erection contracts SECTION 55 (CONT) damages. However, to keep continuity of work 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 facilities, resources, warranty obligations contract. 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. EFFECT OF ACCEPTANCE OF If the promisee that is owner/ purchaser PERFORMANCE AT TIME OTHER accept the promise at or after the time THAN THAT AGREED UPON. schedule, the purchaser/ promise cannot 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 All project contracts, contains facilities to be EFFECT OF NEGLECT OF PROMISEE provided by the purchaser as agreed, such as TO AFFORD PROMISOR REASONABLE land, area for construction work , water FACILITIES FOR PERFORMANCE supply for construction work, power supply If any promisee neglects or refuses to afford for construction work, others like to the promisor reasonable facilities for construction plant and machineries some performance of his promise, the promisor is owner supply materials. excused by such neglect or refusal as any If the purchaser, neglect or refuses to provide non- performance caused thereby. 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.

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, counterstatements, 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 Judgment Citation AIR 1977 Supreme Court – 1481 V.R.Krishna Iyar and A.C. Gupta- J.J. Civil Appeal No. 2262 of 1968 dt. 19.1.1977 We thing that it will be just and reasonable to put this profit at 10 percent of the contract price which works out to R.s 1,25,000/◊◊◊◊◊◊ We restore the award of r.s the award of r.s

SI. NO. 1.

Mohd . salamatuallah -Appllant 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 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 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.

1,87,500/- made by the trial court on account of estimated profits.

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 33damages 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 74damages or compensation scope breach of contractheld 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




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

C.b. tanwar & co. Vs. Delhi development authority.

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)

ISSUE: Bank guarantee independent contract court will not normally Interfere – encashment. Si No. 1 judgment 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. 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 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. AIR 1982 Delhi 78 Avandh behari The contract Act, 1872 (9of 1872)Ss 124 and robatgi-j. 126- performance guarantee by bankSuit No.336a of 1980 guarantee- and conditional and irrevocableDt. 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) 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 IndiaPunjab 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


AIR 1986 Rajasthani (jaipur bench) D.L.Mehta. j. m/s basent Rlymers. -petitioner. Vs. State chemicals and pharmaceuticals corpn. Of India. - Respondent.

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 126bank 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 ladingdelivery 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


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.


AIR 1991 Orissa-314dash- j. National aluminium co. ltd. Vs. R.S.Builders (India)

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)


AIR/2006/SC-1148. BSES Ltd., Now reliance energy ltd Vs. Fenner India ltd.

Bank guarantee must be honoured in accordance with its terms, as the bank is not concerned with the relation between the employer and the contractor. 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. No 1 Judgment M.P.Arbitractor. Tribunal, Bhopal Shri shirpurka and G.S. Palmitkar – Members Case 105 /1989 Decided on 25. 3.1994 Govt . brothers -petitioner. Vs. State of M.P. and others -respondent. Head note- citation Madhaya pradesh madhyastham adhikaram adhiniyam- 1983- section 7- stoppage of work for 11.5 months- petitioner claimed 20% rise in the rates due to this petitioner’s claim entitled. (Para 5.1) Section -7: claim for refund of security and earnest money due to stoppage of work- cannot be forfeited. (Para-5.3) Section -7 claim for loss of overheads, profit loss of overheads 10% allowed (Para-7)



Section 16 (3): power to grant interest as may be deemed fit interest allowed 12% per annum. (Para 9.1,9.2) AIR 1992 Supreme court 732from The arbitration act (10of 1940)section 47and AIR 1985 Orissa-182. 41- pendent elite interest- grant of interest . it K.N.Singh – CJI, has to be presumed as implied term of P.B.Sawant, agreement. Arbitrator has power to award N.M.Jeevan reddy- jj, pendent lite interest. G.W.RAY The interest act, 1978 sections 3 and 4. Civil appeal no.1403 of 1986 A person deprived of the use of money to With c.a. 2586 of 1985 which he is legitimately entitled has a right to dt.12.12.1991. be compensated for the deprivation, call it by Secretary – irrigation any name. it may be called interest, Department – govt. of compensated for the deprivation, call it by any Orissa - appellant name . it may be called interest , compensation Vs, G.C.Ray – respondent. 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. Delhi (suppl.) arb. L.R 32 The arbitration act (10 of 1940), Delhi high court vijender jain – j. Section 30 & 33 - disputes referred to Puri &company arbitrator – award – objections – reasoned Vs. award- penel rate recovery clause 10 CC – D.D.A. and another. delay – pendent lite interest – award made rule Suit no. 884 of 1993of the court . Decided on 24.7.1997. 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


1997 (suppl) Arb. LR 78 Delhi high court C.M. Nayar – j. Suit no. 2378 of 1992 Decided on 29.11.1997 A.S.Sachdeva & sons Vs. Delhi development Authority


AIR 1999 SC 3275 (from patna) D.P. Wadhwa and M. B. Shah-j.j. Civil appeal no.507 of 1992 dt. 1999 Sail Vs. V.J.C.Budharaja

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) The arbitration act (10of 1940)- section 14,17, sand 18 contract for construction work clause 25 of the agreement. Delay in handing over sites- drawing – non – fulfilment of contractual obligation – extra expenditure on various account pendent lite interest – clause 10 © disputes referred to arbitration award objections dismissed - award made rule of the court. The arbitrator has jurisdiction to award interest. (Para – 15) The arbitration act (10 of 1940) section 30 – jurisdictional error by arbitractor – contract prohibited award of damages or compensation – arbitract ignoring said conditions and awarding damages – travels beyond his jurisdiction – awaed illegal. (Para – 15,22) 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.

(Para -17) 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 (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 NO 1 Judgment AIR 1955 SC 468 (Vol. 42 C.N.78) From patna 24th march 1955 Bose Jagannadhadas Sinha – j.j. Thawardas pherimal - appellent Head note- citation The contract act (1872)section 73 – contract with government for supply of crores of pucca bricks according to schedule delivery at kiln site – default of government in removing burnt bricks, resulting in lacs of kacha bricks being destroyed by rains – claims for price of kacha bricks against government – contract containing express stipulation that government will not entertain any claim for

Vs. Union of India - respondent.

damage to unburnt bricks due to any cause whatsoever – effect – government whether 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

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) 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. 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


Judgment (1994) 3 supreme court Case 521 B.P.Jeevan reddy and B.L.Hansaria – J.J.

Tarapore& co. Vs. State of M.P.


1999 (3) arb. LR 335 (SC) Supreme court of India D.P. Wadhwa and M.B.Shah – J.J. Civil appeal no. 507/ 1992 High court- decided on 1.9.1999 Steel authority of India - appellant Vs Badharaja mining contractor - respondent.

specically by the contract can subject – matter of claim by a contractor. Such a proposition will mock at the term agreed upon. Parties cannot be allowed to depart from what they had agreed. (Para -25) The arbitration act (10 of 1940) Section 30 and 33 misconduct- jurisdiction of arbitrator- and any amount to misconduct and mala fide – such award is illegal. Conditions specifically prohibit granting claim for damages for the breaches mentioned therein. It was not open to the arbitrator to ignore the said conditions which are binding on the contracting parties. By ignoring the same , he 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) Construction contract- while reading the clause of the agreement, the court shall not either add or delete any condition into it than what is mentioned therein, more particularly when the condition are not vague, but clear and unambiguous.


2003(2) CTC 65 High court madras S.Jagadesan and D.Murugesan –J.J. l.suresh vs p.ravi

ISSUE : Two contracts cannot be compared. No authority to rewrite the contract SI NO. 1 Judgment 2003 (i) raj 2001 del. Delhi high court Head note-citation The contract act, 1872 –section 7 –acceptance – scope –except in the eventuality of

s.mukerjee – j. vs central ware housing corporation OMP/No. 265 of 2000 decided on 18.11.2002.

unconditional acceptance it can’t be contended that there arises any consensus ad idem between the parties –offeree has to unreservedly assent to the exact terms of offer , so as to bring 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

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) ISSUE : Earnest money deposit- in a tender – refund forfeiture. SI Judgment Head note- citation No. 1 AIR 2001 Madras 271 civil suit The contract act (9of 1872) section 74- earnest No.160 of 1997 dt. 30.11.2006 money deposit (EMD)-refund – when Mrs. Praba sridevan – J. permissible – EMD taken to cover possible Murali & co. losses- breach of contract – no legal injury / or Vs. actual loss suffered – party entitled to refund of State trading corporation of India earnest money deposit (Para -4) 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 (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. The contract act, 1872 section 5 –


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. 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. - 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 withdrawalsustainability- 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. 10.04.1987 K.V.George Vs. The secretary to govt., water and power dept.. trivandram.

claim petition – second claim petition raising remaining issues is barred. (Para -16) The arbitration act, 1940, section 41, 8 and 20resjudicate – principles applicable to arbitration 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) Arbitration act (10of 1940) S2 (a)- arbitration scope of inclusion of fresh items in statement of claims after reference of claims to arbitration – not permissible. (Para -4) The arbitration had presented the award but while appeal against the award, the party included additional fresh claims said to have 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. Court consisting of five judges, held it was open to the parties to enlarge the scope of a reference by inclusion of fresh disputes that they must be held to have done that when they filed their statements, putting forward claims not covered by the original agreement that these statements satisfied the requirements of section2 of the arbitration act and that it was competent to the arbitration to decide the dispute. (Para – 23)


AIR 1992 SC 1809 Civil appeal no. 10548, 10550 of 1983 dt. 20.12 2001 Allahabad M.N.Venkatachalliah and S.C. A garwal – J.J. Santosh singh arora Vs. Union of India and others


AIR 1963 supreme court 90 (from Calcutta AIR 1959, 4th may 1962) B.P.Sinha – C.J. K.Subba rao, N.Raja gopala ayyangar dholkar T.L.Venkataraman Aiyar- j.j Wavely jute mills and Kelvin jute co. ltd., -Appellant Vs. Attorney general of India - respondent.


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. No 1 Judgment AIR 1988 Supreme court 1172 From (1987) 1 Arbi LR 22 (A11) Sabyasachi mukhariji and S.Ranganathan - J.J. Union of India -Appellant. Vs. L.K.Ahiya rao & co. - Respondent. Head note- citation The arbitration act (10of 1940) section 20 application for reference- maintainability matters to be taken into account- contractor executing construction work – accepting payment and giving no claim declarations. He however subsequently claiming certain amount as due on contracts and claiming reference to arbitrator by govt. within three years- reference deniedapplication was maintainable whether claim 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) The arbitration act (10 of 1940) section 30 and 33 contract for construction work – final bill accept ed without any objections- claim for additional work done – disputes referred to arbitrator award – one item not referred –claim no.2 set aside and rest of the award affirmed. (Para -5) No claim certificate given under duress prior to final bill will not stop from raising disputes. 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



S.L.P. 13395 OF 1999 From calcutta high court Dt. 28.1.1999, G.B. Pattanaik – J. Union of India Vs. Popular builders, Calcutta. 2004 (i) CTC – 445 SC N.T.P.C. ltd Vs. Reshmi construction

case prove before the arbitrator. ISSUE: Claims on price variation due to extended contract period- failure by employer express covenant – Admissibility. Si. No 1 Judgment AIR 1960 SC 588 (V47 C91) From puyals)20th January, 1960 S.K.Das K.N.Das K.N.Wanchoo J.C.Shah – J.J. Alopi parshad & sons ltd, Vs. Union of India - respondent. Head note –citation The contract act, 1872, Ss 56,73 Executory contract- uncontemplated turn of events whether and when basis for relief – Abnormal rise in prices – no. frustration of contract – claim for payment at higher than stipulated rate on basis of equity – not sustainable. A contract is not frustrated merely because the circumstances in which the contract was made, 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 pointnot because, on its true construction it does not apply in that situation . (Para -21) Head note: Contract for electrification of DDA building providing payment of enhanced rates in case of rise in prices of materials and wages during


AIR 1980 Delhi 206 rajindr sachar and S.B.Wed - J.J. Metro electro co. Delhi -Petitioner.

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

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) 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. The contract act (9 of 1872),Ss. 55, 73constitution 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 provisioncontractor 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 costsobjection by state govt. – consideration of extra


From Madhya Pradesh SLP. (Civil ) 13180 of 1985 dt. 7-3-1988 Sabyasachi mukharji and S.ranganathan - J.J State of Madhya Pradesh - respondent

Vs. Continental constructions Company - petitioner


AIR 1989 supreme court – 1034 (from Kerala) Sabiyasachi mukharji and S.Ranganathan – J.J Civil misc petition no. 26519 Of 1988 in civil appeal no. 2032 of 1987 dt. 16.1.1989 P.M.Paul Vs. Union of India

claims – in the event of price escalation was barred under specific clauses of contract. Awarding of costs by arbitrator without 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. The arbitration act, 1940 – s 30 award setting aside of misconduct- delay in completion of work of building contract – arbitrator allowing escalation in contract amount does not commit any misconduct- award could not be set aside on that ground. In the instant case, the dispute was as to who is responsible for the delay, what are the repercussions of the delay in the completions of 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.


1997 (2) Arb. LR 417 Madhya Pradesh Arbitration Tribunal D.S.Chaudhary and V.K. Jain – Members Case No. 28 of 1994 Decided on 21.3.1977 Ramakanth pondey & co. Vs. State of M.P.

(Paras – 11, 12,13) Nothing is payable on account of escalation during original contract period of escalation clause does not exist. When government or employer is at fault in causing delay in completion of contract, contractor’s claim for escalation for the period of delay is permissible. The petition claimed increase due to delay in finalization of site . even the provision for price 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)


1997 (Suppl) arb . LR 78 Delhi high court C.M. Nayar – J. Suit no. 2378 of 1992 Decided on 29.11.1997 A.S.Sachdeva & sons Vs. Delhi development Authority


AIR 1997 supreme court – 980 B.P. Jeevan reddy, Mrs. Sijata. v. manohar –J.J. Civil appeal no. 808 of 1997 – 913 of 913 of 1944 dt. 1.8.1996 bombay, New India civil erection -appellent

The arbitration act, (10 of 1940) section 14,17,18, - contract for construction work – clause 25 of the agreement- delay in handing over site and drawings – non – fulfillment of contractual obligation – extra expenditure on various account pendent elite interest – clause 10© - disputes referred to arbitrator award objections dismissed- award made rule of the court. Claim : due to delay in supply of drawings – idle charges price increase labour materials – bricks, steel pendent lite- intrest allowed (Para- 15 , 16) Head not : The arbitration act ( 10 of 1940) S.30arbitration award interference – construction contract – express stipulation between parties as to price being firm and not subject to any escalation till completion of work- contractor was not entitled for escalation for work completed after expiry of contract – award




AIR 1998 Kerala 314 Mrs. K.K.Usha , K.A. Mohammed shafi- J.J. State of kerala - appellant. Vs. N.E. Abraham -respondent. M.P.A.No.615 of 1987 Dt. 5.2.1998.

granting such amount beyond authority of 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) Head note –citation arbitration act 910 of 1940) s.30 – setting aside the award groundsagreement for execution of work within stipulated period- extension of time for completion of work by supplemental agreement under terms of agreement contractor not entitled to any enhanced rate – award in respect of claim of contractor for enhanced rate – liable to be set aside. 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. G.B.Pattanaik, U.C.Banerjee and brijesh kumar –J.J Ramachandra reddy Vs. State of A.P.and others Head note: The arbitration act, 1940 – s 2 (a) escalation in rates for labour and materials held, can only be granted on basis of agreement mere grant of extensions of time would not entitle contractor 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).

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