ANALYSIS TO CLAUSE 2 OF CPWD CONTRACTS

ANALYSIS TO CLAUSE 2 OF CPWD CONTRACTS

Clause:2   Compensation for Delay

This clause deals with liquidated compensation to be imposed on the contractor in case of delay. The compensation is predefined (liquidated) @ 1.5% per month to be computed on per day basis subject to maximum of 10% of the contract value. The decision of the authority imposing compensation is final and binding and it is not open to Arbitration. Following important points are to be learnt.

 

Meaning of compensation

The term compensation has been defined in Mitra’s Legal and Commercial Dictionary (5th edition page 174) as under: Compensation is something that constitutes an equivalent or recompense. Compensation is making things equivalent, satisfying or making amends, in ordinary parlance the word compensation means anything given to make things equivalent; a thing given to or to make amends for the loss, recompose or pay. Compensation has also been defined as “Compensation means anything given to make amends for losses, recompose etc.”

 

Meaning of damages- The jurisprudential meaning of the word damage is that it is nothing more than the compensation which the court determine in the circumstances of the case for the injury or loss which has been sustained by the other party.  Damages constitute the sum of money claimed or adjusted to be payable as compensation for the loss or injury sustained. The object of damage is to decompensate the injured party for what he has lost or what would have been in his pocket if he had not been injured by the other party.  The purpose of paying damages is to keep the injured party in the same position had there been no breach of contract by the other party.

 

Difference between Liquidated and unliquidated Damages- Liquidated damages are those damages for which the quantum is determined in advance at the time of entering into the contract e.g. under clause 2 rate of compensation has been mentioned.  The liquidated damages are fixed and there is no necessity to prove whether or not the actual loss has been suffered or not.  The sum has been assessed between the parties and is not subject to consideration of Court.  On the contrary the un-liquidated damages are those for which quantum is undetermined and uncertain till the claim is formulated by the innocent party.

 

Is this clause a penalty clause- No, It is very important to understand that Clause 2 is for compensation and not for penalty.  (Here the difference between compensation and penalty can be easily understood by the difference between the common urdu words “Harzana” and “Jurmana”). The word used under this clause is compensation not penalty.  “What must be kept in mind is that penalty clauses are not legally enforceable in India and damages must be proved. If damages have been liquidated or pre assessed in the contract itself, so long as they are realistically close to actual damages sustained, they can be given effect to. In India liquidated damages are indicative of the maximum damages awardable.

 

What if provisional extension is granted during execution of work.- It must always be kept in mind that this clause is always to be read with clause 5 which deals with the extension of time. It was held in the case that:  The last date of extension viz. 31-7-1989 was fixed as the new date for completion of the work and the obligation of the contractor was then to complete the work by that date.  That the contractor did.  We have carefully examined the relevant provisions of the Contract, particularly the provisions of Clause 5 and we are of the opinion that there is no delay in execution of the work, as postulated by Clause 2.  Hence the counter claim based on ‘delay’ falls being unsustainable”.

 

 

 

Time essence of the contract?

It is now settled law that where in a contract it is provided that the period of contract can be increased conditionally or unconditionally, the time is not the essence of the contract and the period so increased is to be considered as the period of contract.

Even where the parties have expressly provided that time is of the essence of the contract such a stipulation will have to be read along with other provisions of the contract and such other provisions may, on construction of the contract, exclude the inference that the completion of the work by a particular date was intended to be fundamental, for instance, if the contract were to include causes providing for extension of time in certain contingencies or for payment of fine or penalty for every day or week the work undertaken remains unfinished on the expiry of the time provided in the contract such clauses would be construed as rendering ineffective the express provision relating to the time being of the essence of contract.

What is final and binding whether decision attributability of delay or amount of compensation. The meaning of SE’s decision of penalty is final has been clarified. A basic concept of this term is that the decision of SE is not arbitral (Through it is not exceped from the purview of the court). It is an excepted matter under clause 25.

Clause 2 of the contract makes the time specified for the performance of the contract a matter of essence and emphasizes the need on the part of the contractor to scrupulously adhere to the time schedule with a view to compel the contractor to adhere to this time schedule, this clause provides a kind of penalty in the form of a compensation for default in a adhering to the time schedule. Firstly, the reference in the clause to the requirement that the work shall throughout the stipulated period of the contract be proceeded with due diligence and the reference in the latter part of the clause that the compensation has to be paid ”in the event of the contractor failing to comply with” the prescribed time schedule make it clear that the levy of compensation is conditioned on some default on the part of the contractor. Secondly, the clause fixes the rate of compensation with maximum compensation of 10 per cent. It also provides for discretion to the Superintending Engineer to reduce the rate of penalty, though the clause does not specifically say so, it is clear that any moderation that may be done by the Superintending Engineer would depend upon the circumstances, the nature and period of default and the degree of negligence that could be attributed to the contractor. This means that the Superintending Engineer will have to go into all the aspects and determine whether there is any negligence of the part of the contractor or not.  Where there has been no negligence on the part of the contractor or where on account of various extraneous circumstances referred to by the Division Bench such as vis major or default on the part of the Government or some other unexpected circumstance which does not justify penalizing the contractor, the Superintending Engineer will be entitled and bound to reduce or even waive the compensation.  It is true that the clause does not in terms provide for any notice to the contractor by the Superintending Engineer.  But it will be appreciated that in practice the amount of compensation will be initially levied by the Engineer-in-charge and the Superintending Engineer comes into the picture only as some sort of revision or appellate authority to whom the contractor appeals for redress. Clause 2 contains complete machinery for determination of the compensation on the ground of delay on the part of the contractor in completing the contract as per the time schedule.  The question regarding the amount of compensation livable under Clause 2 has to be decided only by the Superintending Engineer and no one else.

 

Clause 2 deals with the question of compensation and concerned engineer should decide this question and his decision is final. The arbitration clause opens with the words 'Unless otherwise provided'. DDA ought not to have requested the arbitrator to include the said amount in the arbitration award. DDA committed a blunder in requesting Arbitrator to formally include the above said amount as part of the award. Taking advantage of the said request, the contractor argued the question of levy on merits and obtained a decision from the Arbitrator in his favor.

 

Though action under clause 2 cannot be referred to arbitrator but if  department itself refer compensation to arbitrator then it comes to the ambit of the arbitration.

 

Decision of arbitrator on the levy of compensation was within the jurisdiction of the arbitrator notwithstanding that the clause treated the decision of Superintending Engineer as an excepted matter, when the dispute was to the very applicability of the clause or its enforcement. The clause remained applicable only if time was essence of contract and the compensation was levied during the period contract remained operative.

 

Time When compensation is to be imposed- If amount withheld but no decision made within reasonable time then SE looses his power to impose compensation

“Before the arbitrator, the respondent made the statement that the amount of Rs.5000/- has been withheld for want of sanction  of extension of time case by the competent authority and the competent authority has not granted the extension of time as provided under clause 2 of the agreement without levy of compensation. The very fact that no decision was taken by the Superintending Engineer with regards to clause 2 of the agreement till the award is made, the arbitrator was well within his power to adjudicate  and allow the claim of the petitioner( for refund of the withheld amount) on the premise that on the date of finalization of the bill, no action was taken (by the Superintending Engineer) to levy compensation for liquidated damages.” SE is restricted only to decide the quantum not beyond that. He has no power to levy the compensation. Only EE can levy compensation upon the contractor for the amount decided by SE.

1. During progress not after completion.
2. Undertaking “I will not claim anything extra”
3. No interest is payable
4. It must be ensured “Whether time was essence of the contract or not”?
5. Whether the case has not been referred to arbitrator?

 

Once the case is referred to arbitration no compensation can be levied thereafter.

Whether showcase Notice is must

Showcase notice is must before levy of compensation under clase. it is must under the law of natural justice for opportunity to be heard given to other party even CPWD works manual also says under para 28.19 that all letters intending to impose compensation or to recover liquidated damages under clause 2 of the agreement should be issued over the signature of SE as he is the only officer competent do so under clause 2 of the agreement in order to fulfill contractual obligation.

 

As such the dispute regarding compensation under Clause 2 had been referred to arbitration even before the Superintending Engineer had taken a decision to levy the compensation.  Taking all these factors into consideration the respondent has no case to levy compensation.  The claim of the respondent is rejected.  The public authority like DDA is expected to act in accordance with the contract and having failed to act cannot project the case without mentioning the facts completely in the objection petition which he alone can make the court to appreciate the position.

 

a)      Whether there was any programme (Bar Chart) whether it was modified or not under clause 1 of the General Conditions of the Contract?

b)      Decision of SE to be in writing- It is mandatory

 

Important Extracts from various judgements:

1. Clear Site and drawings not given in time thus time does not remain essence of the contract. No penalty can be imposed
2. Compensation means anything given to make amends for losses, recompose etc.
3. Action under clause 2 can be taken soon after stipulated date of completion and not after several months of this date
4. Show cause notice is must before levy of compensation under principle of natural justice-
5. When provisional extension of time for completing of work up to  a certain date was granted, liquidated damages cannot be levied after the extended date has expired though it is mentioned that subject to recovery of liquidated damages and time being essence of contract- Hudson law of Building Contracts Chapter 2

 

1.Provisional means “Suitable in existing situation but subject to change or nullification” Hence provisional EOT once granted cannot be changed after extended period is over and no scope is left for this

2. The Government directed to withdraw a letter requiring sundry Authorities to withhold money due to the Contractor, on account of compensation, for the reason that Clause 29 give them power to do so.

 3. Although action under clause 2 cannot be referred to arbitrator but if department itself refer compensation to arbitrator then it comes to the ambit of the arbitration

4. DDA committed a blunder in requesting Arbitrator to formally include the above said amount as part of the award. Taking advantage of the said request, the contractor argued the question of levy on merits and obtained a decision from the Arbitrator in his favor.

5. Action under clause 2 can be taken soon after stipulated date of completion and not after several months of this date

6. SE cannot levy compensation but his powers are restricted only to decide amount of compensation. Compensation is to be levied only by EE.

7. If amount was withheld for milestones and no decision made within reasonable time then SE loses his power to impose compensation

8. Once the case is referred to arbitration no compensation can be levied thereafter.

9. Once date is extended whether provisionally or permanently than original stipulated date of completion losses its meaning. Once the provisional extension of time for completion of work is granted upto a certain date, liquidated damages cannot be levied after the expiry of provisionally extended date

10. The amount of compensation will be initially levied by the Engineer-in-charge and the Superintending Engineer comes into the picture only as some sort of revisional or appellate authority to whom the contractor appeals for redress. The decision of the Superintending Engineer, is in the nature of a considered decision which he has to arrive at after considering the various mitigating circumstances that may be pleaded by the contractor or his plea that he is not liable to pay compensation

11. Arbitrator awarded payment of additional cost in execution beyond the stipulated date of completion. The respondent itself extended the contractual period without levy of liquidated damages. If the contractor was guilty of delay, then surely extension would only be granted subject to levy of liquidated damages. The Arbitrator is thus justified in awarding this claim.

12. If the Contractor fails to reserve his right to claim damages, once the extension is granted and acted upon, no claim for damages would be tenable.

13. If the Authority grants an unconditional extension, it would not be entitled to raise any demands for damages on account of delay up to this stage, on a later date.

14. Once an unconditional extension is granted, it amounts to an admission that the Authority was responsible for the delay.

15. Non-release of payment within time also amounts to hindrance in the work.

16. What is made final is only the decision of the Superintending Engineer in regard to the percentage of compensation payable by the contractor for every day's delay that is whether it should be 1% or lesser. His decision is not made final in regard to the question as to why the work was not commenced on the due date or remained unfinished by the due date of completion and who was responsible for such delay. A contract cannot provide that one party will be the arbiter to decide whether he committed breach or the other party committed breach.

17. E.O.T can be oral and may be prove by conduct.

18. Where in contract it is provided that the period of contract in any case conditionally or unconditionally, the time is not the essence of the contract and the period so increased is to be considered as the period of contract. The contractor is at a liberty to walk out of the contract as the expiry of the period of contract. The fact that the contractor asked for announcement of the period of contract for performance of contract and did not put any condition only shows that the contract between the parties remained intact. The only thing in the contract was a period of performance and there was no change in any other condition in the contract. Once the arbitrator had accepted the prolonged period of performance without any demur and continued with the work, the contractor cannot claim additional amount because of the prolongation of contract.

 

19. Clause 2 only prohibit the arbitrator from interfering the determination of the SE as regard to quantum of completion and does not preclude the arbitrator from deciding a dispute as to which of the party was responsible for the delay.

 

20. Show cause notice is mandatory before levying the compensation

 

21. After expiry of the period stipulated in the agreement, no time was mutually agreed between the parties for completion of the contract. Thus, the time was not kept as essence of the contract and clause 2 becomes inoperative

 

22. Delay due to additional work cannot be termed as breach on the part of the Employer

 

23. No amount can be withheld in running or final bill in anticipation of grant of extension of time. There is no provision in the Agreement that an amount can be recovered from the bill in anticipation of granting extension. As and when the extension is applied by the contractor, DDA can either extend the contract conditionally or unconditionally or refuse an extension. If a condition is imposed of imposing penalty at the time of extension, that penalty can be recovered subsequently from the bill but an amount cannot be deducted from the bill in anticipation that a penalty would be imposed

24. Clause 2 is excepted matter only during the contract period not thereafter

25. Only the quantum of levy is final and binding not the decision to levy compensation (GT Gajria P-1194).

26. Claim on account of levy of compensation could not fall within `excepted matters' under clause 25 as Superintending Engineer had failed to exhaust all the requirements and options provided in the clause.

27. If the delay is justified by the arbitrator he can award in favour of contractor for the total compensation levied which is not beyond the scope.

28. Once an extension of time has been sanctioned without levy of compensation under clause 5 of the contract, there is implication of breach of contract on the part of the department and the claim for damages/compensation would be inevitable in law under section 73 of Indian Contract Act- (CPWD TLQA Circular no. 12 dated 05/10/1997 para 6). In actual practice delay from both the parties but contractor apply only those hindrances which are on the part of the department since there is no such column where department may highlight delay on the part of the contractor. This is advantageous condition for contactor. Hence it is essential that delay on the part of the contractor should also be projected in time extension case.

29. Extension is to be granted under clause 2 within 3 months otherwise personal responsibility to be imposed- CPWD (TLQA dated 10/05/2001)

SUMMARY:        The usual provision by way of a percentage for each day delay fails to meet the legal principle. Provision by way of liquidated damages must be based on a genuine pre-estimate and as such it must be a firm figure for a particular contract and not as a varying percentage for all contracts. Time is of the Essence of contract on the part of the Contractor. Why specially for the contractor is not understood. It must be one applicable to both the parties. Law has established that if provisions for granting extension of time, and for levy of liquidated damages are made in the contract/agreement the purpose of making time as the essence of contract losses its meaning itself. The inclusion of a clause to make time as the essence of the contract must be for genuine cases only and section 55 of the Indian contract Act will be applicable. The stipulated date of completion is prescribed by the owner, so the contract requirement is that the contractor must take all steps to complete the work by the stipulated date. Having fixed the date for completion, the owner should not be given the right to fix date of starting. This usual stipulation regarding proportionate progress that is ¼ work within ¼ time ½ work within ½ the time and ¾ time is not only meaning less but also not possible in a building contract. Earthwork may be only a very small part but requires considerable time. Concreting may be one of very large proportion but can be completed within days. Similarly, finishing items may form a little portion of the contract. For this item the period requires is much higher than the proportionate period. Such stipulation cannot find a place in the contract. The contractor is selected with reference to his experience in the field and the resources available with him, because of this he is entitled to have his own planning, programming to complete the work in time. Interfering with the progress is a serious breach. The contract being one of reciprocal promises time limits for the owner to perform his obligations must also be fixed in the contract