ANALYSIS OF CLAUSE 3 OF CPWD CONTRACTS

ANALYSIS OF CLAUSE 3 OF CPWD CONTRACTS

1. Under this clause contract can be determined not rescinded and there is only risk of earnest money, Security deposit already recovered and Performance guarantee and there is no risk and cost.

2. There is a subtle difference between determination of contract and recession of contract.

3. It is not compulsory that EMD, Security and P.G. are compulsorily to be forfeited but it is discretion of the department. However this forfeiture is illegal and not in accordance with Indian Contract Act and the same can be claimed in court.

4. If the recession is proved wrong/unjustified, the department is liable to pay for Loss of profit against the work not done and Payment of 10% of prime cost is a reasonable measure of loss of profit.

5. For recession of contract department should act differently than public individual. Individual’s interest is to earn money whereas department’s interest is just the interest of public at large. It is very important that the action should not violate article 14 of the constitution.

6. Time is never essence of the contract since there is a time extension clause (Clause 5), therefore it is not easy for the department to rescind the contract under clause 3. Contracts usually contain a clause that time can be extended by the architect, and when the time has been so extended a fresh date is substituted for the contract. Where in a contract between the government and the contractor for construction of an adequate across in the work within the stipulated period, power was conferred upon the executive engineer to grant the extension of time for completion of works on reasonable grounds and further provision was made for a levying and recovering penalty spot compensation from the contractor at a specified rate for the unfinished work after the expiry of the date, the provision would exclude the interference that time was intended to be the essence of the contract. The recession of such a contract on the part of the government without fixing any further period making time is essence of directing the contractor to complete the work within such period, was clearly illegal and wrongful and, dare by the government committed a breach of the contract with the result that the security deposit of the contractor cannot be forfeited.

7. It is written in first part of the clause that decision of Engineer-in-charge is final and binding in case contractor delays or suspends the execution of the work and he will be unable to secure the completion of the work by the stipulated date of completion. What is made final by this provision is the decision of the Engineer-in-Charge as to whether the contractor will be able to secure the completion of the work by the due date of completion which could lead to the termination of the contract or other consequences. The question whether such failure to complete the work was due to reasons for which the contractor was responsible or the department was responsible, or the question whether the contractor was justified in suspending the execution of the work, are not matters in regard to which the decision of Engineer-in-Charge is made final.

8. In second part of Clause 3 it is provided that if contractor had made himself liable for action under this clause the Engineer-in-Charge shall have powers to determine or rescind the contract and the notice in writing to the contractor under the hand of the Engineer-in-Charge shall be conclusive evidence of such termination or rescission. This does not make the decision of the Engineer-in-Charge as to the validity of determination or rescission, valid or final. In fact it does not make any decision of Engineer-in-Charge final at all. It only provides that if a notice of termination or rescission is issued by the Engineer-in-Charge under his signature, it shall be conclusive evidence of the fact that the contract has been rescinded or determined.

9. The question whether the determination or rescission of the contractor by the Engineer-in-Charge is valid and legal and whether it was due to any breach on the part of the contractor, or whether the contractor could be made liable to pay such excess, are not issues on which the decision of Engineer-in-Charge is made final. Thus what is made final and conclusive by Clauses (2) and (3) of the agreement, is not the decision of any authority on the issue who was responsible for the delay or whether termination/rescission is valid or illegal. What is made final, is the decisions on consequential issues relating to consequence, if there is no dispute as to who committed breach.

10. The decision as to who is responsible for the delay in execution and who committed breach is not made subject to any decision of the Respondents or its officers, nor excepted from arbitration under any provision of the contract. It is because the question whether the other party committed breach cannot be decided by the party alleging breach which is against common sence as well as law. A contract cannot provide that one party will be the arbiter to decide whether he committed breach or the other party committed breach. That question can only be decided by only an adjudicatory forum, that is, a court or an Arbitral Tribunal.

11. It has been decided by courts that adjudication upon the issue relating to a breach of condition of contract and adjudication of assessing damages arising out of the breach are two different and distinct concepts and the right to assess damages arising out of a breach would not include a right to adjudicate upon as to whether there was any breach at all.

12. Quantification of liquidated damages may be an excepted matter but for the levy of liquidated damages, there has to be a delay in the first place. If there is a clear dispute as to the fact that whether there was any delay on the part of the contractor, it is to be decided by the adjudicatory authority (Court or Arbitrator)  not by the department. Clause 3 as a whole cannot be treated as an excepted matter because of the fact that it does not provide for any adjudicatory process for decision on a question, dispute or difference, which is the condition precedent to lead to the stage of quantification of damages.

13. If the contractor executed the quantum of work as per contract inclusive of variations provided therein and therefore no action under clause 3 for the balance work can be taken against the contractor.

14. In one of the case the Stipulated date of completion was 20.08.05 and there was hindrance of trees- Contractor wrote letter on 17.5.2005 and 28.7.2005 to handover hindrance free site so as to enable him to start the work and record Hindrance and idle T&P Staff etc.- Hindrance removed on 28.10.2005 and contractor was directed to start the work – Contractor refused & invoked Arbitration for damages, loss of profit etc.- Award was made in favour of Contractor with simple interest @ 10%- Department moved to Court- Lower court allowed objections and held site became hindrance free for carrying out the work from 28.10.2005, and at no point of time prior to 28.10.2005 the appellant had ever intimated to the respondent that the contract
 stood rescinded/terminated on account of failure of the respondent to hand over the hindrance free site. – High Court held that contractor at all point of time, kept the contract alive and therefore it was not open to him to urge in the arbitration to the contrary and claim profits with respect to the contract he did not perform - A perusal of letter of award reveals that the same specifically provided that period of four months shall be reckoned from 10th day after the receipt of the order to commence work or from the first day of handing over of site whichever is later. Respondent no.1 has not placed any document or record to show that site was handed over to him prior to 28.10.05 - site was handed over to the respondent on 28.10.05 and thus the period of four months for completion of work started on 28.10.05. In the letter of award, it was specifically provided that period of four months shall be reckoned from 10th day after the receipt of the order to commence work or from the first day of handing over of site whichever is later. As handing over of the site is later in time, the period of four months for completion of work started on 28.10.05. In his own letter written by the contractor he wrote that I am still ready to do the work noted above provided extension of time is granted without levying any compensation?.? The contents of the letter show that contractor considered the contract to be alive on 16.01.06. Further in another letter dated 17.05.06 by contractor he has written the work could not be executed as the office of EE(WIS) failed to provide me clear site. Therefore the agreement for the above noted work be treated as closed. In the same letter, contractor has raised his claims. Thus, contractor in his own letter has admitted that clear site was not provided to him till 28.10.05. The work was rescinded/terminated by the Department on 10.03.06, whereas contractor raised his claims on letter dated 17.05.06. The contents of this letter show that contractor rescinded the contract through this letter dated 17.05.06 and that too for the reason of failure to provide to the contractor clear site which in itself signifies that site was not handed over to contractor before 28.10.05. Thus the Arbitrator passed the award against the terms of the award rejected since time of completion of subject work was four months was to be reckoned from 10th day after the receipt of the order to commence work or from the first day of handing over of site whichever is later. In the present case, the site was handed on 28.10.05 and the period of four months for completion of work started on 28.10.05.

15. In one of the case it was held by the arbitrator that the rescission of the contract was neither justified nor legal and, therefore, the petitioner is entitled to profits which they could be expected to earn on completion of the entire work as per contract. Court allowed the award and hold that the court cannot sit as a court of appeal on the aforesaid findings recorded by the arbitrator and reappraise the same. Accordingly, when it is found that the rescission of the contract was not legal and justified the contractor becomes entitled to claim loss of profit.

16. In one of the case 99% of the entire work was completed by the contractor, therefore action taken by department for rescission of the work for insignificantly small quantum of work without a proper opportunity by way of a fresh show cause notice was not proper and forfeiture of security deposit for such small quantum of work found not justified

17. In one of the case forfeiture of the contractor’s security deposit and decision of the recession of contract without fixing further time for the performance of contract was illegal and unjustified.

18. In case award is made in favour of the Department for rectification of defects due to recession of contract, the Department is not entitled to recovery of security deposit under section 74 of Indian Contract Act.

19. In one of the case delay was on the part of the department- Contractor claimed higher rates- department Denied- Work abandoned- Show Cause Notice given by department – Show Cause Notice Replied by Contractor – it was held that “Under the circumstances the respondent should have closed the contract as the claimant was not responsible for the initial delay and as the respondent was not willing to pay the increased rates after the stipulated date of completion and Rescission of the contract was unjustified

20. In one of the case contract was rescinded by department after expiry of stipulated date of completion without any extension of time and department did not file any communication to show that the time was made the essence of the contract upto the date of recession. Recession held invalid.

21. It must always be contended that on the one hand deoartment unilaterally extended the time for completion of work upto --- and on the other hand the terminated the contract on ----.

22. Forfeiting of Security Deposit- In spite of default on the part of the Contractor, if no loss to the owner is there no forfeiting of Security Deposit is possible. A clear provision in this regard in the agreement is essential. It cannot be done unilaterally. There must be repudiation of contract by one party which can be acted upon by the other party. The law provides for terminating a contract if there is a fundamental breach going to the root of contract like prevention of performance abandoning etc. There is a clear provision in law that for ordinary breach only compensation can be levied.

23. If no extension is given after SDOC- Time is set at large and it ceased to be essence of the contract, hence contract cannot be rescinded since work was being taken in vacuum since no reasonable date for completion was agreed between the parties-

24. Whether clause 3 is excepted matter- Clause 3 is intended to check the contractor causing delay or employing inferior workmanship for the execution of the contract. There also, the Engineer-in-Charge had been given the power to take a decision in respect of the matters enumerated therein. Contention of the contractor can be that this Clause legally cannot be treated as "excepted matters" since all these matters were submitted to arbitration. Department has to raise the issue of excepted matters before arbitration. Mere existence of certain clauses in the contract providing that the decision of a designated authority on a particular matter shall be final and binding would not ipso facto bring such matters within the mischief of "excepted matters" and/or bar the claimants from raising claims in this regard. Existence of such decision on those aspects is the primary and necessary pre-requisite for invoking excepted matters clauses. The authority, said to be designated by the said clauses, had not taken any decision pertaining to those matters. Such decisions, to be taken by the named authority, should be considered decisions, after giving reasonable opportunity to the contractor to put forth his case. To constitute an "excepted matter", the competent authority should act justly and fairly. The decision in such matters should be taken after giving notice to the affected contractor and after giving reasonable opportunity of being heard. None of these matters did happen in this case. In State of Karnataka Etc vs Shri Rameshwara Rice Mills ... on 24 February, 1987 it was held that Even if the clauses (related to excepted matter) empowered the officer to decide upon the question of breach as well as assess the quantum of damages, an adjudication by the officer regarding the breach of contract cannot be sustained under law, because a party to the agreement cannot be an arbiter in his own cause.

25. In one of the case it was held that Even if the clauses (related to excepted matter) empowered the officer to decide upon the question of breach as well as assess the quantum of damages, an adjudication by the officer regarding the breach of contract cannot be sustained under law, because a party to the agreement cannot be an arbiter in his own cause. Law relating to "excepted matter" clauses in the contract, therefore, can be summarized in the following terms. The "excepted matter" clauses in a contract do not require adjudication as the parties have already agreed to resolve the dispute through a named adjudicator. To constitute a clause in a contract as "excepted matter", it must provide for an adjudicatory process. It must be remembered that the true essence of any arbitration agreement is to arbitrate the matters in the event of disputes/differences. So, a clause in a contract shall not be readily inferred as an "excepted matter" to destroy the very foundation of the bargain. The named adjudicator should have taken a decision in the matter after complying with the legal requirements and principles of natural justice.