Legal and Contractual Interpretation of Construction Contract Time Bar Clauses Part 3

This is the third in a three-part series. In the previous posts, the time bar clauses of FIDIC and Indian construction contracts were compared, the differences between FIDIC and Indian contracts were examined, as well as how Common Law has evolved to favour the implementation of these clauses. In this post, we shall examine the treatment of time bar clauses in India.

Contractual Time barring of claims is a relatively recent inclusion in Indian contracts. CPWD has no such clause and NHAI EPC contracts has these time bar provisions for EOT, change in law, Force Majeure, and Termination due to Authority’s default. Some state agencies have copied these clauses in a distorted fashion to be all-encompassing for all claims, including variations with a reduced time frame.

Leading Indian Cases

Chandigarh Constr Co. v State of Punjab - SCI ruled that such condition precedent cannot be considered as a statutory bar for the claim. Though the clause indicates that if such a claim is not made, it would amount to a waiver, in circumstances where the claim is ultimately put forth for adjudication, if the adjudicating authority is satisfied that the actual work had been done and the Contractor was entitled to the extra amount, it would not be just to deny such claim only on the ground that it had not been indicated strictly in the manner as provided in the contract.

M/S Ajay Deep Constr vs Maha State Police-Bombay HC - came to a similar conclusion.

Some experts interpret this to imply that Time Bar provisions are void based on ICA section 28 - Agreements in restraint of legal proceedings void.
Every agreement-

(b) which extinguishes the rights of any party. . . , in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent.
Saving of contract to refer to arbitration disputes that may arise.

In my opinion, this section does not make Time Bar clauses void. It only makes restraint of legal proceedings (except for reference to Arbitration) void. The above judgments make no mention of ICA section 28. So, then why did the Court not concur with these time bar clauses? To my mind, this is due to the specific nature of these claims.

  • Both cases related to claims due to variations/extra works.
  • In neither case, was quantum or broad valuation disputed by the Engineer.

As mentioned in the previous posts in this series, time bar provisions generally relate to EOT, prolongation, and disruption claims. These have to be expressly worded, reasonable, and liberally construed (“no reason why this clause should be construed strictly against the Contractor and why it should not be construed reasonably broadly, given its serious effect on what could otherwise be good claims” - Justice Akenhead).

However, since these clauses are relatively new entrants in Indian contracts, Engineers are not used to exercising these clauses. In no case in India have I seen a claim rejected by the Engineer solely on the basis of a time bar clause (legal bar due to the Law of Limitation is a separate matter).

The previous posts in this series can be read here and here.

This post was contributed by Amit Kathpalia FICCP, MRICS.

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Legal and Contractual Interpretation of Construction Contract Time Bar Clauses Part 2

This is the second in a three-part series. In the previous post, the time bar clauses of FIDIC and Indian construction contracts were compared. Making timely notice and/or submission of a detailed claim as per the time limit given in the contract as a condition precedent to entitlement to claim. This post will consider the fine-line differences between the time bar clause of FIDIC Sub-Clause 20.1 (Contractor’s Claim) (1999 Edition) and Sub-Clause 20.2 (Notice of Claim) (2017 Edition) and Indian contracts. Additionally, we shall examine the validity of time bar clauses under Common law keeping in view the Prevention Principle and good faith clauses.

FIDIC vs. Indian Construction Contracts

FIDIC Sub-Clause 20.2 (Notice of Claim) (2017) lays down time bars for notices and a detailed claim pertaining to EOT and/or additional costs (and loss of profit in some cases) for all types of excusable and/or compensable delays and/or disruption, but not for variations.

Claims for variations instructed or consented to by the Engineer are not subject to time bar under Sub-Clause 20.1 (Contractor’s Claim) (1999)/Sub-Clause 20.2 (2017) and cannot be rejected on the basis of delayed submission except as per the legal statute of the country (law of limitation). Hence, most of the claims that would come under the purview of Sub-Clause 20.1/Sub-Clause 20.2 would be prolongation and disruption claims.

FIDIC Sub-Clause 13.3.1 (Variation Procedure) states: "The Contractor shall be entitled to such EOT and/or adjustment of contract price, without any requirement to comply with Sub-Clause 20.2".

In contrast, Indian time bar clauses lay time bars for all types of claims including variations and extra items instructed/approved by the Engineer.

FIDIC provides a reasonable time frame for issue of Notice (28 days) and detailed claim (84 days), while Indian contracts generally shorten this time frame to 15 days (for Notice) and 30 days or less (for detailed claim).

The Validity of Time Bar Claims

There have been conflicting views under Common law with regard to waiver of claim due to delayed notice even in the presence of an explicit clause like FIDIC 20.2. Some of the leading cases on this are:

Bremer v Vanden - “Whether this Sub-Clause is a condition precedent must depend on (i) the form of the Sub-Clause, (ii) the relation of the Sub-Clause to the contract as a whole, and (iii) the general considerations of law.”

Gaymark v Walter - where it was held that denying a valid claim merely on the basis of a delayed notice, runs contrary to the Prevention Principle.

Turner Corp - Which upheld the validity of waiver to a claim due to delayed notice if expressly mentioned in the contract - "If the Builder, having a right to claim an extension of time fails to do so, it cannot claim that the act of prevention which would have entitled it to an extension of time."

Multiplex v Honeywell:

“Contractual terms requiring a Contractor to give prompt notice of delay enables matters to be investigated while they are still current. It gives the Employer opportunity to withdraw instructions when the financial consequences become apparent. If Gaymark is good law, then a Contractor could disregard with impunity any provision making proper notice a condition precedent. At his option, he could set time at large”.

Panther v MESC–DIFC Dubai - where it was upheld that such time bar provisions do not conflict with Good Faith and reasonableness:

“In my view, Panther is not constrained by these Articles in the Contract Law from seeking to be entitled to LD for the delays for which MESC could have applied for a EOT but failed to do so within the time limits. I am of this view because MESC was a willing party to the Contract including notice requirements in Sub-Clause 20.1 which are important conditions precedent and Sub-Clause 3.5. These provisions admit of no scope for the implied term or obligation of good faith. I can see no reason why the overriding principle of pacta sunt servanda should be circumscribed by the operation of these provisions in the Contract Law”.

Thus, despite being seemingly unfair, the prevalent legal view now is that Time Bar clauses should be upheld and the Contractor will lose his entitlement to claim if these are not complied with. However, in many Common law countries, for example, Malaysia, experts opine that a failure to serve notice would not be fatal to the Contractor’s claim.

The final post in this series shall examine this from the point of view of the Indian Contract Act and Indian legal judgments and discuss the desirability of enforcement of this clause in Indian construction contracts.

The previous post in this series can be read here.

This post was contributed by Amit Kathpalia FICCP, MRICS.

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Legal and Contractual Interpretation of Construction Contract Time Bar Clauses

Over the next few posts, we shall examine how the legal and contractual interpretation of certain construction contract clauses in India is a bit different as compared to the UK and other common law countries; despite India being a Common Law jurisdiction and following the UK in most legal judgments.

Issue 1- Time Barring of Claims

According to the 1999 Edition of the FIDIC Red Book Sub-Clause 20.1 (Contractor’s Claims):

“If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim.”

Sub-Clause 20.2 (Appointment of the Dispute Adjudication Board) of the 2017 edition of the FIDIC Red Book lays a further time bar on the claim:

“….If within this time limit (84 days) the claiming Party fails to submit the statement under sub-paragraph (b) above (detailed claim), the Notice of Claim shall be deemed to have lapsed, it shall no longer be considered as a valid Notice”.

This implies that even if the Contractor has some legitimate payment due, he may still lose his entitlement due to a delayed Notice or a delayed detailed claim.

Indian Contracts

Many Indian contracts also require timely submission of a Notice or a claim as a “Condition Precedent” for entitlement.

NHAI contracts state:

“In the event of the Contractor not giving notice within 15 days of his “becoming aware or should have become aware” of the event, he shall forfeit his claim for EOT and any associated claim in connection with EOT.”

And:

“The Affected Party shall not be entitled to any relief for or in respect of a Force Majeure Event unless it shall have notified the other Party of the occurrence of the Force Majeure Event as soon as reasonably practicable, and in any event no later than 10 (ten) days after the affected Party knew, or ought reasonably to have known, of its occurrence, and shall have given particulars of the probable material effect that the Force Majeure Event is likely to have on the performance of its obligations under this Agreement.”

Some other Indian construction contracts include the following restriction:

“The Contractor will give details of the additional costs incurred by him, if any, along with the monthly statement, with all supporting documents. In case the details of the claim are not included in the next monthly statement, the Contractor will have no right to the claim”.

In the next post, we shall examine what are the fine-line differences in these clauses between FIDIC and Indian contracts, how British courts and Indian courts deal differently with these clauses and their pros and cons, and the implied reasons for such differences.

This post was contributed by Amit Kathpalia FICCP, MRICS.

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Construction Contract Issue - Pay-If-Paid and Pay-When-Paid Clauses

In this post, we shall discuss ‘pay-if-paid’ and ‘pay-when-paid’ clauses in construction contracts: their meaning, differences and implications.

Delays in payments are endemic in the construction industry all over the world. A European Commission report on payment behaviour in business-to-business transactions, published in 2018, mentions that construction industry is most affected by delays with 65% of stakeholders having experienced delayed payments. Extensive research all over the world has shown that delayed payments in the construction industry have four major outcomes:

  • cash flow problems,
  • increase in disputes,
  • insolvency and bankruptcy, and/or
  • delays and cost overruns in projects.

One reason for delayed payments in the construction industry that particularly affects Subcontractors, is the ‘pay-if-paid’ and ‘pay-when-paid’ clauses included or implied in construction contracts. These broadly imply that the main Contractor will be liable to pay the Subcontractor if and when he is paid by the Employer.

On the face it, this may seem reasonable - how can an upper tier Contractor pay a lower tier Subcontractor unless he himself is paid for the work? But a closer look at this clause shows how it is unfair and unreasonable to the lower tiers in the contracting chain. It blocks their cash flows and may even lead to bankruptcy.

Let us take a small, simplified example from my own project – a conversion of a hall in a hospital in a remote area of India into a makeshift operation theatre. It was a lump sum fixed-price contract with a 10% advance payment and the remaining payment on completion.

The main Contractor gave two Subcontracts - one for building renovation and one for HVAC and for specific medical requirements, such as shadowless lights, etc. While the building Contractor completed his work on time, the project completion was delayed by six months due to the other Subcontractor.
The Employer refused to make the payment before completion. The civil works Subcontractor, who had completed his job on time, could not get his payment which seriously affected his business and cash flow.

To prevent such unfair delays on Subcontractors, many countries have banned ‘pay-if-paid’ and ‘pay-when-paid’ clauses by enacting laws or including them as part of a construction law/construction contract act. The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) in the UK has expressly barred such provisions in construction contracts. Similarly, construction contract acts enacted by various provinces of Australia, New Zealand, Ireland, the Building And Construction Industry Security Of Payment Act of Singapore, and the Construction Industry Payment and Adjudication Act 2012  of Malaysia, have also made inclusions of these clauses illegal.

Differences Between Pay-if-Paid and Pay-when-Paid Provisions

Pay-if-paid clauses dictate that the main Contractor will pay the Subcontractor for the completed work only if he is paid by the project Owner. If he is never paid by the Owner (for example, due to insolvency, dispute, or any other reason), he is not obliged to pay the Subcontractor at all.

‘Pay-when-paid’ clauses, on the other hand, establish the timing by which the main Contractor will pay the Subcontractor after receiving payment from the Owner. This sometimes seems contradictory, in that the main Contractor still has to pay the Subcontractor for his completed work (since pay-if-paid is illegal) but can time the payment as per receipt from the Owner!

A recent judgment in the California Supreme Court in the case of Crosno Construction Inc v Travellers Casualty and Surety Company of America, finally gave clear meaning of the pay-when-paid principle as implying that the main Contractor may delay the payment to a Subcontractor for some time if not paid by the Owner, but still has to pay the lower tier within a reasonable time irrespective of whether he is paid or not paid by the owner.

This post was contributed by Amit Kathpalia FICCP, MRICS.

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