Organizing the Unorganised: The Indian Construction Industry
The Indian construction industry has been a propellor of economic growth and foreign direct investment in India. It is expected to register a CAGR greater than 10% during 2022 – 2027, while also contributing approximately 13% to our country’s GDP by 2025. In acknowledgement of the sector’s significant contribution to the country’s development, the Indian government has also stepped up its support in form of policies such as establishing the National Bank for Financing Infrastructure and Development (NaBFID) which works towards funding construction and infrastructure projects in India.
Unregulated Indian Construction Industry: Cause for Concerns
Following are some of the key factors that contribute to a general lack of optimization and chaos in the sector:
One-Sided Construction Contract
Construction contracts have been defined by Indian Accounting Standard as “a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. It also includes agreements for real estate development to provide services together with construction materials in order to perform the contractual obligation to deliver the real estate to the buyer.”
There are multiple parties involved in a construction contract, such as an employer, contractor, sub-contractor , vendor, project manager, independent engineer/s , Project Management Consultant (PMC) and others. Among these parties, employer, contractor, independent engineer/s and the PMC play a crucial role.
Numerous institutions, such as the International Federation of Consulting Engineers (“FIDIC”), the Institute of Civil Engineers (ICE), and the Association of Consultant Engineers (ACE) have drafted standard forms of construction contracts. However, common parlance witnessed across the industry is that they do not adhere to/do not want to adhere to such set standards. The employers and contractors draft the construction contracts which cater to their specific requirements. Further, numerous government organisations involved in the construction industry draft contracts that suit their specific needs, exposing a glaring lack of uniformity and fairness with respect to the terms and conditions of the contract.
Under the construction contracts, numerous unfair terms can be seen –
The provision stipulates that in circumstances of extension of time clauses under the contract, any claims of compensation made by the contractor towards the employer for causing disruption and delay leading to such extension are prohibited.
In the case of R.L Kalathia vs. The State of Gujrat (2011) 2 SCC 400 the Supreme Court observed that,
“(i) Merely because the contractor has issued “No Due Certificate“, if there is an acceptable claim, the court cannot reject the same on the ground of issuance of “No Due Certificate“.
(ii) In as much as it is common that unless a discharge certificate is given in advance by the contractor, payment of bills is generally delayed, hence such a clause in the contract would not be an absolute bar to a contractor raising claims which are genuine at a later date even after submission of such a “No-claim Certificate“.
A similar observation was afforded by the Supreme Court in Union of India vs Master Construction Company (2011) SCC 12 349, wherein it was held that if the claimant successfully establishes that the “no claim certificate” had been obtained by fraud/ coercion, then the Court shall have to determine whether the contention is prima facie credible. If not, then it shall be not necessary to send it for arbitration.
The issue has been further clarified in the case of Payan Reena Saminathan vs Pana Lana Palanippa Civil Appeal No. 7970 of 2010, “the receipt given by the appellants and accepted by the respondent, and acted upon by both parties, proves conclusively that all the parties agreed to a settlement of all their existing disputes by the agreement formulated in the receipt. It is a clear example of what used to be well known as common law pleading as ” Accord and Satisfaction ” by substituted agreement. No matter what the respective rights of the parties were, they were abandoned in consideration of the acceptance of all of the new agreement. The consequence is that when such an accord and satisfaction takes place the prior rights of the parties are extinguished. They have in fact been exchanged for the new rights, and the new agreement becomes a new departure , and the rights of all the parties are fully represented by it.”
Time bar clauses:
The provisions stipulate difficult time periods under which damages and relief enshrined under the contract can be claimed by the contractor towards the employer.
In the case of Muni Lal vs The Oriental Fire and General Insurance Company Limited (1996) 1 SCC 90, the Apex Court clearly held that, “ ….. It is true, as rightly pointed out by Shri Rakesh Khanna, that Section 28 of the Contract Act prohibits the prescription of a shorter limitation than the one prescribed in the Limitation Act. An agreement which provides that a suit should be brought for the breach of any of the terms of the agreement within a time period shorter than the period of limitation prescribed by law is void to that extent.
The Courts have, from time to time, reached to the conclusion that any agreement which seeks to curtail the period of limitation of a party to enforce their right, if shorter than as prescribed by law, then such an agreement shall stand void on account of Section 28 of the Indian Contracts Act.
One-sided arbitration clause:
The arbitration clause under these contracts is one-sided since it enables the employer to appoint the sole arbitrator and the panel of arbitrators without a say from the contractor. There is also no uniformity in deciding which arbitration forum/institution one should choose (like SIAC of Singapore ).
In the case of Emmsons International Ltd. Metal Distributors, the Delhi High Court held that when an arbitration clause is conceptualised to deprive the other party of local courts/tribunals or initiate arbitration, then it shall run in violation of section 28 of the Indian Contract Act, which establishes that agreements that restrain legal proceedings are illegal and cannot be enforceable.
However, in the case of Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., (2001) 6 SCC 356, the Supreme Court upheld the validity of a one-sided arbitration clause that allowed only one party to initiate arbitration in the UK. The judgement has been interpreted as per the English laws, hence the validity of such agreements still lies in the grey area at present in India.
At present, it can only be concluded that one-sided arbitration agreements are not completely invalid in India unless and until their terms and conditions are prima facie against public policy. One such example is the appointment of a sole arbitrator by the employer which has been invalidated by the Supreme Court.
Non-payment of Award:
In the majority of contracts in the industry, the authority fails to honour the award passed by the arbitration tribunal and it takes years for the contractor to realise the award. But the contractor has to spend a huge amount of money towards conducting arbitration proceedings and realising the award.
Under such clauses, the employers evade their liability for the delays caused on their part and further exclude them from the damages caused due to the delays on their part.
In some of the construction contracts, the variation/additional works have not been properly addressed, which has lead not only to a delay in the completion of the project but also to payment for these additional/variation works. There is no lack of formula to decide whether the particular work falls under variation/additional work till it is decided how the other project will proceed.
Negative scope of work:
Some of the earlier concession agreements do not provide the formula for arriving at the value of negative scope. In one of the concession agreements, the concessionaire has been asked to pay 80 % of the sums saved in respect of the negative scope of work, but the term “sum saved“ had not been defined under the concession agreement, which led to the dispute. However, this has been addressed in the subsequent concession agreement. But the dispute continues irrespective of the earlier concession agreement.
In Executive Engineer vs Gangaram Chhapolia (1984)3 SCC 627, the Apex Court observed that “ The general rule that the grammatical and ordinary sense of the contract is to be adhered to unless such adherence would lead to such manifest absurdity or such repugnance or inconsistency, applies also to building and construction contracts. The meaning and intention of the parties have to be gathered from the language used. “
The Supreme Court’s decision in S. Harcharan Sinoh vs Union of India 1990 SCC (4) 647 observed that the validity of the additional work shall depend upon the reasonability and limits placed on the quantity of such work which the aggrieved party is required to execute. For this purpose, consideration can be placed on the prevalent industry practices, correspondence between the relevant stakeholders and authorities.
Delays in Payments
According to a report released by the Ministry of Statistics and Programme Implementation in March 2022, 425 projects out of 1579 projects have reported cost overruns of approximately 4.83 Lakh Crores and 664 projects have been delayed. According to the report, “The total original cost of implementation of the 1,579 projects was Rs 21,95,196.72 crore and their anticipated completion cost is likely to be Rs 26,78,365.62 crore, which reflects overall cost overruns of Rs 4,83,168.90 crore (22.01 per cent of the original cost).”
Delayed payments plague the construction industry worldwide. Such delays happen at every stage of the construction project, including progress payments, milestone payments, return of retention money, performance guarantee fees, etc, resulting in cost and time overruns of the project, increased disputes, cash flow issues and bankruptcy.
The cash flow in the construction project plays a pertinent role for the contractor since it allows efficient and timely payment to all the labourers and other stakeholders in the project. Section 55 of the Indian Contract Act provides that when one party to the contract promises to fulfil the terms and conditions of the agreement on or before the specified time but fails to do so, the other party is entitled to claim damages for the loss suffered by them. Further, Section 73 of the Indian Contract Act envisages that the party who has suffered damages because of the inability of the other party to fulfil the necessary obligations is entitled to be duly compensated.
So, if there is a delay in payments by the employer, the employee or contractor can recover the money under these provisions. It is necessary that the contractor should record all the delays in the payment incurred by the employer during the course of the construction so that it would be easier to prove the actual loss when claiming the damages.
Section 73 and 74 provide for compensations relating to breach of contracts. Section 73 lays down the route to recover actual damages resulting from the loss or damage caused by the breach of the contract. Section 74 provides for the recovery of money stipulated as payments in the contract due to a breach. Delay in payments may be anticipated by the parties while drawing up the contract and relevant provisions for such delay may be included at the time of entering the contract. In such situations, delay in payments shall be considered a contractual breach and the same can be recovered by the parties under Section 74. In case of any uncertainty in calculating the amount of loss suffered, the aggrieved party shall prove the loss suffered and the Court shall decide the compensation.
Construction laws: An International Perspective
The rising pertinence of the construction industry has been noted by numerous countries and in response, they have established efficient legislations to govern the sector. Such legislations have efficiently addressed the issues of delays in payments and unfair terms in construction contracts.
The United Kingdom, after Sir Michael Latham’s report titled “Constructing the Team.”, rolled out the UK’s construction laws by enacting “Housing Grant, Regeneration and Construction Law (HGCRA) 1996”. The Act drew commendations from the construction industry due to its efficient features-
- The Act classified construction contracts under a separate category of contracts.
- It mandates provisions for time-bound payment schedules under all construction contracts.
- Enlists contractors and sub-contractors with the ability to claim interest, suspended performance and even terminate contracts if the employer delays or fails to pay.
- Conditional payment clauses have been prohibited under construction contracts.
- The act establishes “default periods of payment” which are to be followed in circumstances where it is not specified under the construction contract.
All construction in the United Kingdom is governed by the Building Act of 1984 and the Building Regulations of 2010, which provide for building regulations, situations which call for exemptions from such regulations, regulations relating to documentation, monitoring of construction work, and other provisions relating to drainage, yards, passages and others.
The Scheme for Construction Contracts (England and Wales) Regulations 1998, contain provisions relating to adjudication (notice of adjudication, appointment of adjudicator, powers of the adjudicator) and payments (dates of payment, notice of amount to be paid).
The Health and Safety at Work Act 1974 establishes the duties of employers towards their employees and the general public, the duties of employees at work and other such regulations.
The Construction (Design and Management) Regulations 2015 is a subset of the Health and Safety aspect which applies exclusively to the construction sector. It includes the duty of the client towards managing the project and the duties of the designers, contractors and other stakeholders with relation to health and safety. This legislation establishes the general requirements at the construction site including the fresh air, lighting, stability of structures, excavations, explosions etc.
The Control of Substances Hazardous to Health Regulations 2002 lays down the duties of employers to provide safety measures relating to hazardous substances at work.
Singapore is another example of a country that has efficiently regulated its construction industry. The Singapore Building and Construction Industry Security of Payment Act 2004 comprehensively addresses the issue of delayed payments under Section 8, wherein the payment is to be made to the contractor within 14 days. Further, the Act, under Section 9, bans conditional clauses of “pay when paid” under construction contracts. Singapore has also established a successful institution like SICA to address the disputes/difference in the contract within stipulated time. Most of the industries in Asia agree to redress their disputes through SICA, and it works well.
Further, countries such as New Zealand and Western Australia have drafted the Construction Contract Act 2002 and Construction Contract Act 2004 under which the payment to the contractor should be within the time period of 20 days and 10 days. Such legislation further bans conditional payment clauses under construction contracts.
A central construction legislation which addresses all the abovementioned issues is the key to unlocking the full potential of the sector in India. Further, the setting up of a regulatory authority, for instance like TRAI or IRDEA, to identify opportunities for growth, streamline dispute resolution, etc. is also the need of the hour.
India’s lack of specific regulations for the construction industry brings forth numerous problems for the stakeholders. To start with, the average time period to resolve construction disputes is around 7-8 years. The majority of such disputes revolve around delayed payment and unfair terms under construction contracts. Therefore, apart from implementing a central law, it is also prudent to acknowledge that documentation and other paper work should also be standardised across the sector as per industry best practices.
Countries such as the United Kingdom have witnessed an increased rate of productivity in the sector after implementing construction laws. The UK’s construction industry witnessed a 30% rise in production, and the rates for construction disputes also drastically dropped.
Enough evidence is present before the Indian legislators to take cogent steps towards drafting a specific legislation for the Indian construction industry. It’s time to break ground!
Photo by: Shivendu Shukla on Unsplash
India’s lack of specific regulations for construction industry brings forth numerous troubles for the stakeholders. To start with, the average time period to resolve construction disputes is around 7-8 years. The majority of such disputes revolve around delayed payment and unfair terms under construction contracts. Therefore, apart from implementing a central law, it is also prudent to acknowledge that documentation and other paperwork should also be standardized across the sector as per the industry best practices.