Construction Contracts Essentials

CE 6010 – CONSTRUCTION CONTRACTS & SPECIFICATIONS
GENERAL PRINCIPLES OF CONTRACT

1.1. Contract in general
The Indian Contract Act, 1872, defines an agreement as “Every promise and every set of promises,
forming the consideration for each other is an agreement”. An agreement enforceable by law is a
contract. The essential elements required for formation of a contract have been stated to be:
“All agreements are contracts if they are made by the free consent of parties competent to
contract for a lawful considerations and lawful object, and are not hereby expressly declared to be
void.
Nothing herein contained shall affect any law in force in India and not hereby expressly
repealed, by which or in the presence of witness, or any law relating to resignation of documents.”
Thus, the essential conditions required before the formation of a legally valid and binding contract
are as follows:
i. The contract must be between at least two persons-the person under an obligation and
another entitled to enforce the obligation;
ii. The persons making the contract ought to be of sound mind when contracting. A juristic
person too can enter into an agreement;
iii. Parties must be ad idem about the subject-matter of the contract and must have understood it
in the same sense while entering into the same;
iv. There must be a lawful consideration for doing the act; and
v. There must exist an intention of creating a legal relationship.
1.2. Proposal
A proposal is a declaration by the proposer of his intention to be bound by an obligation if the
offeree fulfills or undertakes to fulfill certain conditions.
A person makes a proposal when he evinces an intention to be bound by clearly ascertainable
terms, and to be so bound, as soon as the person to whom the proposal is addressed signifies his
acceptance.
An offer can be made to any number of persons, or indeed to the whole world with no
particular offeree in mind, as for example, in the case of newspaper advertisement of goods for sale.
When one person signifies to the other his willingness to do or abstain from doing anything,
with a view to obtaining the assent of that other to such act or abstinence, he is said to make a
proposal.
EXTRACTS FROM BUILDING & ENGINEERING CONTRACTS (LAW & PRACTICE) BY DR. P C MARKANDA
When a person does not make any definite offer to purchase property for any specified
amount, but only states that he is prepared to purchase for a “reasonable sum”, the proposal cannot
be considered as an offer to purchase for any definite amount and when the sale finally takes place
and is confirmed, without any allegation of irregularities pointed out, he sale cannot be vitiated
simply on the ground of non-consideration of an indefinite offer.
A tender notice does not amount to an offer or proposal but merely an invitation to the
contractors for making an offer.
Where a person makes a bid at an auction, it is in the nature of an offer and when the
appropriate authority conveys acceptance thereof an agreement comes into being within the meaning
of section 2 of the Contract Act.
1.2.1. What does not constitute „proposal‟

A person cannot be bound by a one-sided offer which is never accepted, particularly when the parties
intended that the contract should be reduced to writing.
1.2.2. Counter proposal

Where an offer containing certain conditions has been made to a party and that party by adding to the
conditions makes a counter offer, the counter offer amount to a rejection of the offer made to him.
The offeree must unreservedly assent to the exact terms of the offer to bring about a
concluded contract. If, while purporting to accept the offer as a whole, he introduces a new term
which the offeror has had no opportunity of examining, he is in fact, merely making a counter offer.
1.2.3. Offer and invitation to tender-Distinction

A notice inviting tender merely indicates a readiness to receive offers. The offer comes from a
person who submits the tender and there is no contract until the person asking for tender accepts one
of them. A tender notice is merely an invitation to contractors for making an offer and does not
amount to an offer or a proposal. Notice inviting tender is issued by way of an advertisement. It is
not a proposal within the meaning of the Contract Law but merely which invites a proposal.
Therefore, unless the bid is accepted and the acceptance communicated to the bidder, there is no
binding contract between the parties.
1.2.4. Offer must be specific

The terms of an offer must be certain, and the offer should be such as in law is capable of being
accepted and gives rise to a legal relationship. If the terms of an offer are unsettled or indefinite, its
acceptance cannot create any contractual relationship and vagueness of the offer would not carry any
contractual force. It is for parties to make a contract in clear and unambiguous terms since the Court
cannot make a contract between the parties.
Where the parties understand the terms finally settled between them, one of them cannot later
on be heard to say that some of the terms remained unsettled and hence the contract was not a
concluded one. However, an agreement between two parties to enter into an agreement in which
some critical part of the contract matter is left undetermined is no contact at all.
1.2.5. Offer-What is not

A person cannot be bound by a one-sided offer which is never accepted, particularly when the parties
intended that the contract should be reduced to writing.
An offer which is not communicated is no offer and there is no communication of it unless
the other party knows about it. Thus, putting an offer in transmission from a particular place is no
part of the clause of action, as the offer is made only when it is received.
1.3. Acceptance of proposal

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.
Acceptance will not take effect at once if this is not intended by the parties. Most
importantly, the question arises where the execution of a further formal contract is contemplated, and
in this situation it is often difficult to decide whether the late formal document is to be simply a
record of an existing contract, or an essential requisite of the whole deal, a condition precedent to the
enforceability of the contract.
If an agent who is not authorized in that behalf accepts a tender, the employer is not bound by the
acceptance, but if he should ratify the unauthorized acceptance, both parties are bound from the date
of acceptance so ratified.
Silence to a letter does not amount to an acceptance of the terms proposed.
1.3.1. Acceptance must be absolute

To convert a proposal into a promise, the acceptance must be unqualified and without condition.
When once a proposal is practically refused it does not hold good and no acceptance after the refusal
could convert the proposal into a promise so as to create a contract. A proposal is converted into a
promise when the acceptance is unqualified and absolute, and until there is such an acceptance, the
stage of negotiation has not passed and no legal obligation is imposed.
Both offer and acceptance must be absolute, unqualified and unconditional. If it is
conditional, parties can withdraw at any moment until absolute acceptance takes place.
An acceptance must be absolute and unqualified. There is no complete contract if the
acceptance is „subject to approval of terms of contract‟ or „subject to a formal contract being
prepared and signed by both parties as approved by their solicitors‟ or simply „subject to contract‟ or
where it otherwise appears that all the terms of the contract are not definitely settled or that
additional terms are to be agreed to and inserted in formal contract.
When there is variance between the offer and the acceptance even in respect of any material
term, acceptance cannot be said to be absolute and unqualified and the same will not result in the
formation of a legal contract.
Where one of the conditions was that “tenders not accompanied by security deposit are liable
to be rejected summarily” and the tender was accepted without the defendant having deposited the
security deposit, it was held that there was a concluded contract as by virtue of condition the plaintiff
had option to waive security deposit.
An absolute acceptance of an offer would not make a binding contract if, in fact, it does not
extend to all the terms of the contract under negotiations or it is only a provisional arrangement
subject to the condition that a further agreement would be executed.
The offeree must unreservedly assent to the exact terms of the offer to bring about a
concluded contract. If while, proposing to accept the offer as a whole, he introduces a new term
which the offeror has had no opportunity of examining, he is in fact merely making a counter offer.
The effect of such a counter offer in the eyes of law is to destroy the original offer.
When an offer containing certain conditions has been made to a party and that party by
adding to the conditions makes a counter offer, the counter offer amounts to rejection of the offer
made to him.
Acceptance under law should be absolute and unconditional. Where the defendant placed
order for a quantity lower than the one for which the plaintiff had quoted in the tender, it cannot be
said that acceptance was either absolute or unconditional because defendant accepted only a part of
the offer of the plaintiff.
If the terms of an offer were unsettled or indefinite, its acceptance cannot create any
contractual relationship and the vagueness of the offer would not carry any contractual force. The
parties must make their own contract, which means that they must agree as to its terms and if they do
not make any such contract in that way, the court cannot make a contract for them.
1.3.2. Acceptance when complete

The contract is completed when the offer made is accepted. It is the acceptance which gives rise to
cause of action and not merely an offer.
Only a concluded contract can bind both the parties and for such a contract to come into
existence, the offer and related acceptance must be absolute and not qualified or conditional.
An acceptance is either absolute or conditional. There is no half way house between the two,
if an acceptance is conditional, the offerer can withdraw it at any moment until absolute acceptance
has taken place.
When a tender submitted by S is accepted by the Government and the acceptance is duly
communicated to S through a letter but before the acceptance letter was received, S sent a telegram
revoking tender which was received after the Government had mailed the acceptance letter, it was
held that the contract was complete between S and Government as soon as the letter of acceptance
was posted. The moment acceptance letter is sent to the tenderer the acceptance is complete
irrespective of the fact whether or not the letter of acceptance has reached him. The acceptance
would otherwise be complete even if the letter of acceptance is lost in transit.
A mere request for information obviously does not destroy the offer. Seeking clarification of
an offer cannot amount either to the acceptance of the offer or to the making of a counter offer.
When the offeree wrote to the offeror that defects in the tender submitted may be rectified so
that it may be fit for consideration, it was only an opportunity given to the offeror and not the
counter offer.
Acceptance and intimation of acceptance of offer are both necessary to result in a binding
contract. In the case of a contract which consists of mutual promises, the offeror must receive
intimation that the offeree has accepted his offer and has signified his willingness to perform his
promise.
1.3.3. Acceptance must conform to offer

When the offer is made subject to a condition and that offer is accepted, the person accepting the
offer must be presumed to have accepted it with the condition so attached and he cannot be heard to
say that though he accepted the offer, he was not bound by the condition.
1.3.4. Conditional acceptance

Where one of the terms essential to the implementing of the acceptance is left to the discretion of a
third person, the acceptance cannot be said to be unqualified.
1.3.5. Condition not accepted – Effect of

An absolute acceptance of an offer would not make a binding contract if, in fact, it does not extend to
all the terms of the contract under negotiation or if it is only a provisional arrangement subject to the
condition that a further agreement would be executed.
1.3.6. Acceptance by conduct

An offer may be accepted by conduct, without any formal acceptance, provided that the conduct is
unequivocal.
A main contractor placed an order with a nominated sub-contractor on terms which conflicted
with the terms previously agreed between the sub-contractor and the architect. The sub-contractor
started the work. Held: the terms of the offer placed by the main contractor, constituted an offer,
which had been accepted by beginning the sub-contracted work, and therefore, the sub-contractor
was bound by the main contractor‟s terms.
1.3.7. Rates once fixed cannot be changed

Under the general law of contract, once the contract is entered into, any clause giving absolute power
to one party to override or modify the terms of the contract at his sweet will- even if the opposite
party is not in breach, will amount to interfering with the integrity of the contract.
1.3.8. Acceptance- Whether can be made effective retrospectively

An acceptance may have a retrospective effect, and therefore, apply to work done before the contract
was entered into.
In the case of building contracts it is very common for the tender or offer of the contractor to
be accepted at some considerably later date, often after changes in the work or modifications in the
tender provisions or designs have been discussed and agreed.
It is also common for formal contracts to be exchanged and signedsome considerable period
after work has commenced.
1.3.9. Acceptance whether culminates into contract

A contract can come into existence by exchange of letters. It is not necessary that there must be a
single formal document executed and signed by both the parties. When an offer is made and the
same is accepted, it would result in the contract being concluded. Thus where an offer has been
accepted by the other party, a contract comes into existence.
Where all the material terms as given in the tender were settled by the time of acceptance of
tender, the contract becomes concluded even if tender was required to execute an agreement after
acceptance of his tender.
When the letter of acceptance referred to a future negotiation for finalization of more terms of
contract then there is no concluded contract between the parties.
An absolute acceptance of an offer would not make a binding contract if, in fact, it does not
extend to all the terms of the contract under negotiation or if it is only a provisional arrangement
subject to the condition that a further agreement would be executed. It is also well settled that in
order to decide those matters, the entire negotiations and the correspondence on which the contract
depends must be considered.
1.3.10. Condition in acceptance letter supersedes special conditions

Even if special conditions are given with the invitation to tender showing general conditions, former
cannot apply when acceptance specifies only those general conditions. The letter of acceptance is the
counter offer and when acted upon it becomes accepted. Then the special conditions can never
become part of the contract.
When one party makes a composite offer, each part thereof becomes dependent on the other,
the other party cannot by accepting a part of the offer, compel the other to confine its disputes only
to that part not accepted, unless the party offering the composite offer agrees to that course.
1.4. Withdrawal of offer

A person can withdraw or modify his offer or tender before communication of acceptance is
complete as against him, i.e. before its acceptance is intimated to him. The Government by merely
providing a clause to the contrary in the tender notice could not take away the legal rights of a
person.
When in pursuance of tender notice, the petitioner has given his tender but had withdrawn it
before it was opened and accepted, it was held that when the tenders were opened there was no offer
from the petitioner and, therefore, there could be no contract either express or implied between the
parties. There is no bar for withdrawal of a tender before acceptance is conveyed to the tenderer even
if there be a stipulation that the tenders would be prohibited from the tender before being opened.
Legal right of a tenderer to withdraw the tender, it is submitted, cannot be taken away by such a
stipulation.
An offer may be accepted at any time after it has been made, unless before it is accepted:
(a) It is expressly withdrawn; or

(b) It is rejected; or
(c) It is revoked by the counter-offer; or
(d) It lapses by efflux of time
A person making a tender is entitled to withdraw it at any time before acceptance, but if he
does not do so, it remains in force until it is accepted or lapses by effluxion of time.
Under the provisions of the Contract Act, a party has a statutory right to withdraw/revoke his
proposal before acceptance therefore by the appropriate authority. It being the statutory right of the
party, he can withdraw his tender before acceptance and the question for the settlement period could
not be enforced on such a party and he cannot be saddled with a liability to make good the
deficiency.
1.4.1. When can proposal be withdrawn

An offer to buy or sell may be retracted at any time before it is unconditionally accepted, by words
or conduct. However, if there is a statutory rule having the force of law precluding withdrawal of a
bid before its acceptance, such a proposal cannot be withdrawn.
A tenderer is entitled to revise his offer before acceptance. When the contract itself allows the
offeror to revise the offer by revoking his earlier offer, before it is accepted by the opposite party, a
condition to the contrary in the tender cannot be made operative against the tenderer. Where the
tenderer had revised his earlier offer before acceptance by the opposite party followed by a telex
message accepting old rates, it cannot be said that a binding contract has come into existence. When
there is no concluded contract, there is no question of giving security for earnest money by way of
bank guarantee.
1.4.2. Deposit- When cannot be forfeited

Where the condition in a works contract specified that the amount of earnest money may be treated
as security deposit after conclusion of contract and not as earnest money, forfeiture of such amount
for loss sustained on account of non-acceptance of contract by putting certain term as pre-condition
for acceptance was not valid since no concluded contract had come into existence.
Where the tenderer rescinded the contract, the earnest money deposited by the tenderer could
not automatically be forfeited by the Department unless further damage is proved.
The doctrine of forfeiture in the case of an earnest money is based on a principle completely
independent of the consideration laid down in sections 64, 65, 73 or 74 of the Contract Act. In fact,
an earnest money, belonging as it does to a class of its own. It means where the agreement is
unequivocal and it is specifically agreed upon then the earnest money deposit has to be dealt with in
the light of the principles which apply to such deposit and not in the light of those that generally
apply to restitution, penalty or liquidated damages.
1.4.3. Deposit- When can be forfeited

Earnest money is part of the purchase price when the transaction goes forward; it is forfeited when
the transaction falls through, by reasons of the fault or failure of the vendee.
1.4.4. Failure to deposit initial deposit- Contract whether valid

When in response to notice issued by the Chief Conservative of Forests, a firm offered their tenders
for purchase of certain forest products and their tenders being highest were accepted but the firm
failed to make an initial deposit of 25% of purchase price which in view of notice is a condition. The
purported acceptance was not a valid one and there was no concluded contract between the parties.
Where balance works on a project were awarded to a contractor on emergency basis and he
had also done some work, meaning a concluded contract came into existence and the condition of
deposit of the security amount necessarily stood waived.
1.5. Tenders
The submission of a tender normally amounts to an offer; and the effect of an “acceptance” of such a
tender turns on the construction of the acceptance and the tender in each case. Binding contract will
normally arise from acceptance of the tender, unless it is expressly stipulated and there is to be no
contract until certain formal documents have been executed.
It is not that the authority inviting tenders cannot deviate or relax the prescribed standard in
any situation. But any deviation, if made, should not result in arbitrariness and discrimination.
When tenderers were required to supply their documents supporting their work experience
and financial position along with the application, and furnishing of required documents was made a
pre-condition, it was held that tenderer can be excluded from consideration for failure to supply
required documents.
It is a well settled rule of administrative law than an executive authority must be rigorously
held to the standards by which it proposes its actions to be judged and it must scrupulously observe
those standards on pain of invalidation of an act in violation of them.
1.5.1. Notice inviting tenders

Notice Inviting Tenders is merely a general invitation to make offers and it is not necessarily a notice
containing general terms to be included in every contract made by the Government. Where such a
notice includes any terms which will be deemed to be part of the tender depends upon its language.
1.5.2. Tender- What is

A tender notice means only an invitation extended to the contractors for making offers. It does not
amount to an offer or proposal and the quotation of rates offered by the contractors does not amount
to acceptance of offer or proposal thereby creating any promise or agreement. It is by the acceptance
of any of those offers by the person calling for tenders that it becomes a promise or an agreement.
This is valid even for a person making the lowest quotation in response to the tender notice.
A notice inviting tender is nothing but calling of an offer under section 4 of the Contract Act.
The filing of the tender with the authority calling the tender is nothing but an offer made. Such an
offer made by the tenderer is open to acceptance but it must be unconditional and unqualified
otherwise offeror has a right to refuse to accept the modified acceptance.
1.5.3. Pre-Requisites of a valid tender

A tender is an offer. It is something which invites and is communicated to notify acceptance.
Broadly stated, the following are the requisites of a valid tender:
1. It must be unconditional.
2. Must be made at the proper place.
3. Must conform to the terms of the obligation.
4. Must be made at the proper time.
5. Must be made in the proper form.
6. The person by whom the tender is made must be able and willing to perform his obligation.
7. There must be reasonable opportunity for expression.
8. Tender must be made to the proper person.
1.5.4. Tender must comply with stipulations

Tenders not in conformity of the stipulations cannot be accepted as valid tender.
1.5.5. Relaxation of tender condition permissible

If some of the requirements are not mandatory, then certain relaxation is permitted, if it results in a
lower tender sum leading to considerable savings
1.5.6. Period for acceptance of tender

An offer made by a party cannot be kept pending for acceptance by the authority for an unreasonable
period of time. If no time is specified in the tender for acceptance of offer, acceptance has to be
communicated within a reasonable time and acceptance conveyed belatedly will have no binding
effect on the tenderer.
1.5.7. Whether lowest tender must be accepted

Lowest tender need not be accepted if the tender invitation clearly stipulates that the “authority
reserves the right reject any or all tenders”
1.5.8. Letter of Intent

A letter of intent merely indicates a party‟s intention to enter into a contract with the other party in
future. A letter of intent is not intended to bind either party ultimately to enter into any contract. It is
no doubt true that the letter of intent may be construed as a letter of acceptance if such intention is
evident from its terms.
The letter of intent merely expresses an intention to enter into a contract. If the conditions
stipulated in the letter of intent are not fulfilled by the respondent and if the conduct of the
respondent is not otherwise such as would generate confidence, the petitioner is entitled to withdraw
the letter of intent. There is no binding relationship between the parties and the petitioner was
entitled to look at the totality of circumstances in deciding whether to enter into a binding contract
with respondent or not.
Where a party proposing to contract indicates to the other that he wishes to be reimbursed his
pre-contractual expenses if the deal goes off, and the other then sends him a letter of intent, this may
operate as an agreement to reimburse those expenses if the contract does not materialize.
1.6. Standing offer- What is

The whole concept of standing offer is want of mutuality but where there is mutuality there is
concluded contract. Where the tender for supply of goods in a year had been invited subject to the
condition that order for the goods shall be placed as and when required, it was held that the tender
was a “standing offer‟ and the contract came into existence only when the order was placed.
1.6.1. Standing offer and its operation

Where the letters merely set out the terms on which the parties were ready to do business with each
other as and when orders were placed and executed, it was held that as soon as the order was placed
and accepted, a contract arose. It was further held that it is true that this contract would be governed
by the terms set out in the letters but until an order was placed and accepted there was no contract
and that each separate order and acceptance constituted a different and distinct contract.
1.7. Agreement „Subject to contract‟

The fact that there has been a provisional acceptance makes no difference. A provisional acceptance
cannot in itself make a binding contract. There must be a definite acceptance or the fulfillment of the
condition on which a provisional acceptance is based.
1.7.1. Execution of formal deed- Whether necessary

A binding contract by tender and acceptance can come in to existence if such a tender is accepted by
a person duly authorized in this behalf by Governor / President of India. Such a contract would be in
conformity with Article 299 of the Constitution. There is, therefore, no necessity for a formal
contract in any particular form.
1.7.2. Intention to enter into agreement

A mere reference to a future formal contract in an oral agreement will not prevent a binding
agreement between the parties. The fact that the parties refer to the preparation of an agreement by
which the terms agreed upon are to be put in a more formal shape does not prevent the existence of a
binding contract. There are however, cases where the reference to a future contract is made in such
terms as to show that the parties did not intend to be bound until a formal contract is signed. The
question depends upon the intention of the parties and the special circumstances of each particular
case.
1.7.3. Provisional agreement

A provisional acceptance cannot in itself make in a binding contract.
1.7.4. Agreement whether provisional depends upon language

Where only certain terms of the contract were settled and the other terms of the agreement were left
open, there is no concluded contract.
1.8. Concluded contract

“Contract” is a bilateral transaction between two or more than two parties. Every contract has to pass
through several stages beginning with the stage of negotiation during which the parties discuss and
negotiate proposals and counter proposals and also the consideration resulting finally in the
agreement. It is at this stage that the agreement is reduced into writing and a formal document is
executed on which parties affix their signature or thumb impression so as to be bound by the terms of
the agreement set out in that document.
1.8.1. Essentials of concluded contract
It is the essence of the contract that there should be an aggregation mentium, the meeting of minds of
the contracting parties.
1.8.2. Contract whether concluded- Determination of

Whether an agreement is a completed bargain or merely a provisional agreement depends on the
intention of the parties as deducible from the language used by the parties on the occasion when the
negotiations take a concrete shape.
1.8.3. Contract when lacks completeness

If you find an unqualified acceptance subject to the condition that an agreement is to be prepared,
and agreed upon between the parties, and until that condition is fulfilled no contract is to arise then
you cannot find a concluded contract.
Acceptance with a variation in substance is no acceptance. Acceptance must be absolute and
unqualified and must include all the terms of the offer and that failure to reply to a counter proposal
would not per se amount to an acceptance.
1.8.4. Intention to create a legal relationship

In addition to the presence of consideration there must be an intention to create a legally binding
obligation. This will nearly always be ascertained from the general surrounding circumstances of the
transaction in question, including, for example, whether it is of a commercial or domestic nature.
1.8.5. Contract enforceable when entered into with full knowledge

It is a fundamental principle of general application that if a person of his own accord, accepts a
contract on certain terms and works out the contract, he cannot be allowed to adhere to and abide by
some of the terms of the contract which prove advantageous to him and repudiate the other terms of
the same contract which may be disadvantageous to him. The maxim is qui approbat non reprobate
(one who approbates cannot reprobate).
1.8.6. Court bound to enforce valid contract

It is the duty of the court as far as possible to uphold a bargain between the parties and to give
efficacy to a commercial transaction and it should for that purpose interpret the contract or the offer.
1.8.7. Contract void when terms vague and uncertain

If the terms of the contract are vague and uncertain, the contract itself would be void and uncertain
under Section 29 of the Contract Act and that will go into the root of the matter and, therefore, it is a
plea that can be raised even at the appellate stage.
1.8.8. Agreement by correspondence

The terms of an agreement may be collected from a series of documents. It is not necessary to
constitute an arbitration agreement that its terms should be contained in one document.
Where the existence of the contract is to be found out from correspondence, the rule is that
the entire bunch of the correspondence that passed between the parties has to be looked into for
determining whether there was a concluded contract.
1.8.9. Signatures whether essential to conclude contract

A person who signs a document is deemed to have read it before appending his signatures. Signing
of a document even without reading it would still bind a party.
1.8.10. Oral contracts- Whether valid

By the law of India, an oral contract is valid and enforceable. Oral contracts must be proved by the
clearest and most satisfactory evidence of credible witness; and it would be unwise to act upon oral
evidence unless there as contemporaneous written to corroborate it.
1.8.11. Plea of estoppel whether available in concluded contracts

If the work commences without a formal contract and is allowed to continue by the owner when all
terms have been agreed, this will almost always bring into principles of waiver or estoppel so as to
prevent a subsequent denial of the contract by the owner if no formal contract is concluded.
Furthermore, where a formal contract is subsequently concluded, not only will it usually be
interpreted as superseding any previous agreements, but in the absence of indication to the contrary,
it will be treated as applying retrospectively so as to validate actions or claims under the contract in
respect of the period prior to the formal execution of the contract.
1.8.12. Invalid contract- Arbitration clause not binding

If a contract is illegal and void, an arbitration clause, which is one of the terms thereof, must all
perish along with it.
1.8.13. Part performance in illegal contract- Effect of

A party to an illegal contract cannot invoke the aid of a court to have such a contract carried into
effect as law will not tolerate any party to violate any moral or legal duties.
1.8.14. Payment whether to be made in a void contract

There must be a valid and enforceable contract before the contractor is said to be entitled to receive
payment. However, if it is a void contract then the contractor would be entitled to compensation
under section 70 of the Contract Act if he has established his claim that the employer has enjoyed
benefit of the thing being delivered and the said thing was never intended to be delivered
gratuitously.
1.8.15. Implied terms

It is a matter of common experience that no perfect contract can be made, because the parties to it
may not at the stage of making it envisages or provide for all the contingencies that may arise.
Nevertheless, in certain circumstances, the court can imply terms. The necessary
qualifications for a term to be implied are:
(1) It must be reasonable and equitable;
(2) It must be necessary to give business efficacy to the contract, so that no term will be implied
if the contract is effective with it;
(3) It must be so obvious that it „goes without saying‟;
(4) It must be capable of clear expression; and,
(5) It must not contradict any express term of the contract.
1.8.16. Contracts must be simple and clear

The use of the multilayered agreements with several printed annexures, each with cyclostyled
amendments, typed and handwritten additions and deletions lead to confusion, uncertainty, delay in
execution apart from giving rise to avoidable disputes.
1.8.17. All contracts are independent, distinct and separate

Each company is a separate and a distinct legal entity and the mere fact that the two companies have
common shareholders or common Board of Directors, will not make the two companies, a single
entity. Also, each separate order and acceptance constituted a different and distinct contract.
1.8.18. Standard form contract

A standard form contract is one which has a set of clauses which are repeated irrespective of the
nature of work for which tenders are invited. In certain departments, the same set of published
clauses form the basis of tenders and are in vogue for decades together without effecting any change
whatsoever.
A document should be transaction specific and effort should be made to delete or exclude
inapplicable or irrelevant clauses which is generally not done. The Supreme Court has come down
heavily on the adoption of such stereotyped contract forms and has suggested that efforts should be
made into:
(1) Improve the documentation and avoid unnecessary and repetitive clauses;
(2) Avoid incorporation of other documents by vague references; and
(3) Discontinue pasting or annexing of slips
If documents are clear, specific and self-contained, disputes will be far lesser and litigation
will considerably be reduced.
It has universally been recognized that standard form agreement must be strictly construed
against the party responsible for drafting it. This is also for the reason that in the preponderance of
such contracts a monopoly can be found to exist. Due to an imbalance in the stature and strength of
the parties, they are not in pari delicto.
1.9. Jurisdiction of court when contract breached

The decision of the question as to whether a suit on contract is within the jurisdiction of the trial
court must necessarily imply the decision of the question as to whether the contract was made in the
light of the provisions of section 4 of the Contract Act.
1.9.1. Unilateral extension of time not valid

Under Section 63 of Contract Act, the promisee makes certain concessions to the promisor which are
advantageous to the promisor, and one of them is that he may extend the time for such performance.
But it is clear again that such an extension of time cannot be a unilateral extension on the part of the
promisee. It is only at the request of the promisor that the promisee may agree to extend the time of
performance and thereby bring about an agreement for extension of time. Therefore, it is only as a
result of operation of Section 63 of Contract Act that the time for the performance of the contract can
be extended and that time can only be extended by an agreement arrived at between the promisor and
promisee.
1.9.2. Unilateral rescission of contract illegal

A party in contract is not entitled in law to cancel a concluded contract unilaterally.
1.9.3. Time not mentioned in contract-Effect of
Time will be of the essence of the contract if it is so provided in the contract or if one of the parties
after an unreasonable delay on the part of the other party gives a reasonable notice to the other party
making time as the essence of the contract. If none of the two happened, reasonable time will be
deemed to be the time which will be of the essence of the contract.
If a contract does not specify the time for performance, the law imply that the parties
intended that the obligation under the contract should be performed within a reasonable time.
1.9.4. Difficulty in interpretation not synonymous with vagueness

A contract will become void only when its terms are vague, uncertain and it cannot be made certain.
Mere difficulty in interpretation is not synonymous with vagueness. Documents embodying business
agreements should be construed fairly and broadly so as to give business efficacy.
1.10. “Consent” defined

Two or more persons are said to consent when they agree upon the same thing in the same sense.
1.10.1. “Free consent” defined

Consent is said to be when it is not caused by-
1. coercion, as defined in section 15, or
2. undue influence, as defined in section 16, or
3. fraud, as defined in section 17, or
4. misrepresentation, as defined in section 18, or
5. mistake subject to the provision of sections 20, 21 and 22.
1.10.2. Inequality of bargaining power

Plea regarding bargaining power cannot be entertained in case of the parties have entered into a
commercial contract since the parties had chosen to enter into contract voluntarily and with eyes
wide open. Later, when it does not suit a party it cannot be heard to say that it is one-sided contract
and is loaded in favour of the employer.
1.10.3. Unconscionable clauses in Construction Contracts
Courts in India have often favoured the argument that agreements entered into voluntarily even if
they contain unfair clauses ought to be upheld. When a party without any coercion, fraud,
misrepresentation or undue influence, willingly accepts of his own accord a clause in contract which
provides that the arbitrator may be an employee of the employer, it cannot turn round and say that
the clause is unconscionable.
Courts have set aside clauses of contract which are clearly penal in nature. A penal
stipulation to pay the sum agreed on breach of contract cannot be enforced. Agreed liquidated
damages, if it be enforced, must be the result of a “genuine pre-estimate of damages”.
One sided clauses providing for unlimited variation in quantities and unfair interpretation of
variation clauses have been set aside by the courts by holding that the Engineer-in-charge cannot
require a contractor to execute additional work without any limit and that reasonable limit should be
placed on the quantity of additional work, which the contractor may be required to execute at the rate
stipulated for the main work under the contract. Thus, even if the power to order extras may appear
to be unlimited, it is in fact, limited to ordering extras up to a certain value.
A clause in contract debarring the contractor from claiming escalation in rates has been
construed to be limited only up to a stipulated period of contract and not beyond. Even in the absence
of an escalation clause in contract, the court have allowed compensation in form of escalation in
prices on ground that once it is found that delay in execution of the contract due to conduct of the
employer, it was liable for consequences of the delay, namely, increase in prices.
Courts have held that a clause in contract providing that: “No claim for interest or damages
will be entertained by the government with respect to any money or balance which may be lying with
government or may become due owing to any dispute, difference or misunderstanding between
Engineer-in-charge on one hand and the contractor on the other hand or with respect to any delay on
part of the Engineer-in-charge in making periodical or final payment or in any other respect
whatsoever”, would not debar an arbitrator from granting interest during the pendency of the
reference if, in his discretion, he considers it appropriate to award it.
Where a clause in contract provides that a contractor has to submit a no claim certificate
before any payment is made to him, the courts have held that such a clause would not debar him
from getting his claims adjudicated upon through arbitration if the undertaking was given under
undue influence.
Under the general law of contracts, once the contract is entered into, any clause giving
absolute power to one party to override or modify the terms of the contract at his sweet will or to
cancel the contract – even if the opposite party is not in breach, would amount to interfering with the
integrity of the contract.
In some instances, courts have upheld clauses which are one-sided such as Clause 11 of the
MES standard form of contract which debars any claim for compensation for delays, in respect of
which extensions have been sought and obtained. Similarly clause 59 of the A.P. Standard
Specifications, which states that no claim for compensation on account of delays or hindrances to the
work from any cause would lie except as therein defined, has been upheld.
1.11. Fraud-What is
Fraud may be defined as an act of deliberate deception with the design of securing some unfair or
undeserved benefit by taking undue advantage of another.
1.11.1. Fraud vitiates transaction

Law is well settled that no person can retain a benefit obtained by fraud, misrepresentation,
suppression of facts or the like.
1.11.2. Fraud and misrepresentation-Distinction between

In case of fraud and misrepresentation there is a misstatement or false statement of fact which
misleads the party on whom the same is perpetrated. The principal difference between fraud and
misrepresentation is that in the case of fraud the person making the suggestion, does not believe it to
be true, which in the case of misrepresentation he believes it to be true, though in both cases it is a
misstatement of facts which misleads promisor.
1.11.3. Repudiation of contract-When justified

Where a party executes a document under a mistake as to the subject of the contract as an innocent
misrepresentation by other party that the document contained all the terms agreed upon, while in fact
it did not contain all the facts, held that matter was sufficient to justify repudiation of the contract.

Construction Contracts Essentials

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Construction Contracts Essentials

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CE 6010 – CONSTRUCTION CONTRACTS & SPECIFICATIONS

GENERAL PRINCIPLES OF CONTRACT

1.2.1. What does not constitute „proposal‟

1.2.2. Counter proposal

1.2.3. Offer and invitation to tender-Distinction

1.2.4. Offer must be specific

1.2.5. Offer-What is not

1.3. Acceptance of proposal

1.3.1. Acceptance must be absolute

1.3.2. Acceptance when complete

1.3.3. Acceptance must conform to offer

1.3.4. Conditional acceptance

1.3.5. Condition not accepted – Effect of

1.3.6. Acceptance by conduct

1.3.7. Rates once fixed cannot be changed

1.3.8. Acceptance- Whether can be made effective retrospectively

1.3.9. Acceptance whether culminates into contract

1.3.10. Condition in acceptance letter supersedes special conditions

1.4. Withdrawal of offer

(a) It is expressly withdrawn; or

1.4.1. When can proposal be withdrawn

1.4.2. Deposit- When cannot be forfeited

1.4.3. Deposit- When can be forfeited

1.4.4. Failure to deposit initial deposit- Contract whether valid

1.5.1. Notice inviting tenders

1.5.2. Tender- What is

1.5.3. Pre-Requisites of a valid tender

1.5.4. Tender must comply with stipulations

1.5.5. Relaxation of tender condition permissible

1.5.6. Period for acceptance of tender

1.5.7. Whether lowest tender must be accepted

1.5.8. Letter of Intent

1.6. Standing offer- What is

1.6.1. Standing offer and its operation

1.7. Agreement „Subject to contract‟

1.7.1. Execution of formal deed- Whether necessary

1.7.2. Intention to enter into agreement

1.7.3. Provisional agreement

1.7.4. Agreement whether provisional depends upon language

1.8. Concluded contract

1.8.2. Contract whether concluded- Determination of

1.8.3. Contract when lacks completeness

1.8.4. Intention to create a legal relationship

1.8.5. Contract enforceable when entered into with full knowledge

1.8.6. Court bound to enforce valid contract

1.8.7. Contract void when terms vague and uncertain

1.8.8. Agreement by correspondence

1.8.9. Signatures whether essential to conclude contract

1.8.10. Oral contracts- Whether valid

1.8.11. Plea of estoppel whether available in concluded contracts

1.8.12. Invalid contract- Arbitration clause not binding

1.8.13. Part performance in illegal contract- Effect of

1.8.14. Payment whether to be made in a void contract

1.8.15. Implied terms

1.8.16. Contracts must be simple and clear

1.8.17. All contracts are independent, distinct and separate

1.8.18. Standard form contract

1.9. Jurisdiction of court when contract breached

1.9.1. Unilateral extension of time not valid

1.9.2. Unilateral rescission of contract illegal

1.9.4. Difficulty in interpretation not synonymous with vagueness

1.10. “Consent” defined

1.10.1. “Free consent” defined