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UNIT 11 LEGAL ASPECTS OF CONTRACTS

Structure
11.1 I~itroduction
C)l>jectives
11.2 Defi~litionof a Contract
11.3 Essential Elements of a Contract
11.3.1 Agreement
1 1.3.2 Lawful Subject Matter
11.3.3 Valid (lonsidzmtion
11.3.4 Competent Parties
11.3.5 Provi.~ionsof th? Law with Regard to Form

11.4 Types of Conslruction Coxitract


11.4.1 (?ompetitivr. Bici ConLmcls
11.4.2 Negotiated Co~ltracts
11.5 Purchase Clrders as Contracts
1 1.6 Suhcontracls
11.7 Selection of Type of Contract
I 1.8 Project lusuraice
11.9 I~lsuruiceContracts and Claims
1 1.9.1 I~lsura~ice
C:ontmcts
11.9.2 Iltsurancr Claims
11.10 Procedures for Disputes aL Law

11.12 Arbitration
11.12.1 Indian Arbitratio11Act
11.12.2 Indim1 ('ontract Act

1 . 1 INTRODUCTION
Co~ltractsare needed Lo be drawn up between parties for executing a cnnstruclion project.
In his unit, you will sludy about various Lypes of contracts as applied iu the conslrucliou
industry. Further, you will learn aboul arbitratio11 as a rneans of seLtliilg dispules belwccn
Lhe owner aid the conlraclor.

Objectives
After studying this unit, you should be able lo
define a contracl,
explain the various Lypes of construclion contracl,
describe manage~nentand sub-contracts,
select a particular Lype of contract as per the situation,
; draw procedures for disputes at law, and
discuss and appreciale consulner proleclion,

11.2 DEFINITION OF A CONTRACT


A contracl is m, agreeinent aiforceahle at law. Only the parties Lo the agreement are
bound by its t e r m and no pcrson who is not a party can eiher be~ieBtor suffer fro111il.
However, if the contract is made keeping in view the benefit or suffering lo a ll~irdparty,
like third party risk, Ulen such benefit is enforceable a l law.
minor but is enforceable againsl the other party. After a illinor attains 21 years of age, he Lcgnl Aspects of
Contract laws vary from state to state. Thus, tlle law governing a specific contract will be Cont.racts
determined by tl~eplace where the conlrilcl was made or by the place of residence of thc lnay affirm a contract inade previously and make it binding. If a minor obtains possessioi~
parties. of goods tl~roughan illegal contract, he cannot keep the goods. A contract with an insme
person or made when in a drunken state is legal (in some states) if made in good faitl~and
Construction conlracts slale that all disputes will be decided by t l ~ eeilgineer in charge if tl~eperson knew what he was doing.
and Ulat his decision shall be final. This holds only so long as it is acceptable to both
parties on a voluntary basis. No clause in a contract can deny either party to submit a Matler of competency to contract is important to engineers forming corporations. A
dispute to a court for settlement. l11e place of court has to be decided when the contract is corporation is a person formulated by law, and it has only such powers as the law confers
hcing drawn up. upon it*and the types of contract which a corporation lnay enter into is limited. Thus, i1
barrage contract may include the construction of a bridge on its c'mals but lnay have no
SAQ 1 right to contract for the construction of a pleasure resort to attract tourists. The ~narulerin
which a corporation may conlract is strictly prescribed by statutes or its bye-laws, and
How-do you define a contracl ? failure to observe these may void a contract.
If due to incompetency, a contract with a private corporalion fails, the other party may be
able to recover something for his services if the corporation has made use of them, but il
is time consuming and expensive. But in a void contract with a public corporation, there
is no possibilily of recovery even in a law suit.
Competency to contract is importcult to engineers in connection with g o v e r i ~ ~ i ~ e ~ l t
11.3 ESSENTIAL ELEMENTS OF A CONTRACT agencies. Contracts with Municipal, State xnd Central Government agencies must be
inade within the authority of the contracting officers of those agencies.
For a conltact lo he enforceable at law, il must contain some essential elenlenls described
in subsequent sections. If any of the elements is absent, it can void a contract. 11.3.5 Provisions of the Law with Regard to Form'
11.3.1 Agreement There are certain types of agreements which inust be in wriling 'and "signed by the party
to be charged" before they can be enforced at law. The following types of cnnlracts iriusl
For a contracl to exist inutual understanding and assent as Lo l l ~ eterms of the agreement is necessarily be in wriling :
essential. The wording of the contract should be such that the intended ineaning is
explicit and clear. Generally speaking, signatures of both parties on the docurnent (a) contract for the sale of land or m y interest in land, or a lease for a period
indjcates an agreement. However, under certain circumstances, tllc contracl lnay be exceeding one year,
~~ullifirdv11icnthere is sufficient evidence to show that there was no real agreement. (b) a promise to pay a claim out of his own money,
11.3.2 Lawful Subject Matter (c) a promise to answer for a debt, default or nliscuriage of another person,
(d) ,any agreement which is not to be performed within 1 year of makillg it (for .
A contract may becoine illegal or unenforceable if t& subject matter contained in it is
against (a) the rules of colmnon law, (b) state laws, and (c) established public policy. exanlple, outlet structure at the end of a long tunnel), and
Contracts involving (a) crime, (b) fraud, (c) collusion, (d) speculation, or (e) gainbling (e) a contract for the sale of equipment or surplus inaterial exceeding a certain
are examples of unlawful subject matter. rupee value uiiless the buyer accepts p'ut or pays p'xt or gives part payment.
It is good busir~esspractice that all contracts be written and signed by the qontractiiig
Subject matter against public policy is imperceptible 'and difficult Lo define except h~ parties for the purpose of record in the event of disputes. This is especially so for
situations where it conflicts with the interests and welfare@society it~ldthe obstruction col~structioi~contracts where the services to be furnished are usually complex atld there
of justice. Contracts that restrain competition or collusion in bidding to creale a
are many pronlises and condilions in the agreenleiit. T l ~ escope of the services to be
monopoly are contracts against public policy. If a person enters into an illegal contract
performed and the consideratio~lto be given for Iheir performance, and the Li~ilein which
unh~owingly,it is not a basis for seeking relief in case of loss or dan~age.Contractirlg
parties are assumed to be aware of all legal implications before signing tbe coatract. they are to be perforil~eclshoulcl be specified in the written document under the signatures
of the parties. Clther conditions of inajor inlporlance nlay be included as a par1 of the
11.3.3 Valid Consideration agreement or set in separate documents.
Legally speaking, consideration ine'ms an act of one party in return for an acl or proinise The signalures to the contract should be the exact names or legal titles of tlle parties and
of i.hc other. 'lhc recluirements of the law of conlracts are satisfied if tlle consideration is should be used with the addresses of their places of business. In the case of partnerships,
real, valid and valuable. l'he function of the law is to assure that the consideration on the name of the firm and that of eacl~partner should be ~nenlionedin Ule agreement. The
wllicl~the col~tractwas based and not to judge its fairness or adequacy. 171c courls will signatures of the fir111 nairle by one of the partners will be billcling on e:\ch of Lhe partners,
not try to make a bargain for either of thc parties, inslead, they will try to detcrnlille from but additional eirlphasis is given if the contract is signet1 hy each 01.' the partners.
Lhe evidence what Llie bargain actually was. Matters of liquidated danlages or debts are When a corporation is a conltacting party, the naine of the corporation shoulii be followed
the only exception to this rule. An established debt cannot be satisfied by paying a lesser by the signature of the person authorised to ohligale llle corporation through a co~itracl.
amount, even thougll an agreement was inade to that effect, unless there is some This signature should be attesletl by the proper c:)l'ficer, usually the secretary of the
additional consideration, such as an advance in Ule date of payment. In~possiblepronlises, corporation, that h e contracting officer is duly authorised to execute tlie contract. In
unilaleral proiuises, gratuitous proinises and acts of God are not enforceable by contracl contracting with a corporaliol~it is imporlant to ensure that the corporation has the right
law due to absence of a real consideralion. Consideration may be stated clearly in a to enter into the contract ultl Ihat it is doing so byproper legal action. ..
contract, for exainple, a definite promise to pay a sum of money or to d o sonle specific
tiling, or it may be implied, in which case the value of the cot~siderationlnay be difficult The signalure should be supported by tlie seals of the signing parties. The seals inay be
to prove. rubber stamped or inlpressed or en~bossedon the pal>er,or it inay be of the slickiiig type.

11.3.4 Competent Parties SAQ 2


Laws related to the competency of my contracting parties differ from state to state. Any (a) What are tlle'essenlial eleillents ol'a conlracl ?
one acting in good faith lnay enter into a binding contract provided he is not a minor, (b) What do you understruld by r u ~agreement '?
insane o r in a drunken state. A contract illade with a minor is not enforceable against the (c) What is iileant by lawful suljecl inatler '?
Constructio~lContract heads due to a number of operations necessary to complete the work. For a lump Legal Aspects of
(d) How will you define valid consideration as an essential element of a contract ? Contrrcls
Manqement sum contract, the plans and specifications should be comprehensive and must
(e) Define competent parties to a contract. I
include complete details and full requirements of the job. The owner has the
I

(f) What are the provisions of the law with regard to form of a contract ? distinct advantage with such a contract because the tender shows him exactly what
the work would cost him. Besides Ulat, he need not engage staff to maintain
I accounts of exactly what work has been done and materials supplied during each
I month.
I Lump sum contracts have the following special features :
I
! (a) Provision is made for the ordering of extras and onlissions.
(b) It is unnecessary to re-measure the whole work except variations or extras
11.4 TYPES OF CONSTRUCTION CONTRACT and omissions.
(c) The contractor is allowed to access the site to f'amiliarise himself with the
There are two main types of contracts, with their sub-types as listed below : nature of the soil and other conditions.
(i) Competitive bid contracts (d) Conditions for the execution of work uld time for completing are
(a) Lump sum contracts, predetermined and inentioned.
(b) Unit price contracts, aud (e) Excessive variatioas and omissions are not expected.
(c) Combined lump sum and unit price contracts. (tJ The work to be done and the inaterials to be used are shown on the
drawings and fully described in the specifications.
(ii) Negotiated contracts
(a) Cosl plus percentage of cost contracts, I A lump sum contract is uiisuited for following :
i (a) Difficult foundations in which Ule extent of excavation cmlot be
(b) Cost plus fixed fee contracts with a profit sharing clause,
(c) Cost plus fixed fee contracts with a bonus clause,
(d) Cost plus a sliding scale of fees contracts,
I I
ascertained, how many piles will be required, how difficult shoring 'md
dewatering of the foundations will be and how inucli time will be required
to complete the work.

(e) Cost plus a guaranteed ceiling price contracts, (b) Excavatioils of ind-eterministicquantities and nature of soil, that is, where
the bidders do not know how much work of excavation iilvolves rock or
(0 Management contracts, blasting in place of ordinary soil.
(c) Struclures that involve additions 'and alteratioils and tliose requiring
(h) Combined engineering and construction corltmcts, maintenance during the course of execution of tlle work,
(i) Joint venture contracts, (d) Projects that are subject to h,uards such as extremely cold weather, floods
and other situations beyoild lhe control of the contractor.
(j) Incentive type contracts,
(e) Emergency works whicll may have be to carried out without sufficient lime
(k) Equipment rental contracts,'and for preparing detailed p l g s before calling for cluotations,
(1) Guarmleed maximum cost. I Unit Price Contracts
These are discussed in the subsequent sections. In the Unit Price or Item Rate Contract llle estimated quantities are nlultiplied by
the respective nnit prices as given in the tenderer's bid aid the bid will1 the total
11.4.1 Competitive Bid Contracts lowest cost is the successful tenderer. The payment to the contractor is made on the
In these contracts, all those who are so inclined submit a bid and the contract is awarded basis of the quantities of specifically stated items of work as actually executed.
to the lowest responsible bidder. Responsibility means the bidder has sufficient workhig The unit price contract has many advantages and is dopled when it is not possible
capital at the particular lime; can furnish required sureties and guarantees; his record is to compute the volume of work in advance, or where the work requires large
free from defaulted contracts and unjustified litigation. In private construction the list of quantities of relatively few types of conslruclion. Though it is importan1 tliat plans
bidders may be selected by the owner or recommended by the engineer, and the contract and specificatioi~smust be complete and show the nature and details of the work,
may be awarded to other than the lowest bidder if it appears to be in tlthe best interests of its limits may be left inore or less indefinite. The engineer's certificate indicales
the owner. the magnitude and scope of work. Another advantage is tllat the contractor is not
Lump Sum Contracts forced to take on the risk of uncertain conditions, such as depth of excavatio~lsand
foundations work as he has to do under a lump sum contract.
A lump sum contract is one in which the contractor agrees to do some work for a
fixed lump sum amount, The payment may be inade in the form of partial or Further, variations in the amount of work c'm be made without forinaI.deviation
running payments on the aclual progress of work. The consideration named is one orders so long as the changes are restricted to h e items covered in the contract. '
and entire, so the contract is indivisible. In order that the contractor may ascertain Ule inagnitude of work, the lype of
There 'we two majn objections in this form of a contract : difficulties that may be encountered, zuld the probable cost of pkrformance, it is
necessary that general design and drawiiigs together with estimates of quantities
(a) it assumes that the amount of work necessary and all risks and liabilities are prepared at the time of ixlvitiilg tenders. After the conlract has been finalised,
cul be anticipated, and
suppleineiltary drawings can be prepared, sufficiently ahead of time so that the
(b) the bill of quantities prepared by the competitive finns are identical so that contractor may secure the necessary inforn~ationfor obtaining materials, inaking
dl tenders are strictly comparable. delailed drawings and executing the work. During the progress of construction,
A lump sum contract is prefered where the type of collstructioi~work is more or botll the contractor and the owner have to do considerable co~nputationin
less standardised and where it is impracticable to break down the work into,various comparing them.
Construction Contract There is a disadvantage to the contracbr in that he callnot be ibsolutely sure of the Legnl Aspects of
M~~ngen~ent
total cost of the work until the job is completed. C)n the other hand, 1le can avoid work and its esti~natedcost. Thereafter, fee remains fixed while actual cost of work Contracts
delay which would otherwise occur in making a large ~luinberof contract drawings may vary considerably from the estimate. The scope of work must be clearly
to show in detail everything that would be necessary as required for a Lump Sum defined and both parties should agree on the amount of estimate. This type of
Contract. contract is used extensively in constructing large buildings for which accurate
bidding estimates are difficult to prepare.
Combined Lump Slim and Unit Price Contracts
Considering the relation between owner, engineer and contractor, this type is ideal.
It may often be advisable to combine the significant features of lump suin and unit The contractor is selected on merit and paid a fixed sum for completing the work.
price bidding in one contract. Like, when the work includes items, details of which He does not inflate construction cost as his fee is unaffected. Indeed his profit
may be defined and broken down illto units but cluaritilies are indefinite. For such might decrease, depending on the provisions for reimbursement of his overhead
work, unit price contract is suited. If the sane project includes special items or costs, as overhead costs vary directly with construction costs. Thus, the contractor
structures involving a large number of types of construction, the recluirements of acts in the best interest of the owner.
which are exactly known and the contractor can prepare ail accurate estiinate and
bid, payment on a lump sum basis will be siinple for all conceri~ed.Tlle However, there is no incentive for the contractor to exert most efficiently, and the
contractor's bid includes lump sum anioullts for some iteirls and esliinate quailtities cost of work may increase thereby.
with corresponding unit prices for others. This type is suited to building A profit sharing clause in the contract serves as an added incentive to the
construction. Exact foundation conditions, generally indeterminate until the coiltractor to keep cost of the work at a miilimum if included in a cost plus fixed
excavation is done, car1 be covered on a unit price basis, while the superstructure is fee contract. The fixed fee is based on a preliminary estimate of the cost of the
well adapted to lump suin bidding sincc it is inore definitely plaimed. work. The profit sharing clause lets the contractor receive a share of any saving if
the actual cost is less than the original estimate. The contractor's share is 25-50%
11.4.2 Negotiated Contracts ofthe amount saved and is in addition to the fixed fee.
Negoliated coiltracls are awarded lo selected col~tractorsafter shidying tlle~r Cost plus Fixed Fee Contracts with a Bonus Clause
qualificalioiis, previous experience and facililies with Illem. Such contracts are restricted
to private coilstruction where they have many advantages under certi~iilconditions. When the owner desires urgent completion of the work, a bonus clause in a
During national eillergency o r war, legal restrictions are removed against negotiated contract serves as an incentive to the contractor to reduce construction time to a
goveriunenl conlracls by special legislatioil so that their advantages may he available for minimum. It is in the form of a fixed sum to be paid to the contractor besides his
coiislruction of defence facilities. After the war, normal procedures are resumed. fees, for each day the owner has full use of completed work before the originally
estimated date of completion. The contract may also provide for a fixed amouiit as
Lump suin and uilit price contracts may also be negotiated. However, in iiegoliated liquidated damages against the contractor for eace day of delay after the originally
contracts, it is assumed that the owi~erpays the actual cost of the work plus some estimated date of completion.
coinpensation for the services, facilities and technical lalowledge of t l ~ ecoi~tractor.
Contractor's coi~lpensalionprovided differs among the various typcs of cost-plus Cost plus a Sliding Scale of Fees Contracts
contracts. 111is is a variant of the cost plus fixed fee type of contract used in construction.
In negotiated contracts, the coiltractor provides the working capitxl 10 finance the Here, the contractor's fee changes with the actual cost of work according to n
construction. Later, he is reimbursed in full the actual cost of the construction plus his sliding scale of fixed fees. As in the profit sharing type this may be used as an
compensation for management, coordinatioil and execution. Tl~us,the terms o C the incentive to the contractor to reduce the cost of work by allowiilg the fee to
contract must anticipate rnetllods for the coiltrol of expeilditures i111dfor i'incling the actual increase in fixed amounts for various increments of cost less Ulan Ule original
cost. This is true of some items of the contractor's overhcatls and indirect cxpenses in his estimate and decrease in fixed amounts for various increments of cost Inore than
central office. These are dil'i'icult to assess, so an agreement as to some approxilnate the original estimate. In the latter case, a minimum fee is mentioiled whicll remains
melhod for their distribution should be made. Alternatively, they may he eliminated unc11,ulged with further increases in cost of work, thus assuring the contractor of a
altogether as items of cost, and the contractor's coinpeilsatioil nlay bc increilsed a rninin~umprofit.
reasonable amout~tto cover tl~em. This lype is a compromise between cosl plus fixed fee and cost plus percentage
To control expenditures, the owner approves all payrolls and purchases prior to placing of contracts by allowing contractor's compensation increase with cost of work
orders. Salaries of key inen is also subject to approval. Wagc ratcs iu-e those cxistiiig i11 according to desired sliding scale rates for various increments of cost ilistead of a
the locality and SO stipulated in Uthe contract. Tlle actual cost of the work ciln he constant percentage of cost.
determined oilly through a proper cost accountilig system anil Ihe account~ngmethods of The sliding scale fee (F) arrangement is given by
the contractor is subject to the approval of the owner.
Cost plus Percentage of Cost Contracts
where
This is the oldest type of negotiated contract wherc the contractor's prol'it is a fixed
percentage of the actual cost of the work. Like all negotiated contracts this type R = base fee rate,
allows starting construction before plans are completely developed, Ulus saving T = target cost, and
lime on completion of urgent projects, and the owner call innke any desired
changes in plans [uld specifications as the work proceeds. It has the disadvantage A = actual cost.
to tlie owner in thal tlle contractor's conlpensation increases with illcrease in To illustrate, suppose the target estimate, T, of a project is Rs 100,000 and the
construction cost. Thus, there is no inceiltive for the conlraclor to econonlise contractor's fee is to be Rs. 10,000 if the actual cost, A, of the project turns out to
during construction. A cunning contractor inay deliberately infli~teconstruction be Rs. 100,000. On this basis, the base fee rate, R, is 10 per cent.
costs to get corresponding increase in his fee. This may be done by padding
payrolls, taking conlmissions on materials purchaseti. etc. It is not recolninended Now consider following three cases :
for general use, though extra work imd change orders are handled satisfactorily. (a) Let A = Rs. 80,000, then
Cost plus Fixed Fee Contracts with a Profit Sharing Clailse F = 0.1 (200,000 - 80,000) = Rs. 12,000
Tllis type allows payment to contractor of cost of work plus a Sixed suin as a fee 12000 x 100
for execution of the work. The fee is found considering the nature and scope of Then, actual fee rate = = 15%.
80000
Construction Conlrnct join1 venturers which gives a clear arrangement for financing and inanagement of Legal Aspects of
(11) Let A = Rs 100,000, then Contracts
Managcrneni the work under the contract and the manner in which the risks and profits or losses
F = 0.1 (200,000 - 100,000) = RS 10,000
a e Lo be shared is a must. The joint venture agreement should be subject to the
approval of the owner and may be made a par1 of the construction cnauacl if
Then aclual fee rate = 10~OOx100 = 10%.
100000 desired.
(c) Let A = Rs. 120,000, then Incentive Type Contracts for Work Outside the Country
F = 0.1 (200,000 - 120,000) = Rs.8,000 There are many uncertaii~liesUI this lype of work, bul 111econtracts are of cost-plus
type. Typical hazards in overseas work are ui~slrlhlelilreign currencies, remote and
80000 x 100 oflen primitive living conclilio~is,lii~iiletland ui~lraii~ed nillive labour supply, 'and
Then aclunl fee rale = = 15'5,.
12000( difficulties of transpurl lurd communication.
Cost plus a Guaranteed Ceiling Price Contracts To give adtlitional incentive to the COIILrilcLOr to operate thc project at maximum
One objection' to cost plus types of co~ltrilclsis tliat the owner Ili~sno way of et't'iciency imtl nlininlum cosl ancl to penalise him h r inelficient work, a
ki~owingin advancc wlirll tl~cwork will cost. Tl~isol?jeclioi~is overcome by cost-plus-base fee conlract with irn incentive provision 113sbee11 developed.
placing amaxiinum limit on cost ol' work. Tliat is, llle contraclor is reimhursetl for I11 this, prospective bidders subilul Iheir c]ualificrltioilsto the engineer and those
actual cost of work plus his fixed Cec, provitled the loti11al~~ounl is less tllrul tlie found unsuilabltl i'or Lllc work are eliminaled from llle hidding.
maximum linlil:cstahlished in the contract. If Ihe lotal i~lllOu11tcxceeds the
inaximutl~linlit., the contractor gels n('~conipensalicn ovcr gu;lri~a[eedceiling price. This type of cnnlracl is uiu~ecess;uilycomplcx ant1 speculative, and, therefore, not
This type of contract removes some unccrlainties fro111orcliiiauy cost-plus coiltract recommencled for domeslic work.
bul requires tllat plxls iuld specificalicns for Ihe work i1l-e suf'iciently developed to Ecluipment Rental Contracts
establish a reasonable ceiling pricq.
Contracts for tlle rental of construclion equipment are often needed during Llie
Management Contracts course of construclion projects. This type of agreeilient is required when Ulc
Negotiated contracts inay anticipate Lhi~tconlraclor's l'orccs, equipmeill i ~ ~ d conlsiLclor lacks equipinen1necess;iry to do the work. Under cost-plus types oT
~ersoilnelare dilised on the work in the nornial miluncr ror gcnerill colitracl work, priine contracts the Kerllls of equipment rental coiltract are a direct coilceril to tlic
or contractor may be retained in n 111aliigcrialcapacity only. I11 tlle latler case, the owner. Ollierwise, setlleu~entof the inaller pertains o~llyto tlie contractor ,and the
entire work is supervised by tlie ccmtractor inclurlilig purchase oC nlalcrials, lliring renter of the equipment, iuld the owner is not involved. Construction cquipiilei~t
labour, and letting of sull1contracts. He may or nlay not do pruls oL'thc work with inay he rented on tlie basis of a luillp sun1 for the duration of t l ~ job,
e a fixed rate
his own forces. If only ~nruiageiiieutservices i~re'intentletl,it should be so stated in per day or per hour, i)r 011 Ihe.hasis of actual cost of ownership plus a
the contract. predetermined profit to the owner of lhc equipment. The agreelnent iilay or may
not include all operalion costs and all-persc)mel required in ils use. Frequently, a
Management contracts differ fro111brokernpe colilracls in which the contractor witll recapture clause is included whereby the rei~terinay take over ownership of the
owner's prior knowledge enters into a contract h:)r executing all or most of the equipment when the lotal rental reaches a specified ainount or in case of a breach
work by sub-contracls lo collect profit on work of each su11-conlractor. These are of tile contract.
not permitted. Mu~agemenlcollltadors iIre selecle~lhaseil 011 Iheir honesty or
technical skill aid ad~llinisteriil~ability. Guaranteed Maximum Cost
Architect-Engineer-Management Contl=acts Many owners have an objection to the cost-plus type of contract in Ihal the cost of
the project is not accurately known until alPer t l ~ ccoi~lpletioi~
of the construclion.
This was developed in USA during World War 11. This lype of contract delegates to This objection is overcollie by the cost-plus-fixcd-fee contract with a guaranteed
one firm of architects and engiileers for all planning, designing and ma~iageinent maximum. Under this form of contract, the contractor guarru~teestllal he would
phases. This type was used in t l ~ econstruction of ~llilitaryand industrial construct the project according to the plans and specifications and tllat the cost to
installalions will] xchitcctural and engineering mnstruction. This is no1 used oil the owner will not exceed some total rnaximuill pricc, For Ulis guarantee, tlie
large construclion prc!jects. contractor receives a fixed fee. In case the cost 01' llle nroiecl exceeds the
Combined Engineel.ing and Construction Contracts I guarruiteed m~axiinum,die excess suill is paid by h e contractor. Thus, a ceiling
Where the owner of a constructiol~pro.jiect desires to.dea1 with only one party for
all services, both engineering and construction, it is called a "turnkey project". The
1 price is established, which the owner is assured will not be exceeded.
The nlaxilnuili cost is deterininen by the contractor based on carelill cstimalus
coiltract may be on a firm price or cost-plus basis and all planning, design, plans, tllade from coinplete drawings and specifications. Such a contract eslablisl~esIhe
specificatioils and construction services are covered in one COlltraCK. This is not maxin~uincost above which the contractor will not be reimbursed. To inake the
ordinarily recommended. Actually, the engineer is an agent of tlie owner. He contractor keep costs below the guaranteed maximum an iilcentive is sometimes
inspects and supervises construction works iuid acts to safeguard the interests of provided in the for111of a bonus clause which states that the contractor and the
the owner during construction. I-Ie is an ii~terpreterof plans aid specifications and owner will share ally saving.
m arbitrator in cases of disputes between the owner and the contractor.
Joint Venture Contracts
I
I (a) Describe the two lnain lypcs of construction contracl.
Very large construction projects to bC accomplished under a general contract may I
require a larger concentration of fii~mcial,adminislralive, and technical resources I
(h) What are conipetitive bid contracts ?
that can be rnobilised by one construction company. Tllis has lead to joint venture
contracts in which many firms combiiie their assets, pla.111and persomiel to (c) "A particular type of contract is ilormally suitable for a particular situation."
undertake such a project. In a joint venture each party in the conlbilialion shares in Coinincnt and describe with suitable exainples.
the work, risks, and profits or losses of the contract accordillg to thc ternis of the
joint venture agreement. It differs from a corporatioli i11 that il is usually resuicted
to one contract and is not a continuing relationship.
A joint venture of several firms nlay enter into any of tlle usual types of
construction contracts acceptable to lhe owner. A written agreenieilt between the
the sale of ~naterialsmay, like othcr contracts, contain conditions. Purchase order f o r ~ n s
Co~~structiou
Managemcot
Contract SAQ 4 used 111 the construction industry usually include characteristic clauses or ternis pertaining
(a) What are lu~npsum contracts ?What are the special features of lunlp sum to the ~naterialsbeing ordered and their delivery.
contracts '1
Nornally, a purchase order is prepared by tlle party requiring tlle nlalerial u s ~ n gits own
Where is a lump sum unsuitable ? What .are the advaitages and disadvantages printed form. Any terms and conditions iilcluded are, therefore, directed primarily towartl
of a lump sum contract ? protecting 111einteresLs of the party and ensuring thal the materids and their delivery
what are unit price contracts ? What is a co~nbinedluinp s u ~ an i d unit price conform to Ihe requireine~ltsof the construction c o ~ ~ l r aand
c t the contraclor, However, it
contracts ? .'
is usual, that vendors will sell malerials only on Ule basis of their own terms and
conditions. Under such circunistances the owner or contractor must sign a purchase order
form prepared by the seller. By doing so, the contractor or owner'accepts all the terms
and conditions of the resultirig purcl~aseconlract.
t
Purchase orders must be prepared in detail wit11 due care and attelltion. I1 is of great
i~nportancethat they includc all the agreenlents, promises, and provisions relating to Lhc
I
procurement a1 hand. Tl~us,purchase orders besides describiiig a i d specifying the
I materials and clualtities lo be provided, also define the conditions pertaining Lo taxes,
SAQ 5 I
freight, shipment and packaging, insurance, time of delivery, discounts, credit terms,
(a) How will you find the cost of construction works !'
(b) What are negotiated contracts '!
I
1
guarantees, payment terms, and other such important matters. A properly prepared
purchase order can be of great importance to the owner or coi~tractorin the evelit of
ilnproper shipment, loss, tlanage, late delivery, shortage, or otller procure~ile~it problems.
(c) Wliat is a cost plus percentage of cosl contract ? I
(d) Wliat are cost plus fixed fee contracts with a profit s11,uing cl;luse ? 1
! SAQ 8
(e) What are cost plus fixed fee contracts with a boilus clause ?
II (a) What is a purchase order ? Why is a purchase ordcr iinpor1,mt ?
I

! (b) Who prepares the purchase orders ? WLlen does a purchase order becon~ea
conlrrict ?

SAQ 6
(a) What are cost plus a sliding scale of fees contracts ? I
I
(b) The target cost of a project is Rs. 250,000 and tile contractor's fee is to be
11.6 SUBCONTRACTS
Rs. 25,000, if the actual cost works out to be Rs. 250,000. What will be h e tees
For my major constructiol~operalion it is not expecled that any one coiltraclor shall
and fee rates if the actual cost works out to be Rs. 300,000 and Rs. 200,000 ? possess the skills in all the spccialised lrades and techniques that will h e required Lo
complete the work. In such cases the services of specialily coult'actors are utiIisec1 under
special agreements and kilown as subcontracts. I11 such silualions, a general conlracl,
called the prime contract is entered into between the owller ;md Uic generat contractor.
Thus, for all the work witllin t l ~ scope
e of the contract, the contractor becomes
responsible to the owncr. This holds for both the work actually exccuted by his work
Sorce'as well as that of Uie forces engaged by the subcootractor. The responsibility h r
SAQ 7 maniigemenl, scheduling <andcoordination of the subcontractor's work is ;~ssuinedby thc
prime contractor along with 11is own. Coordination is of great in~portrulccin s o ~ n types
e
(a) What is a cost plus a guaranteed ceiling price contract ? of work, especially in the conslruction of large sclicrnes where nlany types of specialisecl
(b) Wliat are matiagement contracts ? trades are required a1 specific stages of work. Some of the lypical trades include
(c) Wliat are hchitect-Engineer-Management contracts ? How they are different mechaiics, fabrication and erection, electrical work, air conditioning, foundation
from combined engineering ruld construction contracls ? treatment, piling, e tc. Works such as concreting, carpentry, painting, iiiaioruy, etc. are
performed by the prime contractor.
The agreement between h e prime contractor and the subcontractor is usually an oral one
or an offer and acceptance in writing. For works of iinportant naturc, it is reco~nmended
that a fornlal subcontract be enlered into belween the parties to define the rights and
reponsibilities of either ant1 Lhus reduce the possibilities of misundorstanding and dispules
arising during and after the execution of thc job. The f o r ~ nof subcontract is siinilar to the
one execuled between the owner and the prime conlractor, It should define such itellis
11.5 PURCHASE ORDERS AS CONTRACTS I
like the scope of work to be performed by the subconlractor, the compensation w11ich he
is to receive from the prime contractor, aud the tinre during which the work is to be
A purchase order is a written document that defines the collditions relating to a purchase completed. I1 should be stipulated that the subcontractor is bound by the ter~rlsof the
of materials. When a purchase order is signed by both the buyer (owner of the project, if prime contract, the plans and specificatiolis so far as the work included under the
he is required to arrange for the materials, or tlie contractor if supplying materials is his subcontract is concerned.
obligation) and the seller (material dealer) it becomesia purchase contract between tlie The formal subcontract may include oU1er terms requireti lo establish the special
two parties. Although there can be oral purchase agreements, such contracts are not relationships between the prime conlractor and the subcontractor, wllicll should Slate l h t ,
enforceable if the price of the goods is very much. Oral supply orders often lead to in the event of a conflict arising between m y of the requirements of thc prime contract
di'sagpements concerning the terms of the agreement and are to he avoided. Contracts for
Co~lstructionContract
~magelneht'
aiid tliose of tlie subcontract, the terilis of the prillie conkact ;ue to govern, and that both (c) Wlio is responsible L'or the quality nl~clclui~iLityof work executed by a
the parties ;Ire so bound. Tlie owner lias the right to approve or disapprove the selection subcc>ntractor'?
of uiy subcontractor by the prime contractor.
(d) What u e tlie types of subcontracts !'
As far as the quality and quantity of the work is concer~ied,tlie owner of the work does
not recognise the subcontractor. I11 Such matters, the owner holds tlie prinle contractor (e) How are subcoiitracts awarded ?
directly responsible for the subcoi~tractor'swork. It sliould be acknowledged, that tlle
subcontractor has very definite legal rights whicli have special implications to the owner.
For example, should the prime Contractor fail to make payments to the subco~itractor,the
owner may be held responsible for the indebtedness. To avoid sucli problems, the owner's
best protection is to require the prime contractor to furnisli a surety bond guaranteeing the
payment of all costs for materials, wages, aiid other expenses, including ayinents to

from all claims and liens in connection with the work, perfor~iledby all tlie
1
subcontractors. The owner sliould also require the prinie contractor to su nlit releases
11.7 SELECTION OF TYPE OF CONTRACT
subcontractors, before the filial payinent is inade to the priine contractor.
Though the selection of the type of contract forin is, strictly speaking, a fuiiction of tlie
It is usual to have all subcoiitracts for specialised phases of construclion work awarded on owner, it usually depends on the engineer to furnish recommendalions on which tlie
a co~iipetitivebasis disregarding the type of the prime contract though souie coiltractors owner may base liis decision. In innking tlie decision tlie fulida~lielitaldifferences
deal with favoured subcolitractors on a negotiated basis. Subcontracts may he of tlle lunip between coinpetitive bid and liegotiated contracts sliould be clearly u~~derstoc~)d a i d kept
sum type, the unit price type, or a cdmbiiiation of the two types. Subcolitracts are the constantly in nlind. A coinpelitive bid coiitracl is a straight forward business transaction
responsibility of the prime coiitractor, a i d the basis on which they are drawl1 is of no in which the oinler takes liis chances in xi open m,uket. He agrees Lo pay a specific price
concern to the engineer or the owner, except that all subcontracts are subject to the for a definite service, and coastait inspection and supervision are required to make
approval of the engineer. Under cost-plus prime contracts, all subco~itractsare items of certain that tlie service is co~upleredin tlie nianner prescribed in tlie coiitracl. In contrast,
reimbursable cost, uid therefore their ainomits aid t e r m should be closely scrutinised.
under tlie usual types of negotiated coiilracts the owner. 2nd Uie conlractor are putners
Under these conditions negotiated cost-plus subcontracts sliould iiot be permitted, .pd witli a coinmoil objective, namely, Lo complete tlle work in accordailce with tlie owner's
usually a minilriuin of three conipetitive bids sliould be required for all subcontr;lc~sto requirenlents as cluickly a i d as ecolioniically as possible. In tliis case eilipb,,14s
: is on tlie
ensure that the cost of the work is kept to a minimum. coiltrol of expenditures, which ;Ire reimbursable to the colitractor, as well as on inspection
Uiider a cost-plus-fixed-fee contract, it is usually expected that the pri~necontractor will ,and supervision of liis workmruiship.
execute about 50-80% of the work with liis own forces and that the reinainder will be It will be advantageous to the owner to adopt a competitive bid contract when sufficient
done by speciality subcontractors. But, as the trend tow,wds specialisation in tlie
time is available to work out tlie plans 'and specificatiolis in.detai1, Ulus nlini~nisingcostly
construction industry continues, a change io tliese proportio~islnay be rmticipated. The changes ruid extra work orders at a later date; when activity in tlie collstructioii iiidustry is
amount of work to be dolie by the speciality subcontraclors will also depend upoil the at a low ebb, tlius iiisuring keel1 coilipetition m d lower bids; and when sollie control can
uiiderstanduig wiUi the general contractor when ale prillle contract is negotiated. It is be exercised on tlie quality and character of the bidders.
usual to retain the general contractor as a coiistruction manager and adiili~listrator,with
the understanding that practically all of the work will be executed'by the subcontractors. A negotiated contract will be indicated wlien it is desirable to begill work before
completion of detailed plans aiid specifications, thus assuring earlier completion of the
11.6.1 Awarding Subcontracts work; wlien tlie recluirements of tlie project caiulot be deterlililled definitely in advauce of
Bids on subcontracts are usually on mi illforinn1 basis, a i d , strictly speaking, are a matter the early phases of construction; or wlien h e nature of the project is such that a11 accurate
between the prime contractor and the subcontractor in as much as the prirne contractor estimate cil~ulotbe made for bidding purposes.
assuines full respoiisibility for the work so executed. However, the owner sllould exercise. When a decision lias been iiiade between a competitive bid and a negotiated contract, an
seine restraint over the award of subcontracts by specifying that all subcolitractors are ,malysis of the unique features of llie project will usually indicate tlie most suitable
subjecl to the approval of tlie e~igiiieer.Tiiis is desirable lo assure conipeteiit vkiation to adopt. This selection will be as significalit as that deteriniliing die general
workmansliip aiid to avoid delays and other difficulties tlial inight occur with tlie type.
acceptxice of unqualified subcontractors. Whetlier the selectioli of subcontractors should
be subject to approval beforc or after tlie award of the priiile contractor is a controversial when a competitive bid contract is selected, a decision must be made between the lump
question. If tlie prime contractor is required to submit a list of liis suhcoiilractors with liis sun1 and unit price types. This will be based upoil the type of construction uivolved. In
bid, some protection is available to the subcontractors in t1i;lt the priliie contractor is not general, the lulnp suin contract is uscd for building col~struction,ecluipinellt, a i d
machinery. Tlie unit price forill is used for most kinds of engirieerilig construction, such
perinitted to bargain with tlie competitors for helter prices after the award aid thetehy
increase his profit over that ellvisaged in his bid. 011 the other Ii;uicl, it is soinetimes as bridges, clams, highways aiid foundations. However, local coilditions luay lead to
expected that the prime contractor is entitled to receive the benefits of tlie best bargain exceptions to tliese rules.
, oblainable in as mucli as the owner's interests are iiot involved. m i e n tlie owner decides upon the use of a negotiated contract will1 a selected contraclor,
Generally, the tenders fc~rsubcc~ntractwork should be invited on the basis of tlie the choice of tlie type of contract will usually be restricted to one of the variations of the
specification requirements and of general design and bill qf quantities. It is imnportiuit tliat cost-plus-fixed-fee forill, in view of the disfavour in which the cost-plus percentage type
the hills of quantities d the main or prime contract and thohe of each subcontract should is held by most engineers. The particular variant to be adopted will depeild (?I] local
specifically state the duties of the maul contractor in relatioli to the subcontract work as coliditioiis or personal preference. It sliould, however, be noted that practically all
well as working facilities, services or supplies which the subcontractor shall be entitled to variatiotis introduce additio~lalspeculative elelilcnts into tile contract as colllpared with
receive or share with the iiiaiii contractor and those which the subcontractor will have to the straight forward fixed-fee basis and in inost cases coml~licatethe paylllerlt provisions
provide himself. of the cowact miecessarily. An exception to this rule is found in co1lstructi61l work to he
performed in rernole and prilllitive areas. For these coliditiolls mi incentive type contracl
SAQ 9 is indicated.
(a) Why are subcontractors lieeded on a major coilstructioll project ? It sliould be noted tllat a colllract iiiay be ~iegotiatedon a lump sun1 or unit price basis as
well as. on a cost-plus basis. OrdbiIuily, however, tliis wouId require relatively col~iplete
(b) type of agreement is entered uito between a prime contractor aiid a plans and specificatioi~s,and in nlost instaices, it would be to tlie owner's advantage to
subcontractor ? obtiiin conipetitive bids.
C o ~ l s i ~ - u c tCo~ltlacl
io~~ SAQ 10 Legd Aspcctu of
Maliage~~~c~~f obtainhg coverages such as worker's compensation insurance, employer's liability Contracts
(a) How will you select tlie type of conlract for a construclion work '! insurance, and comprehe?sive general liability insurance. Property insura~ceto protect
(b) What are the advantages of a competitive bid cont~lctto tlie owner ? the project and liability inburance to protect the owner may be made the responsibility of
either the owner or the contractor, depending on tlie contract. There are many types of
special insurance often required in a contract when the construction involves unusual
risks or conditions. An insurance policy is a contract under wliicli the insurer promises,
for a consideration, to assume financial responsibility for a specified loss or liability. The
policy contains many provisions pertaining to the loss against wliich it affords protection.
The law of insurulce is identicd with the law of contracts. A loss suffered hy a
contracting firm by its own deliberate action calu~olbe recovered under an iiisurlmce
11.8 PROJECT INSURANCE policy. But, negligence or oversight on the part of tlie contractor will not geiierally
- invalidate the insurance contract. The contractor inusl pay a prelniunl to the insurance
Conslruction contracts make the generd contractor responsible for tlie project until it is company as the consideralion against the promise of protection to cover the designated
accepled by ttie owner. Therefore, it is necessary for the coiltractor to take all reasonable loss. For the policy to become effective, the prenlium has to be paid in advance and most
stcps to protect the property lrom loss or damage and to see that adequate insurance is insurance co~npuliesinsist on tlle same. If tlie contractor suffers a loss covered under the
provided for [his purpose. Most construction contracts require that project insurance be insurance policy, the contractor cannot recover inore th,m the loss; tllilt is, a profit camlot
purchased and inaintailled for the whole project to tl~efull insurable value thereof, be made at the expense of the insurance company.
iiicluding all suhcnntracled work. The nature or the work, its geographical location, and
llie seas011 (luring which the work will be performed are features which may lead to 11.9.2 Insurance Claims
properly danlage to Llie project itself mil to the stored materials. On building A written notice or report should be made to tl~einsurai~cecxrier aid other parties or
conslruction, the loss potelitial is usually large and diverse iuid call h~cludecollapse, every loss or liability for which Ule contractor's insurance inay be responsible. Accident
explosioii, fire, frceziiig, physical damage of a wide variety, smoke, vnldalisui, water, reports are lo be sub~ilittedin case of all compensable accidents to employees. I11 case of
and wind. Mi~rinestructures can be especially vulnerable to collapse, collision, ice, tides, accidental injury to a person who is i ~ o an
t employee, the coilhaclor should subinil a
waler currents, wave aclion, aid wind. In a general sense, Ihe 11ighway conlractor has to complete report of the inatter to tlie company carrying its comprehensive general liability
face u)nlparalivrly fcw hazards 10 project property, U I eleiilel~ls
~ of 11atwepediaps insurance, for his ow11 protection. Accidents involving noto or vebicles inust usually be
coulrihuling lo Ulc grcalest risk. reported both to the insuralce company and to law enforcen~elitageiicies on special
The pr[.jecl insurance 111ay be provided by the owner or the prime contractor, as laid forms provided for the purpose. Property damage is reported on a proof-of-loss affidavit.
~ O W I ill
I 111emiltract. However, wlloever buys h e insurnae, the inteatioil is to protect t11r However, final settlelllent is made on the basis of a detailed schedule of costs.
interests of tlie owner, the prime contractor, tlie subc~mtraaors,and perhaps the lending It is wise for Uie col~tractorto designate a person in his orga~iisatiolilo assui~ieconiplcte
agency in the eveiil a loss occurs and to provide finmces for repairs or rebuilding. responsibility for matters pertaining to insurance, to ensure tllat clainls (we properly 111ade
Project insura~icesl~ouldbe procured so as to meet tlie specific risks intrinsic to the work, md followed up. Besides filing reports and claims, this person tnusl be familiar with all
Builder's risk policies are slandard on building construction. An all risk installation aspects of the various insurance policies of Uie contractor ru~dof the subcontractors. The
policy is used on water mid sewer conlracts, where there is little or no exposure lo fire person is required to keep a checklist of all coverages, have all new or potelitial
and otller llazxds. Policies designed for specific bonstruction hazards in bridges, special construction contracts exanlined for insurance requirements, make necessary renewals
constniction uid tunnels are available. Highway and c~lgineeriligcontractors often carry and cmcellations, inaintaii~a file of subcontrac~ors'illsurance certificales, and gel~erally
110 insurance and depend on "acts of God" contract clauses to protect them from major oversee the contractor's hisur,mce program.
d ~ i l a g to
e tile project. A typical clause of this kind provides that tlie contractor will lnnke
good all damage to my portion of the work, except those damages clue to uilforeseeable SAQ 12
causes beyond the control of and witllout the fault of the colltractor including acts of God (a) What are insurance contracts ?
or extraodriuary action of the elenients. An act of God is defi~~ed as a n;llural occurrence
ol' enormous and ullpreceda~tedmagnitude, whose proportions and destructive~lesscould (b) What does the law of insurance require to meet the damages suffered by I;.
not have been forecast and provided against by tlle exercise of ordinary foresight. contractor '?How should insurmce clainis be made ?

SAQ 11
What do you understand by "project iiisurance" 'I Who provides for project
iilsurance '?How sllould project insurance be procured '1

11.10 PROCEDURES FOR DISI'UTES AT LAW


For resolving disputes equitably, econonlically uid oil ;I rcal time basis a disputes review
bokd is constituted. The board provides a forum that foslers cooperalion between Ule
owner and tl~econtractor. The result : disputes are tninimised, project delays and costs on
11.9 INSURANCE CONTRACTS,.ANDCLAIMS account of disputes are decreased and bid prices reduced.
(.he must know what are the insurance coi~tractsand insuraiice claims. These are Soon aftek the award of a colltract and before any disputes arise, a tllrec party board is
described in the subsequent paragraphs. formed. The function of the bond is to lieu the disputes on nl informal basis and provide
recommendations for their limely resolutio~~. Tile board is, thus, in a position Lo act
11.9.1 Insurance Contracts expeditiously and resolve the disputes, before the parties adopt a tough stand leading to
It is standard practice tliat mnstmctin~contracls require the a)ntractor 8:) provide certain litigation.
insurmce coverages. Construction caltracts niake the cul~lractorresponsible for For tlie success of tile boxd, tlie selectiol~of in~parlialand qualified members is
important. Both tlie owner and the contractor should have confidence md belief that thb
I.cgd Aspects of
members are genuinely impartial. The owner and the contracLor are responsible for the 111il.dparty attempts to assist the disputing parties iii reaching an agreeable settlement, Contracts
!
selection of the n~embersto achieve this end. wllile lacking s l y power to iirlpose a decision. Mediation has been long associated with
ilisputes arisllg o ~of~labour
t contracts. It is now beiug applied to construction contracts
Tile disputes review board is not a replacement of the otl~erdispute sellle~~lent methods ill wIiic11 situations arise where Ule disputants seek outside assistu~cein settling tlieir
available. It is just an intermediate step wiUi Ule inlention of facilitating resolution of
differences.Mediat,ion is a purely voluntary process. The ~necliatorcan only seek to assisl
disputes in a timely and equitable manner not involving Sorrnal judicial procedures.
the parties to reich a direct settleinent between U~einselvesbut carnot iinpose a
Tl~eboard meetings are conducted at the work site, usually over three or four ~nonths,01 settlemnent. Metliatioli can be provided for by contractual agreement or resc:~rtedto by
as necessary to keep abreast of develop~nent.Besides these, Ule members are provided mutual consent.
with periodic progress reports. Thus, the board members ;Lt.e acquainted with all elements
In mediation, the parlies to a dispute submit ti) tlie mediator, who would be an cxpert in
of the project.
the construction industry, a sunnnary of their positio~lswit11 docuineiitary proof. The
Although the board reconlmendations are not billding on eill~erparly, the~eis a strong medialor meets the two sides, togelller and separately. I l e mediator lellseach party about
incentive to accept the findings of a board Uius constituted. The recom~la~dations of tile its strengtl~sand weaknesses without revealing ru~ytllingabout the other's position. At a
board have a practical finality. It is difficult lo imagine either parly spendiug Lime and later stage, the rnediator suggests a settlement 10 bolh sides which they :we l'ree to accept,
nloney to tlie dispute to recommendations of an impartial board of informed experts re.ject, or negotiate. If no agreenx~ltis reached, the parties may the11 resort to litigation o r
before a judge or jury. But, if a dispule goes to arbitration or litigation. Ule proceedings arbitration to resolve their clisputc.
and recon~mendaliollsof the board sliould be made available as evidence.
The existence of a dispute review board fi~stersii more coopesativc rclatiousliip between SAQ 14
the parties sd ulte~iprovides tlle impetus for settle~iie~lt of dispules witl~oatul)peal to the (a) What dc).you underslaid by mediiltion ?
board. The knowledge Ulat trusled experts are familiar with tlie entire situation ai~dwill (b) How does.mediation help in resolving disputes ?
reconmend a fair settlement further reduces the postu~ingand g:~n~eslnxisl~ip that so
coln~nonlyoccurs in convenrio11;11dispute resolution process.

11.10.1 Consumer Protection


The eslablishment of consumer bureaux in some countries and consnmer courts 111India
has strengthened action a1 h e goveninlent level to protect tlie i~lterestsof llle consulners
against fraud. -

What is h e role of tl~esecourls ? Some of the duties entrustetl to these courls are as 11.12 ARBITRATION
follows :
Soine contracts pernlit settlelnenl of disputes and claims by arbitration. Different
(a) to protect a centre for the receipt and iiivestigatiol~of all connplaints received governillents provide their own rules for uhitratio~i.The salient features of all arbitration
from the public, rules are about the saiiie with some slight n~odificationto suit parlicular governtnents.
(b) lo mediate disputes between tlie consumer md'the violalor wl~ereverpossible, The nuinber of members of arbitration boards range from a 11Ih1imurn of one lo a
(c) lo recolnmetld legislation where none exists, maxi~nunlof five. Members of arbitralion boards are chosen for tlieir background and
ability with respecl to the bchnicalities of the cluestiol~sbeing arbitrated. The Inember
(d) to institute a progranune of continuu~geducatior~of the consumer to enable l~iin
to avoid fraud and to find relief if he has been victi~dsed, should be judicious ;u~dfair.
The participa~tsin arbilration proceedings are allowed a voice in tlie selection of
(e) lo pronlote business self-regulation,
n~en~bers. Very often, arbitration hoards are coniposed of three members, one selected by
(t) to co-operate with private agencies such as cl~ambersof colnmerce and bar each of the participants, u ~ ad third selected by the two previously approved.
associations,
Arbitration proceedings approxil~~ale a court hearing. All Les tiinony a1 the hearing are
(g) to establish a "fraud alert" operatio11to w'un local govermlent agencies or recorded, and an accurate transcript ~llacle.Witnesses sl~ouldi~presented and heuct by
state-wide or regional frauduient activities, the board, which is in a position to query them.
(11) to co-ordinate the work of all consumer protective activities of the slale Initially, a detailed statement of Ule complaint by tlle contractor is filed auld supportetl by
government. documentation. In addition, a cornp'lele chronology of perlil~elithappenings ant1 hcts is
filed wit11 the complaint, aid a complete file of correspondence exchanged by the parties
SAQ 13 on the niatter is inade available. The contraclor sliould prepare in advance, ilu agelida for
(a) How are disputes resolved under law '1 his own presentation. -
(b) What is a disputes review boazd and who are its memnbers'?What are the The contractor should select his witnesses aid coach them on Ule kind and scope of
advantages of such a board '1 lestimoiiy desired for their presentation. Tliey sl~ouldbe provided wid] a11 opportunity to
refer to the record for the purpose of refreshing U~eirineinory eoncenling facts and
(c) What are duties assigned to consumer courts ?
circuinstnnces. Without fail, the contractor's lawyer should very niuch be involved in the
planning for and preselitation of tlie case before the arhilrators.
The owner will also present his case to refute tlie claillls of Ule contractor, and will have
tlie same opportunity to be heard as the contractor, a i d be subject to tlle s u l x rules.
It is presumed that the t'indings of the arbitralion board will be based on equity, but
11.11 MEDIATION notably, the board is not bound by the law, ru~dmay be influenced by other factors
contrary to the intended functioning of an officially co~~stituted courl.
Mediation is a method of dealing with disputes in the co~~struction industry. Mediation is Arbitration proceedings are much inore expeditious than court actions. Uufortunalely
a less formal procedure as compared to arbitration and is an alternative course of action they are prone to produce conlpronlises 01the rigllts of the pxties being hextl,
available in the early stages of a dispute. In mediation a mutually agreeable a ~ impartial
d appxently for the purpose of disposing of llie matters involved.
Constmetion Coniract Some contracts provide that decision of the arbitration board is final and binding on the Legd Aspects of
Management Contrnci-
parties. Under such a provision, the contractor may have no other alternative for possible
relief. If however, court action can be pursued and arbitration is not the only recourse, the Activity
contractor may accept one or the other. A water resources project consists of a concrete dam and a power house at
the toe of the dam. The foundation exploration lias been done in some areas
If the contract does not make the decision of the arbitration final and binding, the of the dam but detailed exploration has not been done for the power house
contractor would be in a position to file a court action contending that the arbitration area. It is proposed to go in for competitive bidding. Discuss the merits of
board erred in its findings, and petition Ule court to review the matter. the different types of contracts possible and suggest the best type of contract.
11.12.1 Indian Arbitration Act
The law on arbitration in India is at present substantially contained in three enactments,
namely, the Arbitration Act, 1940, the Arbitration (Protocol and Convention) Act, 1937
and the Foreign Awards (Recognition and Enforcement) Act, 1961. It is widely felt that
the 1940 Act, which contains the general law of arbitration, has become outdated. The
Law Commission of India, several representative bodies of trade and industry and the
experts in the field of arbitration have proposed amendments to this Act to make it more
responsive to contemporary requirements. It is also felt that our economic reforms may
not become fully effective if the law dealing with settlement of both domestic and
international commercial disputes remains out of tune with such reforms. Like
arbitration, conciliation is also getting increasing worldwide recognition as a11 instrument In this unit, you have learnt about legal aspects of construction contracts. You have been
for settlement of disputes. There is, however, no general law on the subject in India. told the various but essential elements of a contract, and the various types of conshction
contract. When a contractor has to assign a part of the work to another agency, he has to
A few of the important clauses are described below, For a fuller understanding yyo may
be working under provisions made under sub-contracts. When materials have to be
refer to the Arbitration and Conciliation Act, !996. arranged for a project, a contract has to be entered into between Ihe supplier and tlle
Some Important Clauses purchaser. The project has to be protected against damage or loss till the contractor hnnds
"Arbitration agreement" means an agreement by the parties to submit to arbitration it over to the owner. To safeguard against any liabilities, the project has to be insured by
all or certain disputes, The agreement may be in the form of a11 arbitratioli clause the contractor with some insurance agency. Many times, there will be differences between
in a contract or in the form of a separate agreeme~lt.The agreement should be in the owner and the contractor as to the various aspects of the project. The differences have
writing. to be resolved to the satisfaction of both parties. A legal solution, which can be realised in
a court of law, is both time consuining and expensive. When disputes arise, a less
Number of arbitrators : The parties are free to determine the iluinber of arbitrators expensive option available is through mediation and arbitration. The contract provides for
provided that such number shall not be an even number. protection to the consumer. This aspect bas been discussed in this unit.
Equal treatment of parties : The parties shall be treated with equality wid each
party shall be given a full opportunity to present his case. 1 1 . 1 ANSWERS TO SAQs
Finality of arbitral awards : An arbitral award shall be final and binding on the
parties and persons claiming under them respectively. Refer the relevant preceding text in the unit or other useful books on the topics listed in
the section "Further Reading" given at the end of the block to get the answers of the
11.12.2 Indian Contract Act self-assessment questions.
The Indian Contract Act was enacted in 1872 and is being followed even t0day.wit.b some
modifications. It extends to the whole of India except for the State of Jammu and
Kashmif. The Act was an outcome of different systems adopted in the forin of legislation. .
The Act originally contained 11 Chapters, but in 1932 the last Cliapter 11 was repealed by
the Indian Partnership Act.
The Act deals with the m'anner of making valid agreements, contracts, its kind, manner
and possibilities and impossibilities of performance, parties to such performance,
quasi-contracts, and breach of contract and its consequences. Apart fro111it, it also covers
indemnity, guarantee, bailment agency and the effect of contracts through agency.
In this way, the Act is comprehensive piece of legislation. For a fuller cliscussion, you
may refer t o m e Indian Contract Act, 1872.

SAQ 15
(a) How is an arbitration board formed ? How are arbitratioli proceedings
conducted ? How it is different from litigatio~i'2
Describe the various provisions of Indian Arbitration Act as arbitration
agreement, number of arbitrators, treatment of various parties and finality of
arbitral awards ?
Discuss some aspects covered in tl~eIndian Contract Act, 1872.

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