UNIT 13 IMPORTANT CONTRACT

CLAUSES
Structure .

13.1 Introduction
Objectives

13.2 Terms of Payment

13.2.1 Payments on Account or Partial I ' I! nl -III.

13.2.2 Final P n y m c ~ ~ t
13.3 Retention Money
13.4 Acceptance of Work
13.5 Maintenance Period
13.6 Time for Conlpletion
13.7 Extension of Time for Colnpletion
13.8 Variation in Works and Conclilions
'13.9 All Disputes Arising nut of the Cn~llracl
13.10 Clainx and Disputes
13.10.1 Claims
13.10.2 1)isputes
13.11 Liquidated Damages
13.12 Termination of Contract
13.13 Rights of Various Interests
13.14 Responsibilities of Concerned Agencies : Archilecl,
Engineers, Conlractor and Ow~ler

13.16 Changcs in Plans iind Specifications

13.17 Orders lor Changcs or Dcvialioi~s
13.18 Suinrnary
13.19 Answers lo SAQs

3 . 1 INTRODUCTION
As mentioned in Unit 11, a ccnitracl is an agreeme111at law. Right l'rom issuing "Nolicc
Inviting Tender (NIT)" lo awarding contrncl, a well laid procedure is adoptcd aild viirious
terms of payment within specified time frames are defined. Responsibililies o l various
concerned agencies are also well specified. These all paraillelers or a contract arc covecctl
under different coiltracl clauses. In Ulis unit, you will learn aboul soirle oC Lhc i~nlx)rt;u~t
clauses illat are conlnlo~llyused in contracts.

Objectives
After studying this unit, you sl~ouldbe able to
explain the tenns of payment in cc)iitract,
describe inaintenalce period, time for completion ;u1d proceclurt: of cxlension
of time for completion,
discuss the mechanism of settlement of claims, dispules a11d licluidated
dmages,
explain the rights and resporlsibiliti,:~of various concerned agencies, i.e.
architect, engineer, contractor and owner, i~nd
discuss the prt~cedureof intmtlucinp ch'mges in the plans and specifications
during the execution of the contract
 Import.mt
Construction Contract
Management 13.2 TERMS OF PAYMENT deductions to be ~nadefro111tlle contractor for lllillor rectifications in tlle work accepted Cont~-aetClauses
in lieu of its removal and replacement.
Paymenls to the contractors are made in two forms :
A No-demand Certificate is to be furnished by tlle contractor to lhe owner releasing all
(a) Payments on account or partial payments, ,uld claim5 or liells arising out of the contract before lhe final payment is made. Wlieil arly
(b) Final payment. claim of the owner is oulstanding against the contractor, the ainoullt of tllc claim is

I
13.2.1 Payments on Account or Partial Payments
No contractor will be able to finance all costs of tlie project which may extclld over a
long period. In order that there is no l~indrance11the progress of work due to the
difficulty of tl~econtractor, due to his fin,ulces provision is made in mnstruction projects
for Payments on Account or Partial Payments. Payments are soinetinies made in
instalments on the completion of particular stages of work, and sometimes 11ot less than a
fixed ainoui~ttllat represents a percentage of the work to be executed. Quite often the
payment is made at fixed intervals, for example, moiltlily payments in respect oS work
done upto the end of Ule previous month ,u~dInay be also for niaterials delivered at Ule
site. It may be necessxry on large projects to pay in alternate months to reduce the arr~ount
of workiilg capital. Such payments are generally made 011 a certificale issued by tlie
engineer who estimates. For the purpose of the certificate the amount payable is worked
oul on account of the estimated contract value of the peril~alrentwork conipleted during
the month as also wiy temporary works or conslructional plants and equipl~~ellt and
materials, if such payments are lo be inade.
The c o ~ ~ d i t i oof~ lcontract
s stipulate the method of ntakillg payment ;u~dthe nlethod of
determining tlle sum to be paid. It should be mentioned whether t l ~ epaynielits are to he
based on monthly estimales or progress certificates on coinpletion of various stages, wliat
percentage of payment would be withheld and for what duration. It should also he stated
deducted from thc Final Account uld retained hy the owner till the dispute is settled. If
f l ~ econtractor has m y ui~salisfiedclairl~sagainst the owner on accoul~tof damages, extra
work, or for iuly otlier reason, thc payment of the Final Bill is not lo be withheld on
account of the specific unsatisfied claims being ulcluded in No-demand Certificate
furnished by the contractor.
Whcn here is 110 clilin~.ollhc contractor against tl~eowner, and no rccovery is to be made
in favour of lhe owner, t l ~ csum duc to the colilractor in tl~ecase of a luinp sum contract is
the lender price ulii~usthe amounls of all iiltermerliale or running paylllelits that have
been made to him.
hl unit price ulntracts, ineasuretents of cacll iteiil of paynlent are inade and final
qua~ititiesworkcd out R)llowing which Ule total cost is calculated by ~nultiplyillpthe unit
rates with respective quantities. From this totid cost all the running payments tlial
have beell inade are deducted to get the sum due to the conlracbr.
SAQ 1
(a) Wl~atare the two f o r m of paymenl to contractors '1 Discuss in brief.
(b) What are partial payments and when are Uley made to tlie conlractor ?
(c) What is me;uil by fillid payment ?
I

that the contractor would be paid upon the certificate issued by die en&' T~ileer. (d) To wliat extent some amount of each paylnent is retained by the owner and in
which situation ?
By a certain date of each nionth, the contractor subinits a written statclnent statil~g
(a) the value of the work iilcluding materials actually iilcluded in the work upto the
lirst of the monUi, aid
(b) the value of Uie coiiiponents fabricated at the conlractor's worksl~opand
materials delivered at tl~esite but not consumed in the structures, deducting tl~e
total of previous payments.
(.In wlit price or itell1 rate contracts the quantities are calculated under the variol~sitems
which are measured in detail. On lump sum contracts, the paymcnts on xcounl are made
13.3 RETENTION MONEY I

as a percentage of Uie total value of the work to be done.

For construclioli jobs, Ule owner gives ail advance on account to the contractor beforc he
It is usual that 10% of the value of work executed during each paylneilt period is retained actually starts the work. As tlie work progresses, the value of the work executed plus tlie
I
by the owner as retention nloney. This nloney is to meet clai~nsand contingencies against materials delivered to Ihe site of works each inultiplied by tIie co~ltractrates gives lhe
llie contractor arising due to tolal aniotult. The dit'ference between the two ainounts is termed as "retention mclney"
(a) failure of contractor to pay the subcontractors, suppliers L U his
I ~ employees,
This sum though earned by the contractor for the work done is withheld by the owner
from the monthly payments rnade to the contractor and usually limited lo 10% of t l ~ e
(b) damages caused to adjacent property or to work executed by motller coiltractor, value of the work done at the contract rates. This ui~ountis retained by the owner till the
(c) defective work not rectified by the contractor, end of the maintenru~ceperiod and released to the contractor only after tlle ellgilleer or
xchitecl issues tlie final cerlificate.
(d) excess payment discovered so that the remaining work calllot be completed for
the unpaid balance, llie purpose of the retention money is to serve as a 11irld by the owner on the contractor.
Should thc contractor fail to complete the work or rectify tlle defects, tl~erlthe retention
(e) excess materials supplied by the owner for the structure, money held as a security for the perfor~nanceof tlle work is utilised by the owner to be
(f) evidence that the co~~tractor
may not conlplete tl~ework, and paid to mother contractor. When full performance under Uie contract is achieved, tliel~the
retention money is paid to t l ~ econtractor as a part of tlle firial settlement.
(6) disputes arising on account of measurements and pricing oC extra itenls.
Payments on Account are treated as advances to the contractor and have to be adjusted in SAQ 2
the Final Account. The value of work done for the purpose of Payment on Account is not (a) What is retelltioil money ? What is the purpose of retention molley '?
the actual cost b the contractor but it is the value of the partial performame of work as
measured and priced at the contract rate for the entire work. (b) "Thc retention money is to meet clai~nswld corltingetlcies agaiusl the contractor
arising due to his negligence." Co~lullent,
13.2.2 Final Payment
While a percentage, usually 10% is deducted when making Paylnents on Account, the
procedure followed in making the final payment is different. It is necessary for the
, engineer to make a final inspection of tl~ework as a condition to its formal acceptance by
s I
44 the owner before the final payment is made to the contmctor. In the filial inspection, tllc
items noted are any variations in the work, defective work requiring rectification, and any

ConstructionContract
Mmqement 13.4 ACCEPTANCE OF WORK
I
Construction contracts state that the work is to be done to the approval or satisfaction of a
third person, usually the engineer, architect or surveyor on behalf of the owner and that
his approval would be final and conclusive. It means that the decision of the third person
is reasonable. His approval or disapproval is conclusive if there is no frau,d,misconduct
or collusion.
The contractor is required to use only lhose materials and equipment which have been
approved by the engineer or architect.
When the contract says that the engineer or architect is empowered lo reject any work or
remove inferior malerials, he can order that the bad work be rc-executed and rejected
materials removed during the progress of construction. But if he does not exercise this
power while the work is in progress, he cannot do so after the work is completed. The
owner has no right to discard the engineer's or architect's approval of Ule work so as to
sel up a claim against the contractor on account of defective workm'mship or use of
inferior construction malerials.
SAQ 3
Who accepts the work performed by the contractor '?
13.5 MAINTENANCE PERIOD
In coiistruction contracts there is a provision tllat the general contractor warrants the work
against faulty worlunanship and matcrials for some period of tirne after Lhe project is
conipleted. A warranty period of one year is conllnonly used and during this period the
contractor is raquired to inaintain tlle work and reiiledy construction defects for wllich he
is respo~lsibleto the owner at no cost. To protect the owner from breach of warranty by
the contractor, subcontractor, or supplier, there is a surety bond called a ~nailltenance
boiid or w arrmty bond which takes care of Ule maintenance of Lhe construclion for the
required period. If the contractor does not honour this responsibility, the owner is
protected by the perforn1,uice bond, which contiiiues i11 effect during the one-year warrant
period. If the coiltractor does not reinedy defects, then the Surety is required to do so.
SAQ 4
What is the illaintenance period and how is the owner prolected against
constructio~idefects during this period ?
13.6 TIME FOR COMPLETION
Construction contracts usually state that time is the "essence of contri~ct"meaning
thereby that should the contractor fail to conlplete the job by the fixed date, a certain
ainount of money per day or week will be recovered from the contractor as "licluidaled
damages". This provision serves to act as an incentive to the contractor to keep up the
progress of work. Tlie contractor would be liable for failing to perform the work witllin
the stated time.
The contractor has a good excuse for non-performance of tile contract within Ule stated
time, if the provision is lnade as to the tiine for oonlpletion bti 11 tlie "essence ot'
contract" and the owner or his agent interferes with the perforinatlce or causes delay on
46 the greater part of it, or orders extra itelm or additions to the original work.
Importrull
If there is no provision lo lhe coolriuy, it is possible for a contraclor lo recover froln the C a ~ ~ i r aClnuscs
ct
owner damages for the delay in conlpleting the work, if the delay is caused by Lhe owner.
But, if the contract specifically makes impossible such recovery of damages by the
colltractor for delays caused by Ule owner, then such a provision will be effeclive.
The tillle in which the work is Lo be completed is priliiarily for the kenefil of tlle owner iu
pla~lningIhe financing, budgeting aid construction of the work. The erlgi~leeror ardlilect
should also regulate liis lime to prepare the cost estimales.
llle best judge to determine lhe tiine required to perform a particular job is the engineer
or the architect although he nlay find that the professiollal requirenlents of the work may
prompt hill1 10 increase the time specified in the contracl. The owner would be ;tt iul
dviullage if a sonlcwhal liberal lime is provided for conlpletirlg the work in building tuld
constnlction contracts otherwise works carried out hurriedly in order Lo meel a rigid
conlracl date for co~npletionlilay result in defective and inferior work requiring
dismantling ;u1d re-doing it. A concerted efforl should be made by tlle engineer or Lhe
xchitecl Lo get tlie job conlplclcd wllhin h e stipulated time.
If the time for completion is not specified in Lhe contract il will incan that the job would
be ccxnpleted within a reasonable time. In determining a reasonable lilne all the
circumstances of the case should be considered. These include the nature of work, the
time necessary to conlplete the rcnlaining work, the resourcefulness of tlie conlractor,
availability of proper equipment 'and planl, and tiine which a rcasonable pcrsoll of the
salne class or category of conlractor would nornlally take.
If due to unavoidable reasons, there is a delay in thc performulce ol'a coi~lrilclfor wllicll
no time for coinpletion is fixed, the law requires that the contractor will do steady anil
hard work.
In case the contractor delays Lhe work deliberately and the contract time is no longer
binding, tlie c?\vncr nlay serve a notice on Ule coi~tractorto coinplele the work hy a lixed
reasonitble tinlc, and if Ihc conlractor fails to (lo so, Ihc owner may refuse to allow Uie
contractoi Lo proceed any further.
If lime is 1101 the esseilcc ol' the contract or Uie time within wliicli the work is to be
complelcil is not mentioned and there is unwasranted or unreasonable delay by one party,
[he other party has a right lo linlit the tilne by serving a notice and if Ule firs1 party still
frlils lo comply Ulen the contract may be abantloned.
1T Ihe owner has 1101 slipulaled ;I Lirlle fran~ea1 Lhe time of cntcriilg into the coiitracl
leilcling the contractor to helicvc that he will not insist on il tiillc for conlplelio~land tl~al
[he owner will ilccept delayed performance, Ule owilcr cannot ai'lcrwnrds sel up the
slipulat~onin regard Lo tinlc againsl Uie contraclor.
SAQ 5
(a) Why is [he tinle of completion important to Lhe contractor and Ule owner ?
(b) Wliat is a reasonable time of completion ?
(c) What is tlie rexlledy available lo Lhc owner if the contractor deliberately delays
the work ?
13.7 EXTENSION OF TIME FOR COMPLETION
Sometinles works on buildillg and construction contracts are delayell by force nlajeure. or
ky abnormally Bad weather, or due to civil unrest, union of workmen, strike or lockout,
flood, fire, epidenlics, c~uuantiiierestrictions, unaccomilitble dclay in tr:tiisportation, or
by reason of non-availability or ni;llerials, or duc lo an enlergeiicy dcclaretl by Lhe state,
or any other cause which is ;~bsoIutelybeyoncl the colltrol of the coiifi'actor.In such cfises
[lie engiiicer or ;ucliilccl limy make a fair aiid reasonable exlelisioil of liikle for coml>letion
of the works. If tlie cause or delays continues, then only one claiill I'or extension of tiilic
is necessary, Applications I'or exteiisioii of time should promptly he made in writing
mentioning tllc cirusc ol'delay and its duriition, The extension is niade ac Ulc Lillie of
 Construction Contract occurrence of the delay or within a reasonable period after the delay 11;u been overcome.
Management There is no binding on the engineer or the architect to perlriit (an extension of time nor is
the contractor bound to take what he is giten.
The contract allows for suspension of works in the event of the above situatio~isbut ail
unreasonable suspellsion and consequent extension of the contract period may cnnlpel
owner to bear extra expense of the contractor due to the forced delay. If the delay occur
on the part of the owner to give possession of the site, or to the supply of plans or
materials, or due to the interference by other contractors, the engineer or architect should
grant a reasonable extension of time for such delays. Where extras are ordered, extensioll
of time is also given unless the contract states otherwise. If the contract states that the-
contractor may be required to carry out extras (and variations to order, the contractor
should see that he is covered by a suitable clause for meeting ;ul extension of time for
completion.
An extension of time for co~npletingthe construction under the contract, if authorised by
the engineer or architect, should be given before the expiry of tile original date fixed for
completion. If he fails to do so and delays to exercise his authority he nlay cause the
owner to forfeit his right to liquidated damages. It is quite lawful for the' engineer or the
architect to extend the time on the last day fixed for completion, but it would be very
unreasonable on his part to keep the contractor guessing as to what'was actually going to
happen.
When an extension of Lime for delay is accepted by both the parties, a new date is fixed
for completion aud the contractor's obligations would then be to complete the work by
the extended date. Should the contractor not complete ffle work within the total extended
time, the owner is entitled to recover liquidated damages as stated in the contract.
SAQ 6
(a) When does an engineer grant an extensioil of tiine for Qmpletion ?
(b) When should ;ul extension of tiine be given ?
13.8 VARIATION IN WORKS AND CONDITIONS
Variations in building and engineering contracts means the ordering of extras and
or~lissions.Extras rue all work not expressly described in the plans and specifications but
which are of the kind contenlplated by the contract. Omissions are taking out of ffe work
not actually required.
Variations hi contract works usually take tlle form of authorisiiig tlle eilgiiieer or the
architect during the progress of work to order the contractor
(a) to increase or decrease tlie quantity of any work included in the contract,
(b) to delete any particular work or part of it,
(c) to cliuige the level, alignment, position or dialensious of ruly part of the work,
and
(d) to carry out additional or extra work required to colnplete the job.
The extra works are illeasured and paid for while omissions :ire measured and deducted.
Itelus c u i be found froin Ule bill of quaillities lo determilie tlle probable results cd the
measurements. Tlie engineer or architect deterillines what amount is due lo or to be
deducted from the contractor in respect of the variations.
If there is no provision in tlie coiltract for extras or variations, the contractor is justified if
he refuses to comply will1 any order requiring lii~nto carry nut tlle work in a manner
different from thal specified in tlle contract. All and any'additioiial work must tllen be
carried out under a fresli contract.
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While orderiiig variations the engineer or the architect sllould exercise his discretion
wiffiinthe scope of the Original contract and for the purpose of carrying out the work as
intclidcd originally. l l l e cllangcs should not destroy the original design. The chrulges
mllct not be disproportionate in ~~lagnitude a i d qu,mtity nor alter the character of the
work. Tlie c11;uiges Irlust be directed in improving the original design, quality, and the
siifety of die work. When additioils (and onlissions are made, the contract is still valid. But
,I' the alterations arc so extensive that tile original nature and scope of tlle work cuuiot be
lllade out, it may be coi~strucdthat the work so done was not executed under the contract.
rlie contractor will be entitled to claim extra compensation if variations result from one
or other of the following causes :
(a) Revisio~iin Ihe reyuireinents oS the owner,
(b) Revisions made by Llie engineer or ~uchitectto change tlie quality or
workmanship or cluality of materials in the contract,
(c) Changes in design necessitated by the occurrence of something ~ i ~ o r e s e eorn
owing to some new inforination about Llle foundation or other coiiditions
revealed after collunenceinent of the work,
(d) Atldilional clu;mtilies of work ordered during tlie progress of operations on a
Lunip suln contract,
(e) Reduction in the quantity of work in a unit price contract, the reductioll being in
cxcess ol'the pernlissible deviation limit stated in the contract, and
(f) ' Una~llicipateddifficulties experienced during performiuice.
SAQ 7
(a) What are exlra works ? What are Uie fornis of variations in contract work :I
(b) Under what condition is a contractor entitled lo claim extra co~ilpensalio~l'?
13.9 ALL DISPUTES ARISING OUT OF THE CONTRACT
Aphrase "all dispules arising out of tile contract" is included in all tlie agreements. Such
a pliraso refers Lo disputes arising under die agreement and not those which arise in
relation to tlie subject xnatter of the agreement. It does not include a dispute about the
existence of a contract, that is, when il is argued by a party that no contract was entered
into or that it was void on account of illegality.
A dispute is said to have arisen oul of tlie corilracl only when the parties agrcu that there
was a valid and binding co11LracL and when they have b refer to the terlils and conditioils
of the contract 10 settle lhc disputc arising out of tlie contract.
The followilig are disputes (arising out of the contract :
(a) Scope or ambit of the arbitraliai clause,
(b) A breach by one party in discharging the obligalions of the other party involved
in the contract,
(c) Tlie contract lint being satisfied, and
(d) Danlilges, if recoverable, and their anount.
SAQ 8
(a) When is a dispute said to have arise11 ?
(b) Why a phrase "dl disputes arising out of tlie contract" is includetl in all t l ~ e
agreeilients ?
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Constructiol~Conllmct
M.u~agc~~ic~it 13.10 CLAIMS AND DISPUTES
I11 all contracls, a provision is ~iiadeto deal witli claims of tlic conlraclor iuicl clisputes.
These are described in the subsecluent paragraphs.
13.10.11 Claims
11is preferable tlinl tlie contractor clainis for all extras or daniapcs agi~iiisttlie owner
directly as and when they occur. Hc should insist upon llie engineer or architccl to
acknowledge each claim as it is subniilted by liini. T i e clainis sliould he sub~liuitiated
regularly with records that inay be available so that they nii~ybe chccked tor their
accuracy by tlie superintendent of works. The contractor is1,recluirccl k) sub~iutliis claims
within a specified time and this is laid down in the contract, But if n claim is sub~iiilted
after tlie time set forth in Uie contract, it is considered on it? lilerits ;uid it will be treated
as n waiver of the contract recluiremenl.
Such a provision in tlie contract ensures that
(a) the owner is kepl informed that the contractor lias a claini aid the owner gcts
sufficient opportunity to investigale Ihe claini wliile the i'acls i i N still lies11 and
accessible,
(1)) the engineer or architect gets sufficient opportullity lo look inlo tlic grounds aid
prevent recurrence of similar claims, aid
(c) tlie co~itraclordoes not accumulate his cli~iinsuid prescnl tliciii to Uie owucr
long after the damage lias been done ant1 tlie owner is unablc lo ascerti~i~i tlic
true facts or circu~nstancesor check the accuracy of tlic cl;~iiiisor to reniove
co~iditioiisdue to which the claints arose.
Under normal conditions, if the contractor clniins Ilia1 ally inslructions citlier tlirougli
drawings or in writing, would involve extra cost, lie should i1ift)rni the e~ipiiiceror
arcl~ilectabout it in writing within a reaso~~able time dler tlie receipt of. sucli i~istructiolis
but before proceeding to coimnence work. Such a notice sliould state thc ilnioulit of exlra
cost involved aid llie reason why, in tlie opinion of tlie conlr;lctor, lllc instriiclio~~
necessitate perforii~uicebeyond that required by tlie conlrnct resulli~~g 111 exlra cost. Tlie
procedure adopted is as for cliuiges in the work. However, this does 1101i~pplyto
emergencies involviilg life and property.
The claimn? made out in tlie notice should be sup~ortedby verifiable facls sucli as letters,
inslructions, muster rolls, invoices and receipts for materials, cost records, ;uid other
information. After the contractor's notice is received, tlie cligi~ieershould rcview Ihe
claim on its merit and decide whether or not the contractor's clailii is i~ccep(able.
A note of protest piveil by Uie contractor is sufficieiil if il is filcd witliin tlie time
designated in the contract sooil after the work which involves a cliii~iili>rextra payliient
is started. The time for subnlission of the clailii is cou~~ted from tlle date o l start of Uie
additional or extra work and 1101from tlie date when the order to tlo s o is issued.
A claim musl be supported by sufficient rcasolii~igwhen it is preseiiled. The ciigilieer or
arcliitect is always keen to reach a settlement as soon as possible and witli due fairness to
everyone. The contractor should no1 inake claim on the clua~~tities u~ilcssthere IS a
serious omissiou. Clai~lislor special rates sliould be supported by analysis l i ~ material,
r h regard to tllis matter, beforehand, Ule courts will uphold tlie provision regarding
labour, overheads and profit.
13.10.2 Disputes
A difference of opinion between the parties about the certainty of a question gives rise to
a disputc. As soon as the dispute arises, a notice is given 10 the other party to allow Uie
I~artYPreserve all evidence and inemoranda so lliat the disputc iliay be resolved Uirougli
arbitration, if necessary.
The following situations do 1101constitute a dispute :
(a) Failure or refusal of a party to pay iiioney which is due,
(b) m e determination of price or valuatioa by a flurtl pBrly,
(c) Failure to pay a debt,
(d) Delay mused by situations beyolid file miilrol of tile a)~itraclor,i ~ l d
( ) Tbfusal of a Pvty to mq-dete tlie work or Rlfill its ob1ig;Lion.
Impel-tmt
111 suchcases, the aggrieved party can bring about an action for breach of the
- contract or to ask for specific performance. Contract Clauses
Disputes are common in construction contracts in determining
(a) proper classification of work, qualily, quantity, character, care aid skill used hi
execulioll,
(h) sufficiency and satisfaction as regards requirements, and
(c) whether or not a cerlain work is an extra item or amounts lo an alleration or
substitulion on "no cost basis".
I SAQ 9
I (a) When should a contractor present liis claims ?
!
I (b) How are tlie clainls supported by tlie colllractor ?
(c) Wlial are dispules ? What situations do not constitute a dispute ?
(d) describe the coirunon disputes in constnictioii contracts '1
13.11 LIQUIDATED DAMAGES
Liquidated damages ilrc L'ixed or ascertained damages as opposed to penalty. When Ule
parties to a contracl agrec Uial a stated sum would be paid as liquidated damages in the
event of default, il meals tliat tllc sum named has been assessed by the parties. Whelher
the sum is liquidated damages or a penalty is a nlatter to be resolved by the court. llle
court will consider tlie inleiitioli of the parties from a knowledge and circumstances of tl~e
case. Liquidated damages is a genuine pre-estimate of tlie damages likely to occur from n
breach of the contract. 011 the other hand, penalty is a payment of money by way of
terrifying tlie offencling party lo secure the p e r f o r l n ~ c eand lias no relation to the achial
diunage.
If the court holds llial the stipulated sum to be liquidaled damages, tlien the persoll who
b*gs about tlle legal action will be entitled lo recover that sum, no more a i d 110 less,
whatever actual damage lie may have suffered, in Ule event of a breach of the contract.
But, if the stipulated sum is lreated as a penalty, Lhe per so^^ who brings about the legal
action can recover in respcct only of the damage lie has actually suffered. If the sum oT
the penalty does not adequately compensate for Ule damage actually suffered, he may
ignore the penalty and recover his damages in full. Thus, a penalty lias no effecl in-so-far
as the recovery of dunages is concerned.
Liquidated damages generally arise on accounl ol failure lo perform work witl~intlle time
lor con~pletioiiagreed upon in Uie contracl. When tlie parties to tlie contract have agreed
liquidated damages given in the contract.
The engineer or architect is empowered tl~rouglia provision in the contract to grant an
extension of time in certain specified situations, and the contractor is then bound to
Complete tlie work by the exlended date. This exleiided date has llle cffecl of substitutiilg
anew time froin which the liquidated damages are to run.
Damages n o always in the f o r ~ nof a con~pellsationand not of punishment. The parties
entering into L e cc)iinltract may stipulate, by an appropriate dause, tlie value to be paid as
damages il there is a breach 01contract or of m y of its terins, but Ley can neither
provide directly for a penalty nor can they provide any schedule of liquidated dmages
whicli is so disproportionate compared to the actual value of damages cot~templalntedthat
tlley to amount to a penalty.
If tlie owner orders for extra work, tlle contractor may be absolved from liquidated
damages, or become entitled to ul extension of time for completion. If acts of the owner
delay the execution, tile contractor is entitled to an extension of time. It is necessary
the contractor inform the owner, promptly, in writing that the delay is being caused by
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