This article was featured in our 2023 Construction Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the construction industry and presents a goldmine of information based on data available on Jus Mundi and Jus Connect as of May 2023. Discover updated insights into construction arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on construction projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Saloni Kapadia, Partner at Cyril Amarchand Mangaldas
Animesh Bisht, Partner at Cyril Amarchand Mangaldas
Indranil D. Deshmukh, Partner Cyril Amarchand Mangaldas
The Indian construction market was valued at $701.7 billion in 2022 and is expected to grow at an annual rate of more than 6% from 2024 to 2027, as per the Global Data Report published on March 29, 2023, on “India Construction Market Size, Trend Analysis by Sector (Commercial, Industrial, Infrastructure, Energy and Utilities, Institutional and Residential) and Forecast, 2023-2027”.
While the growth has been exponential, the same has not been without its share of disputes, including on account of delays in the completion of construction projects in India in the public as well as the private sector. The 448th Flash Report on Central Sector Projects dated March, 2023 by the Infrastructure and Project Monitoring Division of the Ministry of Statistics and Programme Implementation of the Government of India states that out of the 1449 government projects, 12 are ahead of schedule, 283 are on schedule, 821 are delayed, 354 projects reported cost overrun, and 247 projects reported both time and cost overrun with respect to their implementation schedules. Such delays are caused due to various factors, including budget inaccuracies, labour challenges, sub-contractor commitment failure, and the impact of the COVID-19 pandemic.
In order to streamline the dispute resolution process, the Indian Department of Expenditure, Ministry of Finance has introduced the “Vivad Se Vishwas” scheme (“Scheme”). The Ministry has invited comments on Part II of the Scheme, which aims to settle certain identified contractual disputes where claims involving the Central Government and its specified governmental undertakings (“Procuring Entities”) were submitted by the contractor to the court or for arbitration/conciliation on or before
September 30, 2022 and the tribunal/ conciliation committee has already been notified by the Procuring Entity.
In this context, the importance and interpretation by Courts and Arbitral Tribunals (“Tribunals”) of clauses, stipulating that time shall be of the essence in construction contracts (“TOE clause(s)”), assume great significance.
Indian Position on TOE clauses
Section 55 of the Indian Contract Act, 1872 provides that where time is of the essence of the contract, then a failure to comply with the stipulated timeline renders the contract voidable at the option of the promisee. The onus to prove that time is of the essence of the contract is on the party claiming it. TOE clauses assume great significance in long-term construction contracts especially as delays in such contracts are not only common but often unavoidable.
The principle that Tribunals and Courts must adhere to the terms of a contract and not travel beyond, is well established in India. However, the application of this rule becomes far more complex and nuanced in case of TOE clauses.
Particularly, in cases relating to construction contracts, the Tribunals and Courts in India have held that TOE clauses in a contract by themselves are not sufficient to prove that time is of the essence of a construction contract and that the true intention of the parties would need to be gathered from a collective reading of the contract as a whole, the conduct of the parties, and the surrounding circumstances. Thus, in essence, there is an assumption against time being of the essence of construction contracts unless the agreement as a whole speaks to the contrary [See, Mcdermott International Inc vs. Burn Standard Co. Ltd. ((2006) 11 SCC 181); and State of Gujarat vs. Kothari & Associates ((2016) 14 SCC 761)].
Where construction contracts have clauses which militate against TOE clauses, such contracts cannot be considered as contracts where time is of the essence. [See, Hind Construction Contractors by its Sole Proprietor Bhikamchand Mulchand Jain (Dead) by Lrs vs. State of Maharashtra (AIR 1979 SC 720) read with Welspun Specialty Solution Limited vs. Oil and Natural Gas Corporation Ltd. (2021 SCC OnLine SC 1053)]. Whether a particular clause would have the effect of diluting a TOE clause would depend entirely on the facts and circumstances of each case. For example, clauses relating to levy of liquidated damages for delay or clauses providing for the manner in which the contractor is to complete the delayed work or clauses providing for extension of time and mechanism for the same, have been read to dilute a TOE clause.
Further, even the conduct of the parties has been held to be enough to establish that time is not of the essence of a construction contract despite a specific TOE clause in the construction contract. This has been observed in matters, where the timelines in the construction contract have been waived by interparty correspondence or where there is failure to levy compensation for delay in performance [See, Deconar Services v. National Thermal Power, Judgment of the Delhi High Court, 16 Dec 2009 (jusmundi.com)].
Of course, this is not to say that courts in India have, as a practice, disregarded TOE clauses in construction contracts. Where the intention of the parties to give effect to a TOE clause is evident from the relevant facts and circumstances, the tribunals and courts have recognised the same. Where work under the contract was connected with other time- bound projects or where the terms of the contract provided for a specific timeline and the consequence of termination for non-completion of work within the stipulated time [See, Citadel Fine Pharmaceuticals and Ors. vs. Ramaniyam Real Estates P. Ltd. and Ors. (AIR 2011 SC 3351)], the courts have enforced TOE clauses.
Further, in contracts where time is not of the essence, the non-defaulting party may make time of the essence by issuing a notice expressly stipulating that time is being made of the essence [See, Hind Construction Contractors by its Sole Proprietor Bhikamchand Mulchand Jain (Dead) by Lrs vs. State of Maharashtra (AIR 1979 SC 720)] and may require performance within a specified reasonable period. What constitutes a reasonable period, would depend on the facts and circumstances of the each case and the nature of obligations to be performed under the contract.
Conclusion
The exponential growth in the infrastructure industry in India and the governmental push on capital spending on infrastructure will invariably lead to high-value disputes. It is important that there is utmost clarity not only in the dispute resolution process but also the legal principles on the basis of which such disputes are resolved. TOE clauses remain a major bone of contention in construction contract disputes in India.
ABOUT THE AUTHORS
Saloni Kapadia is a Partner at Cyril Amarchand Mangaldas. Saloni has over ten years of experience in the dispute resolution practice and has been involved in a wide range of disputes relating to construction contracts, corporate insolvency, commercial contracts, real estate contracts and family disputes. She regularly appears before courts, tribunals, and regulatory authorities in India.
Indranil Deshmukh is a Partner and Head of Disputes at Cyril Amarchand Mangaldas, in Mumbai. Indranil has extensive experience of about 20 years in a wide range of disputes relating to commercial contracts, shareholder disputes, corporate insolvency, construction contracts, media rights contracts, etc. His dispute resolution experience is diversified across numerous sectors including construction, manufacturing, securities and financial regulation, health, local government, planning and environment and public sector projects.
Animesh Bisht is a Partner at Cyril Amarchand Mangaldas. Animesh has extensive experience of over 12 years in a wide range of disputes relating to commercial and financing contracts, corporate and personal insolvency, company law matters, securities, insurance etc. He regularly appears before High Court, NCLT, NCLAT, SEBI, SAT and other regulatory authorities in India.
Find more data-backed insights in our 2023 Construction Arbitration Report
