“The infrastructure sector is all about building assets for the country. It is part of nation-building.”
The infrastructure sector is one of the crucial sectors for the growth and expansion of a nation. A delay in construction creates a considerable impact on the economic activities in the country. There are numerous challenges that such an infrastructure project faces, such as delay in handing over of site, third party delays, change of law, change of scope of work, force majeure, delay in payments of running account bills, etc. This ultimately hampers the progress of the project. The theory of time being the essence of the contract is a very contentious topic in construction contracts. The nature of construction contracts is very dynamic and dependent upon numerous unforeseeable and unpredictable state of affairs, leading to delays in the completion of the works, which is not unusual. Despite the fact that the parties to the contract usually incorporate in their contract that time is the essence of the contract, the said clause(s) inexorably find its place in many construction disputes. The consequence of delays in construction contracts carries a rippling effect on the parties to the contract and the nation’s citizens. One of such challenges, namely Third-party delays, which have not found an adequate place in literature despite being a major setback in most construction contracts, is being dealt with by the Author [i] in the present blog.
The object of writing this blog is to familiarize the readers with the concept of Third-party delays in a construction contract and shed light on the legal position in cases of Third-party delays with the help of a few judgments delivered by the higher Courts of the country.
Infrastructure is a major segment that drives the overall development of an economy. The same even stands true for the Indian economy as the said sector is highly responsible for propelling India’s overall growth. India’s construction sector is thesecond largest contributor to India’s economy and accounts for the second-highest inflow of Foreign Direct Investments (FDI) after services. According to the Department for Promotion of Industry and Internal Trade (DPIIT), FDI in the Construction Development sector (townships, housing, built-up infrastructure and construction development projects) and Construction (Infrastructure) Activities stood at US$ 26.17 billion and US$ 26.31 billion, respectively,between April 2000 and December 2021. During the Financial Year 2020-21, the Construction and Infrastructure activities accounted for a13% share of the total FDI inflows of US$ 81.72 billion. However, many projects face extensive delays exceeding the original time and cost estimates. These construction project delays pose a major challenge for economies, especially developing economies like India, where exponential costs result from obscurity in acknowledging and extenuating the factors causing the delay.
AFlash Report for October 2021 on Central Sector Projects issued by the Ministry of Statistics and Programme Implementation (MOSPI) on the status of 1680 Central Infrastructure Projects costing Rs. 150 crores and above reflects that one out of every five infrastructure projects has a delay of more than five years. The said report inter alia has also enlisted reasons for time overruns reported by various project implementing agencies such as delay in land acquisition, delay in equipment supply, etc. These are types of third-party delays.
Even Mr. Nitin Gadkari, the current Minister for Road Transport and Highways in the Government of India, has time and again helddelays in land acquisition andstatutory clearances responsible for delays inconstruction projects andinfrastructure mishaps.
Infrastructure Projects Disputes in India
The recent trend in India concerning projects relating to infrastructure development is that of Public-Private Partnership. PSUs, statutory or government bodies, and even private parties enter into contracts for the construction of projects as an employer with other private parties as a contractor. Thepublic-private partnership endeavors to obtain the best of both worlds, i.e., the accountability of the government and the resources and competence of the private player. However, as fascinating as this concept may sound, it is not always that it yields the results as it is intended to give, which ultimately questions the success of this model.
e the models for these contracts may differ, one thing that remains common in all such contracts is the contractor’s obligation to timely complete the project, which is dependent upon the employer performing its obligations on time. Any delay by any of the parties in performing its part of the obligation puts the whole project at risk and entitles the other party for compensation.
At times delay occurs due to breaches committed by the employer, while at other times, it arises on account of the breaches by the contractor. There are also times where delays take place for which neither party to the contract is accountable. In cases where the delay is on account of breaches by the contractor, the employer generally provides an inherent clause in the contract for realization of damages in the form of liquidated damages. Further, in cases where the delay is due to the employer, the contractor has to claim compensation or damages either before a court of law or before the Arbitral Tribunal, depending upon the Dispute Resolution clause provided in the contract, but what happens when neither party to the contract is responsible for the delay. The same is discussed below.
Concept of Third-Party Delay
In common parlance, a contract is a set of reciprocal promises wherein at one end of these promises is the obligation of one of the parties to do or get done a specific thing on a specified date and a specified time period. A lot of construction contracts have clauses incorporated in them that the contractor willpay compensation to the employer for the delay in completion of the project by payment of liquidated damages. However, not every facet of the project is within the employer’s direct control or the contractor. Every construction project is in some way or the other dependent upon third parties to some extent. While the contracting parties have incentives in the completion of the project, third parties may not be driven by the same objectives as the contracting parties; however, the delay on their part will equally impact the project. While the contracting parties anticipate undertaking specified activities within a specified time and completing the project, however, each activity may not be achieved by the anticipated time on account of third-party dependencies such as issues by the local public, approval from authorities, land acquisition from third parties, supply of material/ equipment by vendors/ another agency and work undertaken by sub-contractors, etc. The delay in the completion of construction projects on account of such third-party dependencies is what we call third-party delays.
Examples of Third-Party Delays
As discussed above, third-party delays are delays caused on account of parties other than the contracting parties, i.e., the same are beyond the scope of accountability of either of the parties to the contract. In many projects, specialized agencies are appointed to carry out specific activities. In some industrial building contracts, the service of third-party vendors is taken for procurement andinstallation of equipment. While in most of the situations, third parties are directly connected to the performance of the project, some of them might be completely unrelated to the performance, like the local public, yet may hamper the timely completion of the project. All these delays are considered third-party delays. Few illustrations of the same are given herein below for understanding:
Delay in land acquisition:
While building an infrastructure project, the stretches of land on which the construction is proposed to be carried out are initially owned by third parties. The employer under such circumstances is required to acquire the said stretches of land from the third parties and provide the said landencumbrance free to the contractor to carry out the construction work as per the terms of the construction contract. Any delay in the acquisition of land falls under this head.
Delay due to ‘Subcontractor / Vendor/ Another Agency’:
In many projects, specialized agencies are appointed to carry out specific activities. In some industrial building contracts, the service of third-party vendors is taken for procurement and installation of equipment. Suppose there is a delay in the delivery of the equipment by the vendor to the contractor, the same results in a delay to the project. These delays are considered third-party delays.
In India, the legal position on the subject of delay in performance of the contract is codified. Delay in performance of the contract has legal consequences under the Indian Contract Act, 1872. Breach of a contract normally triggers Section 55 of the Indian Contract Act, 1872 read with Sections 51 to 54, Section 73, and Section 74. However, the clauses of the contract will determine the quantum of damages payable by the parties.
In construction contracts, the damages are typically ascertained by the project’s Independent Engineer who is usually an expert authority in this regard. He is the one who determines whether the contractor is eligible for an extension of time or damages after considering the facts and circumstances.
There are only a handful of judgments on the said issue, which settles the position that third-party delays such as the land acquisition of the site are attributable to the employer, and the contractor is entitled to compensation for the loss sustained because of third party actions.
One such case ofK. N. Sathyapalan (Dead) by LRs. vs. State of Kerala and Another Civil Appeal No. 4806 of 2000 was decided by the Supreme Court of India on November 30, 2006. It was contended in the said case that there was no provision in the agreement which provides for a claim of compensation by the contractor on account of any loss sustained due to intervention of third parties. However, the Arbitrator held that the contractor was entitled to compensation. While the High Court had set aside the Award, the same was restored by the Supreme Court.
A recent case ofNational Highways Authority of India vs. Emas Expressway Pvt. Ltd. O.M.P. (Comm.) 176/2016 filed under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) was decided by the Single Bench of the High Court of Delhi. In the said case, the Single Bench noted the observations made by the Arbitral Tribunal while passing the Arbitral Award that the employer delayed in acquiring land and handing over access to the site requisite for implementing the project and that the project was affected by frequent forced stoppages and interruptions of the construction works by local residents. The Arbitral Award was upheld by the Single Bench vide its order dated April 17, 2017. The same was challenged by the National Highways Authority of India under Section 37 of the Act before the Division Bench in FAO (OS) (COMM) 157/2017. [ii] The Division Bench of the Delhi High Court vide its order dated November 8, 2017, upheld the order of the Single Bench and did not interfere with the award passed by the Arbitral Tribunal. The matter then went up to the Supreme Court of India by way of a Special Leave Petition filed by the National Highways Authority of India, which was dismissed on merits vide order dated July 16, 2018. [iii]
A construction contract is entered between an employer and a contractor; however, undeniably, not all aspects of the plan are within the direct control of either of the contracting parties. Each project is, to some extent, dependent upon third parties. In such a scenario, it is imperative to identify such third-party dependencies and further comprehend, quantify, and manage their impact on the overall project. The various reasons causing the delay in the completion of the project should be reviewed periodically. While construction delays are common globally, their causes & effects vary depending upon the native context, and culture of the construction industry.
Land acquisition is one such major issue that impacts the very condition precedent of handing over the unencumbered right of way to the contractor in a construction contract. The said issue is also recognized as a major setback time and again by our Union Minister for Road Transport and Highways. The main reason behind this issue is that the employer, without even completing the formalities for land acquisition for execution of the works, awards the contract to the contractor. This results in the work being carried out in bits and pieces and in an unplanned manner by the contractor. While the employer may be faulted for the delay in land acquisition, however, there are other third-party delays that may or may not be the fault of the employer or the contractor. The contracting parties should always bear in mind that there are always some unpredictable events in a construction contract that cause a delay in completing the project and subsequently in achieving the timelines. Thus, the parties should make efforts to insert appropriate clauses in the contract to deal with such possible situations. The parties should also consider such scenarios while setting out timelines for the completion of the project and rather effectively plan and schedule the project in advance by considering all possible risk factors with respect to the nature and culture of the locality. This will reduce the number of cases ending up in time taking litigations at a later stage which more often than not bleed the pockets of the parties and leave the parties in a bad situation.
The views and opinions expressed by the authors are personal.
About the Author
Ms. Harsha Laddha is a Legal Manager with Reliance Infrastructure Limited.
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Preferred Method of Citation
Harsha Laddha, “Third-Party Delays in a Construction Contract” (IJPIEL, 16 March 2022)