UNIT-2

CONTRACTS AND ARBITRATION

CONTRACT

The word contract is derived from the Latin word contractor meaning drawing together.

There are many definitions for the word contract. Some of them are given as follows:

1. An agreement enforceable by law is a contract [refer the Indian Contract Act 1872.

2. When two persons have a common intention communicated to each other to create some obligation
between them, there is said to be an agreement. An agreement enforceable by law is a contract.
(CPWD)

3. An agreement between two or more parties which is intended to be enforceable at law and is
constituted by acceptance by one party of an offer made by the other party to do or withhold from doing
that act. (Halsbury).

Why should we know types of contract?

Whether youre managing a small project or a large complex program you need a basic understanding of the
different types of contract youre likely to encounter when buying from external organizations and 3rd parties.

Types of Contracts: There are three basic types of contract youre likely to come across in managing your
projects and programs:

1-Fixed Price or Lump Sum Contracts:

In this type of contract a specific price is agreed for the good or service being sold. In project terms,
the buyer and seller will agree on a well-defined deliverable for a specific price.

In this type of contract the bigger risk is borne by the seller. They must make sure they make a profit
even given some unknowns such as increasing costs or delays in creation of the deliverable.

Firstly, often the sellers profit is eroded as they compromise to meet the buyers demands.

Secondly, the buyer may have to pay more for change requests when the supplier is no longer willing to
compromise around what, in their eyes, appear to be changing requirements.

Another type of contract you might encounter is the fixed-price plus incentive contract, where the
contract includes an incentive or bonus, typically for the early or on-time completion of the deliverable.

2-Cost-Reimbursable Contracts:

In this type of contract all the costs that the seller incurs during the project are charged back to the
buyer, and thus the seller is reimbursed costs. The costs which are allowable will be defined in the
contract.

In this type of contract more risk is carried by thebuyer as the final cost is uncertain. If problems
arise during the execution of the project then the buyer will have to spend more.

The advantage of this type of contract to the buyer is that obviously scope changes can be easily made
to the work being done.
 One problem with this type of contract is that the seller has very little incentive to be efficient and
productive and complete the work quickly.

It should come as no surprise that this type of contract is most often used when there is a lot of
uncertainty associated with the final deliverable.

Kinds of cost-reimbursable contracts: There are three kinds of cost-reimbursable contracts you should
understand:

1. Cost plus fee (CPF) or cost plus percentage of cost (CPPC)

Here the seller is reimbursed for allowable costs plus a fee thats calculated as a percentage of costs.

Obviously, there is no incentive for the seller to complete the work quickly with this type of contract.

2.Cost plus fixed fee (CPFF)

Here all allowable expenses are charged back plus a fixed fee at the end of the contract.

The fixed fee is how the seller makes their profit.

The aim of the fixed fee is to encourage the seller to complete the work as quickly as possible.

3.Cost plus incentive fee (CPIF)

Here all allowable expenses are charged back and in addition an incentive fee for exceeding the
performance criteria specified in the contract.

The incentive fee is designed to encourage increased cost performance by the seller. There is the
potential of both buyer and seller saving if the performance criteria is exceeded.

This type of contract is a cross between fixed-price and cost-reimbursable contracts.

This is opposed to a fixed-price contract in which the buyer agrees to pay the contractor a lump sum for
construction no matter what the contractors pay their employees, sub-contractors and suppliers.

3-Time and materials (T&M) contracts

This type of contract is a cross between fixed-price and cost-reimbursable contracts.

This is opposed to a fixed-price contract in which the buyer agrees to pay the contractor a lump sum for
construction no matter what the contractors pay their employees, sub-contractors and suppliers.

Time and materials is a standard phrase in a contract for construction in which the buyer agrees to
pay the contractor based upon the work performed by the contractor's employees and subcontractors,
and for materials used in the construction (plus the contractor's mark up), no matter how much work is
required to complete construction.

Time and materials contracts are not common because of the lack of an upper limit for the price paid by
the buyer.

However, if there is no time to send the job out for bids and complete construction, a time and materials
arrangement can save time.

It is also a common arrangement where the original fixed price contractor abandons the work and
another contractor must repair any damage caused by the first contractor and complete the work.
 Many time and materials contracts also carry a guaranteed maximum price, which puts an upper limit
on what the contractor may charge, but also allow the buyer to pay a lesser amount if the job is
completed more quickly.

Several Forms of Engineering Contracts

(i) Express Contract:Agreement is stated either verbally or in writing.

(ii) Implied Contract:When the agreement is a matter of inference and deduction implied.

(iii) Bilateral Contract: It may be defined as an agreement between two parties who has made certain
promises to each other forming considerations which are enforceable at law.

(iv) Simple Contracts: They may be either in writing or by parole or may rise by implication of law from the
acts of the parties.

(v) Executed Contracts:Where nothing remains to be done by either party and where the transaction is
completed at the moment when the arrangement is made.

(vi) Executor Contracts:Where some future act is to be done for example where an agreement is to made
to build a house in six months.

(vii) Entire Contract: Is one where the consideration of which is entire on both sides.

(viii) Contingent Contract: It is a contract to do or not to do something.

OBJECTIVE OF CONTRACT MANAGEMENT

The primary objective of contract management is completion of work entrusted to the construction agency with
least complications (ideally without complication) within specified time, within specified (approved cost) and
conforming to specified quality without loss of harmony among key participants.

Completion
Of
work
 ARBITRATION

Arbitration: A simple method by which two or more parties agree to refer a dispute existing
between them to a third person of their choice for a binding decision.

(i) Arbitration Agreement:A written agreement to submit present or future differences to

arbitration.

(ii) Bank Guarantee:A contract to perform the promise or to discharge the liability of a third
person in case of default.

(iii) Cartel: It is a combination of contractors to keep up prices and to kill the competition in
tendering process.

(iv) Clerk of works:A person approved by the Architect and appointed and paid by the owner to
act under the orders of the architect to inspect the works in the absence of the Architect. He
has no authority to order variations. He has powers to issue notice to the contractor for non-
approval of any material or work.

(v) Consideration: In addition to meeting of minds, it should include an element of obligation.

(vi) Contingencies: Allowances made to cover unforeseen errors and omissions.

(vii) Damages: Monetary compensation for injury (loss) suffered.

(viii) DPR: Detailed Project Report

(ix) Escalation: Escalation is compensation for price rise, or allocation for the risk of price rise.

(x) Force Majuere: An unexpected event. An irresistible and superior force.

(xi) Lien: Legal right to hold others property until debt on it is paid.

(xii) Latent defects: Latent defects are those which could only have been identified after the issue
of final certificate. For latent defects of materials other than those due to faulty specification or
workmanship, the Architect is not liable to his client, but the contractor is liable to his owner.
For latent defects of design, or specification, the contractor is not liable to the owner, but the
Architect is liable to his client, if it can be proved that there was negligence or incompetence on
the Architects part.

(xiii) Negotiation: A process of amicable settlement of an issue in the spirit of give and take.

(xiv) Quantum Meruit: As much as one deserves. It is paid for the work done or services rendered
when the price thereof is not cost fixed by the contract.
(xv) Work order: It is written order issued by the owner or his authorized Architect or engineer to
the contractor, intimating him that his contract has been accepted for commencement of the
work.

RESOLUTION OF DISPUTES B Y ARBITRATION

Arbitration is the most popular mode of settlement of disputes relating to building and engineering
contracts. Most construction contracts provide for arbitration.

Imparting justice with speed and least expense is the primary purpose of arbitration.

Arbitration means the determination of disputes by the decision of one or more persons called
arbitrators.

Every dispute which can be settled by a civil court may be referred to arbitration. It is an alternative
means of settling disputes.

Why Disputes?

Disputes are inevitable in any contract as the interests of the parties involved are at variance and all
contingencies cannot be foreseen and provided for in a contract.

Owner desires the best value for the money spent. He wants quality work in minimum time and cost.
Contractor strives hard for a reasonable rate of return on his investment. Other reasons for disputes
are as follows:

(i) Actual intent of parties is not reflected in contract documents due to vagueness, negligence or
want of skill in drafting.

(ii) Delay in the fulfillment of either parties obligation under the contract resulting in the other party
suffering damages or otherwise getting aggrieved.

(iii) Scope variations and inadequate compensation for the same.

 ADE: Reduced Scope

(iv) One-sided conditions of contract far from equity and fair play in some stipulations.

COMMON DISPUTES IN CONSTRUCTION CONTRACTS

(i) Compensation for delays caused by the owner

- Handing over full clear site

- Issue of stipulated materials

- Release of construction drawings and Authorizing payments for the

work done.

(ii) Scope variations and inadequate compensation for the same.

(iii) Levy of liquidated damages for delay in completion of work.

(iv) Claim for interests for delayed payments.

(v) Compensation for delay in decisions resulting in idle labour and

machinery.

(vi) Compensation for delays caused by the contractor.

(vii) Delayed completion of work.

(viii) Substandard work

(ix) Poor mobilisation of resources.

- Unrealistic estimates

- Vague conditions of tender

- Insufficient details in drawings at tender stage

- Delay in materials supply to contractor by owner

- Varied site conditions

- Many changes and variations during progress of work

- Delay in determination of rates for variations

- Delay in giving decision on work to contractor

- Extension of time.

MODES OF SETTLEMENT OF DISPUTES

(i) Capitulation: Weaker party gives in to retain goodwill and to retain long-term business relationship
with the stronger party.

(ii) Negotiation: Both parties sink their differences and try to reach an amicable settlement.

(iii) Arbitration: Disinterested, impartial third party is appointed to adjudicate.

(iv) Litigation: Disputes are taken to the court. Results in abnormal delay and heavy expenditure.

(v) Dispute Resolution Board: Board constituted on award of contract to resolve and heavy
expenditure.

ADVANTAGES OF ARBITRATION OVER LITIGATION

1. Speed,

2. Less expense,

3. Privacy,

4. Informality of proceedings,

5. Continuity of good relations,

6. Expertise of arbitrators,

7. Flexibility in choice of meeting place/location

8. And Finality of decision

1. Arbitrator :An arbitrator is a judge. He is a person who is appointed

to settle the disputes. Fairness, integrity, full confidence of the parties,

Disinterested nature in either party, capacity to think logically are some

of the attributes of an arbitrator

2. Arbitration Agreement: It is a written agreement to submit present or future differences to

arbitrator(s) whether his/their names are mentioned or not in the said agreement: The main
components are:

(i) It must relate to some disputes.

(ii) Parties desire to settle it by arbitration.

(iii) They agree to abide by the decision of the arbitrator.

In some contracts, an arbitration clause is incorporated in lieu of a separate arbitration agreement.

3.Order of Reference: It is an agreement drawn up between two contesting parties referring the
matter for the adjudication of arbitrators after actual disputes/differences have arisen, It contains
names(s) of arbitrator(s), specific disputes, time limit to declare the award.

4. Presiding Arbitrator: Each party appoints one arbitrator and the two appointed arbitrators shall
appoint the third arbitrator who shall act as the presiding arbitrator. He may determine the procedure
for arbitration if there is no concurrence.

5. Award: It is a written decision given by the arbitrator(s) on issues referred to him/them on

completion of arbitration proceedings.

POWERS AND DUTIES OF AN ARBITRATOR(S)

1. To accept the appointment in writing.

2. To study the submission to arbitration (which sets out the substance

of the dispute), including

a) The legal rights of the parties to arbitration

b) Verification that the dispute is within the scope of those rights and

of the submission made.

3. To act in concert with the other arbitrators if more than one appointed.

4. To give proper notice of meetings

5. To hear all parties and witnesses in the presence of both parties

6. To take evidence under oath

7. To avoid communicating in private with any party or any of their

Witnesses.
8. Administors oath to the parties

9. State a special case for the opinion of the court on any question of

law involved

10. Make up the award conditional or in the alternative

11. Correct in an award any clerical mistake or error arising from any

accidental slip or omission

12. Administers interrogation to any party

13. Strictly follows terms of reference. Decides nothing more than the issue

referred to him

14. To set the procedure, mode of presentation by parties, time and place

of meeting as required

ARBITRATION AWARD

Award: It is a written decision given by the arbitrator(s) on issues referred to him/them on completion
of arbitration proceedings.

A good award should be:

Within the scope of submission to arbitration, which limits the powers

Of arbitrators to the substance therein

Made within the prescribed or reasonable time

Unambiguous, unconditional, complete and final

The judgment and decision that of the arbitrator only and no one elses

Arbitration awards are not generally set aside by courts (legal misconduct

Is an exception). A court will not act as an appeal court and set aside a

Good and valid award.

PROCEDURE ADOPTED IN ARBITRATION

A specific clause is incorporated in building contract for settlement of disputes by the designated
authority specified in Arbitration clause. Arbitrator is appointed for settlement of disputes. Aggrieved
party is required to approach the designated authority to appoint an arbitrator with a list of disputes
and amount claimed against each. The designated authority will appoint an arbitrator and refers all
the disputes or selected disputes only to arbitrators for adjudication.
 In some of the contracts, provision is made for direct resolution of disputes initially by the parties.
Such of the disputes which are not resolved by mutual discussions are submitted to designated
authority with a request to appoint an arbitrator.

Arbitration is conducted in the light of various provisions contained in The Arbitration and Conciliation
Act, 1996 described as follows:

(i) The parties are treated with equality and each shall be given full opportunity to present his
case.
(ii) The parties are free to agree on the procedure to be adopted by the arbitral tribunal.
(iii) The parties are free to agree on place of arbitration and language to be used.
(iv) Arbitration proceedings commence from the date of receipt of request for arbitration by the
respondent.
(v) Claimant shall state the facts supporting his claims, issue involved and remedy sought. The
respondent shall give defense in respect of these claims.
(vi) Arbitration tribunal shall decide on oral hearings/documentary evidence.
(vii) Experts may be appointed by arbitration tribunal to report on specific issues.
(viii) Assistance of the court may be sought for taking evidence.
(ix) Decision is by majority of tribunal members. (The tribunal consists of small odd number of
arbitrators).
(x) Award is in writing and duly signed by arbitrators.
(xi) It is a reasoned award unless otherwise agreed to by parties.
(xii) If award amount is not paid, it carries an interest of 18% per annum from date of award to
date of payment.
(xiii) Award is final and binding. It is enforced as if it were a decree of a civil court.

PROVISION FOR SETTING ASIDE ARBITRAL AWARD

(SECTION 34 OF THE ACT)
The court may set aside arbitral award under the following circumstances.
(i) No proper notice to a party
(ii) Procedure adopted is not as per agreement
(iii) Award is against public policy
(iv) Agreement is not valid
(v) Party was under some incapacity