Construction contracts
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This article is written by Shivalika Misra, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.com.

Introduction

A construction contract is an agreement between a principal and a contractor for the construction of work for a project. There may also be a head contract under which this contract is part of as well as subcontractor agreements between the contractor and subcontractors. The most important part of the Construction Contract is the Scope of Work which determines whether your work satisfied the contract terms. A person is only obligated to perform the work stated under and not outside the Scope of Work Clause. What can be established as work within or outside the scope of work clause under a construction contract is a reason of dispute amongst parties to the contract resulting in large commercial arbitrations. This dispute raises another question whether the work which is outside the scope of work clause of the construction contract entitles a party to claim additional payment for the work done. The principle of Quantum Meruit is applied by the Courts in cases where there is no express contract for the work done by the constructor. Contractor seeks payments usually under two heads- Extra Work and Additional Work. This article is based on the additional payment in construction contracts based on extra work and additional work.

Difference between additional work and extra work

In a Construction Contract, there are mainly two heads under scope of work which is additional work and extra work. Additional work is the work done under the terms of contract whereas, extra work is the work which is outside the terms of contract. Additional work usually comes within the terms of contract and therefore it does not amount to additional payment. It is important to take into account whether the work done is outside the scope of the construction contract and therefore whether it falls within the ambit of extra work or not.

The object and purpose of the construction contract, terms and conditions of the contract and intention of the parties is important to determine whether extra work done by the contractor amounts to an additional payment to the contractor or not. The intention of the parties to the construction contract plays a vital role in determining whether the contractor will get an additional payment or not. If the contract claims to deliver the complete structure then any work done by the contractor in furtherance of building that structure will not be entitled to additional payment under that construction contract and that construction will be considered as the part of the same contract. Therefore, it is necessary to determine whether the work for the completion of a building under construction contract is extra work or additional work, since extra work claims additional payment but additional work does not. Let’s discuss the requirement for grant of additional payment to the constructor for the extra work done by him which is outside the scope of the construction contract.

Need for grant of additional payment

Additional payment is granted to the contractor based on the construction contract. If the construction done is outside the constructor’s expressed or implied obligations then the contractor shall be granted an additional payment for such work. The extra work done by the constructor should be on the demand of the employer then only additional payment can be granted and the employer agreed expressly or impliedly for additional payment for such extra work. The work done by the contractor should not be performed gratuitously as mentioned under section 70 of Indian Contract Act, 1872. Let us look at the role of the arbitrator in this regard. 

Power of the arbitrators to grant additional payment

Arbitrators have the power to grant additional payment to the constructor if the work done by the constructor is outside the scope of the construction contract and is extra work. In order to pay the constructor, the arbitrators take into account all operative clauses of the construction agreement. Arbitrators consider whether the claim by the constructor with regards to additional payment for the extra work done by the constructor satisfies the terms of the contract. If the claim by the constructor fails to satisfy the same, then the Arbitrators reject orders claiming for the additional payment to the constructor. Now, let’s discuss the quantum meruit compensation in case of extra work outside the scope of the construction contract.

Quantum meruit compensation

Compensation under quantum meruit is awarded for the services rendered by the contractor when the payment thereof is not fixed by the contract. Quantum meruit is a right which arises outside a construction contract. A quantum meruit claim arises, where work is done or services rendered by the contractor for the employer or owner, in circumstances which entitle the constructor doing the work or rendering the services to receive a reasonable additional remuneration, the situation being one where either there is no construction contract or there is a contract but the particular situation is not covered under that construction contract.  

The compensation under the principle of Quantum Meruit is allowed in the courts under Section 70 of the Indian Contract Act 1872. The three conditions need to be fulfilled before the benefit of this section can be invoked by a person. The three conditions under section 70 of Indian Contract Act, 1872 are as follows: The first condition is that the claimant should either lawfully do something for another person or deliver something to him. The second condition is that while doing or delivering something, the claimant must not be acting gratuitously and thirdly, the person for whom something is done or to whom something is delivered must enjoy the thing done for or delivered to him as the case may be.

Compensation awarded by the tribunal or court in quantum meruit laid on the equitable considerations. For the construction work which has been rendered by Constructor for Employer and the benefit of which has been taken by the Employer, then Employer will be made to compensate to the Constructor, unless it is shown that Constructor intended to render the services gratuitously. This is the principle on which quantum meruit compensation is granted. This is often described as “restitution for quasi-contract”. However, the facts necessary for exercising this jurisdiction must be proved by the claimant. 

In the case, Alopi Parshad and Sons Ltd. v. Union of India, Hon’ble Supreme Court dealt with a compensation which consists of certain amount on the basis of quantum meruit and it was held that,

“Compensation under quantum meruit is awarded for work done or services rendered, when the price thereof is not fixed by a contract. For work done or services rendered pursuant to the terms of a contract, compensation quantum meruit cannot be awarded where the contract provides for the consideration payable on that behalf. Quantum meruit is but reasonable compensation awarded on implication of a contract to remunerate, and an express stipulation governing the relations between the parties under a contract, cannot be displaced by assuming that the stipulation is not reasonable.”

In the case of Satyanarayan Construction Co. Ltd. V. Union of India, the Hon’ble Supreme Court strictly followed the condition and rejected a grant of additional payment to the contractor for the cost of the work already mentioned in the construction contract notwithstanding the fact that the contractor incurred almost double the cost stipulated in the construction contract.

In the case of Mulamchand v. State of M.P., the court held that, if a claim for compensation is made by one person against another person under Section 70 of the Indian Contract Act, 1872, it cannot be on the basis of any existing construction contract between the parties but on the basis different kinds of obligations.

The Contractor has the right to claim payment for additional work not mentioned in the construction contract, only if the following conditions are all obliged:

  1. At the time of signing the construction contract, the Contractor must not be aware about the need for additional work which is not included in the contract or project documentation provided by the Employer;
  2. The additional work should inevitably entail an increase in the cost of the construction;
  3. The Contractor shall promptly give the notice to the Employer in writing regarding the need for additional work as well as the increased cost of construction for that extra work;
  4. The Employer must give his consent regarding additional work and the parties signed an additional agreement regarding the additional work;
  5. The Employer should have accepted Contractor’s work and did not raise any objections to it.

Conclusion

In cases where the claim is with respect to additional payment for the extra work outside the contract, the courts are following a set of principles in determining whether the extra work done by the contractor claims an additional payment or not. The court considers the contract the most important part while determining the payment of the constructor. The court takes into account the construction contract while determining the claim of additional payment by the constructor. If the scope of contract is clear and the employer denies any additional payment then the constructor cannot claim for the same but if the scope of contract is unclear or ambiguous then payment can be claimed by the constructor and the employer has to pay the additional payment for such extra work by the contractor. The disputes regarding this subject matter is increasing day-by-day, therefore the parties to the construction contract must exercise due care and diligence while framing the operative clauses of the construction contract. The construction contract should be translucent and unambiguous and should clearly define the terms and conditions and the scope of work of the contract in order to eliminate the disputes arising out of it.

References


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