Arbitration agreement
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This article is written by Charu Atrey, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction

Nowadays many people are attracted towards developing their own businesses. Agreements are one big step in the world of business. As we have known the terms and conditions are binding on both parties but discrepancies or disputes or disagreements might occur during the tenure of an agreement for any reasons such as:

  • Delay in the performance of any of the terms mentioned under the Agreement.
  • Non-payment of the due amounts even after issuance of the notices.
  • Default in payments.
  • Defaults in any other obligations or responsibilities mentioned under the Agreement.
  • Defaults due to policy changes of the government.
  • Defaults due to any such reasons which are beyond human control, etc..

Such defaults may amount to disputes in the contracting parties which affects their initial commercial relationship. So to resolve such disputes and to keep their commercial relationship successful, the parties opt for the process of Arbitration. While entering into the Agreement, the parties’ make sure of the presence of all the clauses that are to be mentioned under the agreement such as the clause of obligations of the Parties, repayment or pre-payment dates if any, governing law and dispute resolution clause, events of default, termination of the agreement. Such clauses form an important part of the agreement but while negotiating many parties agree on such clauses that can be unilateral or is in the favor of one party such as delay clause, restrictive covenants or non-compete clauses, escape clauses, etc.

One common feature of all agreements is arbitration. Arbitration is the most popular among all the business entities due to its features such as it is less time-consuming, easy to file claims, no interference from courts, etc. Construction Agreements are one such example where arbitration is the most common and is present in almost all types of construction agreements.

As we have seen above that the arbitration is the most common feature of the construction agreements, most of the parties while entering into the contract considers the arbitration clause thoroughly due to the nature of disputes and the amount of money invested in the construction projects. The delay in the proceedings of resolving disputes by litigation can affect the development of the projects and can also cause losses of money and time.

For example: Party A is a construction company, who has entered into a contract with Party B who is a sub-contractor. And have mutually decided the terms and obligations of a contract. Party A has to build the port for the cargo ship at XYZ (Place), and Party B is obligated to supply the manpower and the raw material for the development of the port project under the agreement. Party A has agreed to pay the amount for the services delivered on the raised invoices by Party B within 10 days from the date of generation of the invoice. Party B delivers the required manpower and raw material as per the terms of the agreement but Party A fails to pay the amount of the invoice and is still outstanding, hence, committed a default as per the terms of the agreement. Here, Party B has the right to initiate the arbitration proceedings if the dispute resolution clause mentioned under the agreement states that- In the event of Default by any of the parties can initiate the following proceedings.

In such a situation both the Parties have the right to defend themselves as per the terms mentioned under the dispute resolution clause and all the process of dispute resolution will be held as per the clause mentioned under the agreement as well as the Arbitration and Conciliation Act, 1996. So to keep the commercial relationship sound most of the companies prefer to get into arbitration agreements.

What are Arbitration contracts?

Arbitration contracts are defined under Section 7 of the Arbitration and Conciliation Act, 1996. If we go through this section we will understand that any agreement is the arbitration agreement that has the required arbitration clause. It is mentioned under the clause that the Parties are required to have an agreement in the form which can prove the existence of such an agreement between the parties whether it is a clause in an agreement, telex, telegrams, letter, or any other telecommunication means. 

It is important in an agreement that it clearly states that all or any disputes arising in respect of any such agreement in which the parties are entering into shall be referred to arbitration for easy and quick solutions of disputes in hand. 

As we have understood that the arbitration clause is required or used when one of the contracting parties did not comply with any of the terms or obligations of the agreement and the other party claims the damages faced due to non-compliance of the terms by one of the parties. An arbitration clause or agreement forms one of the major parts of an agreement and is also one of the major parts of the construction contracts. As we have understood, arbitration forms the part of an agreement that helps the party who suffered losses to claim reimbursement due to the actions of the other party. With this the other essential part of the agreement is the delay clause which is in contrast with the arbitration clause in an agreement. Which brings us to the question of what is the Delay Clause?

arbitration

What is the Delay Clause?

A Delay clause is one of the common features of the construction agreements. This clause provides relief to the owners against any claims filed by the contractors or sub-contractor against any delay in respect of any terms or obligations of the arbitration agreement. As we have mentioned above that this clause is in contrast with the arbitration agreement even if it forms a part of it. Because an arbitration agreement provides the right to the party to claim damages or reimbursements from the defaulting party whereas the damages for delay clause restricts the party to claim any damages from the defaulting party. Therefore, we can say that the presence of the contrasting clauses in the contract forms confusion while deciding the disputes between the parties. 

For Example: Party A is the developer (“Owner”) who is constructing a building namely, ABC apartments, an apartment building with 10 apartment units, holding 3 flats on each unit. Party B is a contractor (“Contractor”) who is working under Party A in the construction business. Party A and Party B have entered into an arbitration agreement with the terms and conditions binding on both the parties which also includes the delay clause under it. Party A was responsible to pay the amount INR ____/- to Party B on the completion of each apartment unit on the invoices raised via Party B. Party B was under the obligation to complete each apartment unit within 3 months. Further, Party B raises the invoices without completing the apartment units, on realizing the malicious intentions of Party B, Party A denies the payment on the raised invoice. Party B has asked Party A to pay the amount several times yet the payment is outstanding. Party B further, files the claim against Party A stating the delay in payment which amounts to delay in performance of his obligations. But due to the presence of the No Damages for Delay clause, Party B is not eligible to file any such claims against Party A. It clearly shows the contradicting nature of both clauses. Though the arbitration clause provides the right to demand claims, the no damages for delay clause debar such a right of the contractors or subcontractors.

Sample clause

No Damages for Delay clause

a) Any or all the delays or non-performance of any of the obligations mentioned under the Agreement (“Agreement”)by any of the Parties, the Owner (“Owner”) shall not be liable for any such claims or damages of any nature arising out of such delays or non-performance of any obligations mentioned under the Agreement.

b) The Owner shall only be liable to provide the extension of time for completion of the obligations mentioned under the Agreement.

c) Any extension of time provided by the Owner as per clause 1(b) of this Agreement shall only be for a month from the date of granting of such extension.

d) Any extension of time provided by the Owner is a matter of discretion and is allowed to make any changes as per the claims set forth by the other Party.

Under what circumstances such a clause is needed and what is the validity of an agreement in such a situation?

Now that we have understood what the Delay clause is? It is also essential to understand why parties agree to such a clause while entering into an agreement. We can say this clause provides security to the owners against the wrongful and malicious claims filed by contractors and subcontractors. The provisions for delay clause is provided under the section 55 and 56 of the Indian contract act, 1872. As we go through these sections we will know as to why delay occurs and what is the validity of an agreement under such a situation? Now let’s see what do these sections state:

Section 55 of the Indian contract act, 1872 states that-

  • The effect of delay in performance of the obligation mentioned under an agreement at which time is the essence is that the agreement becomes voidable

For example: If the party is obligated to perform any act within 3 months (“Specified Time”) under the agreementbut fails to do so within the specified time then in such a case the agreement becomes voidable.

  • The effect of delay in performance of the obligation mentioned under the agreement in which time is not the essence is that the promisee will be entitled to the compensation from the promisor for the loss incurred by the promisee due to the delay in the performance of the obligation.
  • The effect of acceptance of the performance of the obligation by the promisee after the specified time is already expired is that the promisee cannot claim compensation for the damages incurred at the time of the non-performance of such an obligation. The Promisee can claim compensation for the losses incurred only if at the time extension of time for the performance of the obligation provides notice to the promisor stating the intentions to claim damages for losses incurred due to the delay.

For example: Party XZY and Party ABC entered into an agreement under which the party XYZ is obligated to develop and deliver the 5 storied apartment project within the period of one 1year (“Specified Time”) but fails to do so and deliver the project after the expiration of the Specified Time. The Party ABC accepts the project after 6 months of the expiration of the Specified Time. Then in such a situation, the Party ABC cannot claim compensation for the extended time of 6 months and the damages incurred during that extended time of the non-performance of an obligation.

It can further be elaborated with the help of the case law.

Case laws

Northern Railways v/s Sarvesh Chopra, AIR 2002 SC 1272

In the following case, the Hon’ble Court states that the contractor is entitled to claim damages incurred due to the delay only if the contractor provides notice mentioning his intentions to claim damages for the delay at the time of acceptance of the extension of time for the performance of the contract.

Section 56 of the Indian Contract Act, 1872 states that:

  1. An Agreement to do an impossible Act- An agreement to do an act which after the contract is made, becomes impossible or unlawful or due to the unavoidable reasons which the promisor could not prevent, then in such a case, the agreement becomes void.
  2. If the promisor promised to do something which he knew is impossible or unlawful and the promisee is unaware of the fact, then in such a case the promisor must compensate the Promisee for any losses incurred due to the non-performance of the promise.

For Example: Party A and Party B enter into a contract, where Party A promises to take in cargo for Party B at a port located outside their country. Party A’s Government afterward declares war against the country in which the port is located. In such a situation the agreement becomes void.

Exceptions to damages for delay clause

As we have seen above why a delay clause is required under the agreement. There are several other reasons due to which a delay can occur in the performance of the obligation under the agreement such as the reasons beyond human control (“Force Majeure”) etc. As the name states that it is a Force Majeure, i.e. the delays that occurred are beyond human control, no such remedy can be provided other than time extension.

For Example: The time we all have been through for the past 1 year i.e. the year of the pandemic and is still under the influence of that i.e. covid-19. Due to the rapid spread of the virus many industries suffered and were forced to close up, many court proceedings were kept on hold, and so on.

Therefore, under such a situation the Parties involved in an agreement cannot perform their obligations. But of such a non-performance, no parties can claim damages. As we have known to the fact that both the parties have the right to file the claim in case of the event of default in respect of the contract entered into by both the parties but due to the presence of the no damages for delay clause the contractor or sub-contractor cannot file the claims against the owner. But what happens in situations where delays are caused due to the acts of the owner. There are certain situations under which the contractor can claim the damages from the Owner irrespective of the presence of the delay clause such as:

  1. If the delay is caused due to the mala-fide intentions of the owner.
  2. Unnoticed delays.
  3. If the delay is caused due to the active interference of the owner.
  4. If the delay occurs due to the non-performance or breach of the obligation by the owner.
  5. Any such unreasonable delay that leads the contract towards abandonment.

The contradiction of both the clauses can also be seen in many Landmark judgments of the Supreme Court, where the Tribunal has granted the claims but the Supreme Court has set aside such a claim due to the presence of a delay clause in the contract.

Relevant Case Laws of delay clause of Arbitration Agreement

Let’s discuss further with the help of some of the Landmark case laws:

Northern Railways v/s Sarvesh Chopra, AIR 2002 SC 1272

In the following case, the Hon’ble Court states that the contractor is entitled to claim damages incurred due to the delay only if the contractor provides notice mentioning his intentions to claim damages for the delay at the time of acceptance of the extension of time for the performance of the contract.

Ramnath International Construction Limited v/s Union of India

The Hon’ble Arbitrator awarded that the contractor is entitled to compensation even with the presence of “No Damages for Delay Clause”. This award was set aside by the Supreme Court on the basis that the contractor would not be entitled to any compensation as the parties in the concerned case have mutually agreed upon the No Damages for Delay Clause.

Union of India v/s Om Construction Company

In this case, the Arbitral Tribunal awarded the remunerations for the damages incurred due to the delay in the performance of the terms and obligations which was set aside by the Punjab and Haryana High Court. The Court stated that the parties have to face the consequences of such a clause as they have agreed on the No Damages for Delay Clause while entering into the contract.

Conclusion

The Delay clause is as important as the arbitration clause in an agreement. The Delay clause provides the remedies for any such delays that might occur during the tenure of the contract due to any such reasons such as force majeure or any reasons for which the parties are responsible. The Arbitrator while deciding the claims have to take into consideration the terms mentioned under the delay clause while resolving the dispute between the concerning parties. The Arbitration and Delay Clause is in contrast which makes it difficult for the Tribunal to decide whether the contractor is entitled to the claims filed against the owner or not, as the exceptions of which is still present by which the contractor can claim the reimbursements even if the no damages for delay clause is present in the contract.

References


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