The Indian legal system bears resemblance to the English common law system, which is reliant on the value of binding case law precedents, rulings on equity, and the principles of natural justice. Despite the influence of the English common law system, the Indian legal system has also incorporated elements of civil law, such as certain investigative powers of the judiciary relating to the institution of commissions of inquiry or questioning of witnesses.

Broadly, the key legislation governing the construction market in India includes ‒ without limitation ‒ the following:

• Indian Contract Act 1872;
• Transfer of Property Act 1882;
• Real Estate (Regulation and Development) Act 2016;
• Registration Act 1908;
• Indian Stamp Act 1899; and
• Indian Easements Act 1882.

In addition, various other statutes ‒ including the Civil Procedure Code 1908, Specific Relief Act 1963, and other state-specific laws and municipal laws ‒ deal with development and zoning norms as well as conditions for obtaining development licences, completion certificates and occupation certificates in relation to such construction projects.

Foreign investments in the construction and development sector are additionally regulated by the Foreign Exchange Management Act 1999 and the rules, notifications and circulars issued thereunder, as well as those issued by India’s central bank (the Reserve Bank of India).

The Real Estate (Regulation and Development) Act 2016 plays an important role in the construction market, thereby ensuring:

• protection of consumer interests;
• regulating the construction, development, sale, advertising and marketing of real estate projects in a time-bound, transparent and efficient manner; and
• creating a separate real estate regulatory authority, with state-specific and union territory-specific jurisdictions, for the adjudication of disputes between consumers and promoters of real estate projects.

The Indian construction market does not strictly adhere to any standard form of construction contract, as it is not a mandatory requirement in India and parties are free to negotiate and enter into any contract that they deem appropriate for their project, subject to the terms of contract being valid and legally permissible the same is accordance with the Indian Contract Act 1872. However, use of standard contracts helps to avoid disputes and provide a framework that is widely accepted and recognised, to the benefit of all parties involved.

Many government construction agencies use their own standard forms of contracts to meet specific departmental needs, especially for PPPs. In general, the standard form of contracts issued by the International Federation of Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils, or FIDIC) and Central Public Works Department are also used in India.

Some of the widely used construction contracts in India include:

• build-operate-transfer contracts, wherein a contractor is responsible for the design, building and operation (during the contracted period) and then for the transferring of the project back to the employer;
• build-own-operate contracts, wherein the contractor ensures finances, builds, owns and operates the project and the employer purchases the goods and services produced by the construction project;
• build-operate-lease-transfer contracts, wherein a government entity gives a concession to a private entity for designing/building a project, owning it, leasing it to the government entity and subsequently transferring the ownership of the project to the government entity upon expiration of lease;
• design-build-operate-transfer contracts, wherein the contractor is responsible for designing, constructing, financing, and operating the project for the period of concession;
• operate-maintain-transfer contracts, wherein the contractor operates the project, ensures maintenance and provides training before handing the project to the employer;
• engineering, procurement and construction contracts, wherein the contractor is responsible for engineering and the employer is responsible for procurement of material and construction of the project; and
• joint development agreement, wherein the landowner and real estate developer collaborate for construction of a project.

In respect of further delegation of services (eg, designing, subcontracting, procurement, and consultancy), the contractor enters into contracts with the concerned vendors/subcontractors inter alia specifying the requirements in relation to the project and the consideration for performance of services.

Employers

The owners of the construction and development typically act as employers in a construction and development project. The owners/employers can be individuals, private and government corporations and statutory bodies.

Apart from some private real estate developers/employers, construction projects in India can also be in the form of PPPs between a government entity and a private entity, wherein the government entity issues tenders/request for proposals to provide open competition and to drive down costs, and invites bidding from interested private entities. The most common structure in such form is to incorporate a special purpose vehicle, which is a project corporation incorporated in India to carry out the project development, wherein the bidding member(s) own shares in the special purpose vehicle as specified at the time of bidding.

Some on the key government entity employers in the Indian construction market are:

• National Highways Authority of India;
• Central Public Works Department;
• Delhi Metro Rail Corporation;
• Indian Oil Corporation; and
• National Building Construction Corporation.

Rights of Employers

Broadly, an employer has the following rights under construction contracts:

• obtaining earnest money from the bidding parties;
• obtaining security in the form of a performance bank guarantee, corporate guarantee and/or retention guarantee from the contractor;
• indemnity, liquidated damages and levying penalties on the contractor upon occurrence of any breach, delay and/or non-performance by the contractor;
• holdback of partial fees/liability protection for a pre-agreed defects liability period;
• supervising/inspecting the progress of a project;
• ownership of IP relating to the project; and
• terminating the contract upon any breach of terms by the contractor.

Obligations of Employers

The general obligations of an employer under construction contracts are as follows:

• handover of the construction site for the contractor to commence work;
• obtaining construction-related sanctions and approvals (eg, licences and building plan approvals) from government authorities;
• adherence to the payment schedule of the contract;
• in some cases, employers are required to also engage subcontractors directly based on the recommendation of the contractor; and
• principal employer-related compliance obligations under certain labour/employment law statues in respect of the workers engaged by the contractors.

The general relationship between an employer and contractor is on a principal-to-principal basis. In respect of any subcontractor appointed by the contractor, the subcontractor is an agent of the contractor. Further, any financier investing in (or supporting) the employer in the project typically has supervisory rights on the project, along with having security interest. The lenders have rights to appoint various supervisory consultants such as project management consultants and to seek timely reports from them on status of the projects, any non-compliance by the employers, contractors, etc.

Contractors

Construction contractors are typically individuals, partnerships, and companies.

Rights of Contractors

The key rights of a contractor are as follows:

• deploying machinery, equipment and material on the site;
• receiving payment from the employer in respect of the performance of services;
• right to additional costs in the event of any revision to the scope of work; and
• proposing incremental work to the employer for effective completion of the project.

Obligations of Contractors

The general obligations of a contractor under construction contracts are as follows:

• paying earnest money at the time of bidding;
• furnishing suitable bank guarantees and/or other forms of security as agreed with the employer;
• complying with the specifications and timelines as approved by the employer;
• adhering to the performance parameters as provided by the employer;
• ensuring removal of machinery, equipment and material from the site post-completion or upon expiry of the contract; and
• rectifying/replacing the defective or damaged work during defect liability period.

Subcontractors

Construction subcontractors are typically individuals, partnerships and companies. The subcontractors are appointed by the contractors in accordance with the consent/intimation requirements as agreed with the employer. In certain instances, the contractor is permitted to engage subcontractors that are pre-identified/pre-approved by the employer.

Rights of Subcontractors

The key rights of a subcontractor are as follows:

• performance of subcontracted services and receiving payment from the contractor in respect thereof;
• proposing incremental work to the contractor for effective completion of the subcontracted portion of the project; and
• disputing any unlawful/non-negotiated demands and/or breach by the contractor.

Obligations of Subcontractors

The obligations of a subcontractor under construction contracts are as follows:

• complying with the specifications and timelines as approved by the contractor and employer;
• adhering to performance parameters as provided by the contractor and employer; and
• ensuring removal of machinery, equipment and material from the site following completion or upon expiry of the subcontract.

The general relationship between a subcontractor and an employer is negligible, as the subcontractor is treated as an agent of the contractor. Since the contractor remains liable to the employer in respect of the subcontractor appointed by it, the subcontractor does not have any right to make any direct claim to the employer.

Construction projects in India are commonly financed by:

• banks;
• financial institutions;
• non-banking financial companies;
• foreign institutions (eg, private equity funds or foreign portfolio investors); and
• alternative investment funds.

The project financing is generally secured by:

• hypothecation of receivables from project;
• mortgage of the land; and
• pledge of the shares of the borrowers, corporate guarantees and personal guarantees.

The following Indian laws primarily govern project lending to borrowers:

• Banking Regulation Act 1949;
• Reserve Bank of India Act 1934;
• Reserve Bank of India’s guidelines, master directions, notifications and circulars (including on external commercial borrowings);
• Foreign Exchange Management Act 1999;
• Foreign Exchange Management (Debt Instruments) Regulations 2019;
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002;
• FDI Policy issued from time to time by the Department of Industrial Policy and Promotion (DIPP); and
• Companies Act 2013 and the rules provided thereunder.

Rights of Financiers

The key rights of a lender are as follows:

• supervising and receiving timely updates on the progress of the project (or part thereof) for which lending has been done;
• securing the loan (along with applicable interest) by getting a security interest created from the borrower;
• invoking security interest upon occurrence of any default and/or breach of financing documents;
• step-in rights in the project, along with the right to get any party novated and/or any right/obligation being assigned to any third party; and
• approving/consenting to any major deviation in the project and/or construction contract.

Typically architect firms and specialised development management firms act as designers for various large-scale construction projects. The design firm remains responsible for preparing drawings, including concept drawing, schematic drawings and good for construction drawings. The design firm provides various draft drawings to the in-house teams of the employer and, once the employer agrees to the designs and drawings, the drawings are submitted to the sanctioning authorities for their approvals. The sanctioning authorities have right to scrutinise these drawings and provide their comments and revisions, then the design firm makes such revision and resubmits the same to the authorities for approval. Once the authorities are satisfied with the drawings, the authorities issues a sanction letter. The design firm is responsible for ensuring that the contractor appointed by the employer constructs the building as per the approved design.

The scope of work in construction contracts is determined as per the requirement of the employer and the project. The scope of work inter alia comprises the following components:

• detailed overview and objective of the project;
• design and engineering requirements for the project;
• supply requirements for the equipment, machines, materials, tools, tackles, spares, commissioning spares, etc, in respect of the project along with the details in respect of the mobilisation/immobilisation thereof;
• details in respect of the desired services and utilities, transportation, storage, port clearance, customs duty payment, handling, insurances, testing, erection, pre-commissioning, commissioning, defect liabilities, training, supervision, dismantling, demolition of plant, equipment and building, etc;
• identified parameters and specifications relating to the project;
• implementation schedule and the delivery modes;
• requirements under the applicable laws;
• building by-laws;
• estimated costs for completion of the project; and
• management responsibilities of the contractor.

Construction contracts contain clauses for variations in the scope of work or contract price by way of issuance of a change order by the employer to that effect. The variation clause consists of terms related to:

• the employer’s right to request a variation;
• the contractor’s right to request a variation;
• the process to be followed for the issuance of change order; and
• related consequences of a change order inter alia in respect of additional costs, extension of timelines, and incremental obligations (as the case may be).

While the variation of the scope of work depends on the overall requirement/objective of the project, the variation of the contract price is contingent and subject to the commercial agreement of the parties under the construction contracts. Further, such variations are not permitted where they affect the nature of the construction contract and/or are beyond the contractor’s competence. In certain cases, the parties pre-negotiate an upper capping on the maximum variation of scope of work/contract price permissible, typically ranging between 10–20% of the contract price.

Both the employer as well as contractor have respective rights to request variation of the scope of work/contract price only as per the variation clause of the contract price. Any deviation from the same, and/or any incremental variation in scope of work/contract price requested by either party remains subject to the mutual understanding and agreement of the parties to the construction contract.

Typically, the employer engages a third-party service provider/architect for the design process of the project. Such third-party provider/architect prepares the concept design, detailed designs, master plans, layout plan, building plan, etc. These plans are reviewed by the employer. On the basis of these plans, structural consultants are appointed for detailed engineering studies, and for integration of all works and value engineering. On the basis of the detailed engineering, the construction contractor commences the construction of the project.

The ownership of designs and IP rights related to the same vests with the employer.

The technical roles and responsibilities of contractors in respect of the construction varies from project to project; however, the general roles primarily remain the same. The contractor remains responsible for the construction, development and completion of the project as per the contractual arrangement in place with the employer/owners. Further, the contractors appoint the nominated/pre-approved subcontractors for subcontracting small portions of the works.

The division of responsibilities in the project depends on the objective of the project, generally comprising the following:

• employer – responsible for overseeing and supervising the construction process and the implication of the completion schedules by the contractor;
• contractor – responsible for carrying out the construction work in accordance with the construction contract documents, which include schedule, drawings, technical parameters and specifications (additionally, the contractor is accountable for overseeing the subcontractors engaged by it to ensure effective completion of such delegated portion of the project);
• subcontractors – responsible only for the specific portion of the construction work delegated to them by the contractor, within the allotted timeframe and in accordance with the terms of the construction contract; and
• other people – third parties engaged in the construction process are area-/role-specific and typically include responsibilities in respect of designing, technical advisory, supply of materials or equipment, or providing other specialised services as required.

The responsibility for the status of construction site with regard to pollution, underground obstacles, geotechnical conditions and archaeological aspects is typically of the contractor and/or the project manager appointed in relation to the project, and such responsibilities are specified in the construction contract itself. However, both the employer as well as contractor remain obligated to comply with the applicable laws/guidelines as provided by the appropriate authorities from time to time, inter alia as follows:

• waste management – as per the regulations of the Ministry of Environment, Forests and Climate Change under the Environment Protection Act 1986, as well as the Wastes (Management and Transboundary Movement) Rules 2016, the Manufacture, Storage and Import of Hazardous Chemicals Rules 1989, the Construction and Demolition Waste Management Rules 2016, the E-Waste (Management) Rules 2016 and the Bio-Medical Waste Management Rules 2016, etc;
• wildlife – as per the relevant provisions of Forest (Conservation) Act 1980 and Wildlife (Protection) Act 1972;
• pollution – as per the relevant provisions of the Environment Protection Act 1986, the Water (Prevention and Control of Pollution) Act 1974 and the Air (Prevention and Control of Pollution) Act 1981; and
• archaeological – as per the relevant provisions of the Ancient Monuments and Archaeological Sites and Remains Act 1958, which imposes obligations on the employer and the contractor to notify the relevant authorities in the event of any archaeological finds and to ensure that the construction work does not damage or destroy any historical or archaeological structures.

Permits

For every construction project, parties are required to obtain various permits (including without-limitation building plan approval as well as environment and pollution clearance) from various government departments/authorities in order to ensure that the construction is being carried out in a safe manner.

What follows is an indicative, non-exhaustive list of the permits required under construction projects (on a case-by-case basis):

• site plans and building plans for the building;
• commencement certificate for starting the construction of the building;
• structural stability certificate from a certified engineer and/or architect for the safety aspects of the building;
• “no objection” certificate from the state fire services department;
• “no objection” certificate from the Airport Authority of India;
• permission under the Forest (Conservation) Act 1980 is required for using any agricultural land for commercial purpose or using any forest land for any non-forest purposes;
• environmental clearance from the Ministry of Forest and Environment under the Environmental Impact Assessment Notification 2006 S O 1533 dated 14 September 2006;
• consent to establish and consent to operate from the respective state pollution control board under the Water (Prevention and Control of Pollution) Act 1974 and Air (Prevention and Control of Pollution) Act 1981;
• registration under various labour regulations, inter alia related to the Factories Act 1948, the State Migrant Workmen (Regulation of Employment and Condition of Service) Act 1979, the Employees’ Provident Funds and Miscellaneous Provisions Act 1952, the Payment of Gratuity Act 1972, the Maternity Benefit Act 1961, and the Employee State Insurance Act 1948; and
• authorisation to store hazardous waste under the Hazardous and Other Wastes (Management and Transboundary Movement) Rules 2016.

Party Responsible for Obtaining Permits

Given that the majority of the obligations are delegated by the employer to the contractor, the responsibility for obtaining permits in respect of the projects is on the contractor. Some of the key approvals, such as building plan approvals and environment clearances, are typically obtained by the employer/owner.

Typically, the construction contract provides for the contractor to undertake the maintenance of the works until the completion of the works. Following the completion of the project and during the defect liability period, the contractor is required to rectify the deficiencies/defects in the construction work, including routine maintenance, preventive maintenance, and corrective maintenance.

Various contracts also include a covenant to execute an operations and maintenance contract between the employer and contractor, pursuant to which the contractor undertakes the obligation to operate/maintain the project as per the agreed terms ‒ inter alia involving cleaning, inspections, minor repairs on a regular basis ‒ in order to avoid any breakdowns/failures. Such terms also include responsibility for replacing/repairing damaged/faulty components of the work.

Also, in certain instances, a specialist service provider is engaged by the employer for maintenance of mechanical, electrical or technical equipment installed in the project.

General Instructions

The crucial components related to the project are generally incorporated in construction contracts to avoid any unwarranted ambiguity or dispute between the parties. However, save and except the specified terms, if any other general instruction is required to be given in relation to the construction process, it is given by the employer to the contractor and consequently by the contractor to the subcontractor (as applicable). The employer/owner does appoint other contractors such as excavation contractors, mechanical, electrical and plumbing engineering contractors or façade contractors for a defined scope of works as may be agreed between the employers and respective contractors.

Given that the contractor remains the primary party responsible for the construction and completion of the works, the risks related to the work are also allocated to the contractor, including without limitation in respect of the testing of the completion of works. Such tests are required to be done within the timelines/schedule provided in the construction contract. However, in certain cases, employers retain the right to request the test of completion – with no mandatory obligation on the contractor for the same in the absence of such request.

The construction contracts consist of various testing procedures/details/parameters that must be complied with and successfully passed. Any failure in such tests usually results in the obligation of re-performing the work (at no extra cost) or other claims for damages (as agreed).

The construction contracts generally comprise terms related to completion, takeover and delivery of works ‒ subject to such work being in accordance with the parameters as specified in the contract ‒ and the parties mutually negotiate and agree to the delivery process. Further, such delivered works are also covered under the defect liability period, wherein the possession of work by the employer does not waive the contractor’s liability to rectify the defective/damaged work-related aspects. Subject to the completion of the works and final testing to the satisfaction of the employer/owner, the employer/owner issues a certificate. From the date of such certificate, the defect liability period commences.

The majority of construction contracts specify a defect liability period, wherein the employer and contractor mutually agree on the duration within which the contractor can be held liable for any defect in the work performed by it. Such period usually commences following the taking part in or complete delivery of the works by the employer. Any flaws in the design and/or work can be reported by the employer to the contractor during the defect liability period, pursuant to which the contractor is obligated to rectify the same.

The construction contracts may stipulate a notice period within which the employer is required to notify the contractor of any defects in the work. In case the employer fails to deliver the notice, or if the defect liability period lapses, then the employer remains liable for any cost/expenditure incurred in the rectification/replacement of the defective work.

Remedies of Employer

Requiring the contractor to fix/replace the damaged work, withholding any payment of contract price, and imposing any liquidated damages and indemnities are the common remedies available to the employer during the defect liability period.

Construction contracts are based on fixed-price modules on the basis of a bill of quantities provided by the employer. A fixed price for the entire project or a specified scope of work is agreed upon by the parties and all project-related costs (including, without limitation, labour, materials, equipment, and overhead expenses) are included in the contract price.

Some of the general milestones in construction contracts for payment of the contract price include the following:

• advance payment upon issuance of letter of intent;
• payment of an agreed percentage upon completion of designing;
• payment of an agreed percentage upon supply/installation of equipment on the project site;
• payment of an agreed percentage upon furnishing of performance bank guarantees to the employer;
• payment of an agreed percentage upon successful completion of test of works; and/or
• payment of an agreed percentage upon handover of work to the employer.

The contract price may also contain provisions for contingencies, such as variation in the scope of work or additional work. The parties remain free to mutually agree to a revised contract price based on the actual extent of work.

Construction contracts have indexation for the cement and steel to be utilised for the project, and the prices for such materials are driven by market dynamics. The risk of increase in prices is typically on the employer.

The provisions related to payments are tailored to the specific needs and requirements of the parties as well as the project and are usually subject to dispute resolution mechanisms to ensure that any disputes related to payments can be resolved efficiently and fairly.

The various stages of payments under construction contracts are as follows.

• Mobilisation advance payment – the contractor may receive an initial payment at the commencement of work for covering the mobilisation and other pre-construction costs, whereby such amount depends on a project-by-project basis.
• Scheduled payments – the construction contracts specify a payment schedule with specific due dates for each payment to be made to the contractor by the employer, subject to fulfilment of the relevant obligations by the contractor. Any failure/delay by the employer in making such payment permits the contractor to claim interest or other compensation as per the contractual terms.
• Interim payments – the contractor may receive payments at specific stages of the project, such as after completion of a milestone or stage of work. Interim payments are linked to progress reports or other documentation and remain subject to review by the employer. A contractor may suspend its performance if such right is granted to it under the construction contract. A contractor may suspend its performance of works upon occurrence of any event, inter alia comprising delay in payment by the employer, non-fulfilment of pre-requisite contingent conditions, and force majeure.

Construction contracts also include provisions for dispute resolution, wherein the dispute is resolved between the parties by way of negotiation, mediation or subsequently arbitration.

The contractor issues invoices to the employer in the form and manner as agreed in the construction contracts, against which payment is made by the employer within the prescribed timelines and subject to the terms of the construction contract.

One common means of invoicing used in construction contracts is through the use of progress billing. Under this method, the contractor submits invoices to the employer at specific stages of the project on a periodic basis. These invoices are based on the percentage of work completed during the invoiced period and may be subject to review and approval by the employer before such payment is made.

Another means of invoicing used in construction contracts is through the use of milestone billing. This method is similar to progress billing, but the invoices are tied to specific milestones or stages of the project rather than a monthly schedule.

The development and construction of a project is governed by the development regulations, building regulations, by-laws and the respective master plan of a city or area of a state. A state government, usually, from time to time enacts and enhances its development plans for a period of five or ten years or longer periods.

Appropriate development permission or planning permission is provided by state-appointed authorities within the local laws and development regulations. Local municipal authorities in urban areas are empowered to enforce compliance, under applicable local laws, for various aspects of development and construction, including:

• permitted height of buildings;
• floor area ratio or floor space index, which provides the basis for determining the maximum permissible floor area construction;
• fire protection measures;
• water requirements; and
• general building requirements (eg, distance from ancient monuments, as well as eco-sensitive zones).

In the event of any delay in the progress of works, the contractors are usually required to notify the employer in writing (as early as possible) and seek extension of time as per the terms of the construction contract. Upon receipt of such notice by the employer, the parties take suitable steps to mitigate the delay. However, upon any delay that is due to the contractor, the employer remains entitled to recover damages/penalties (if provided under contract) from the contractors.

Construction contracts provide remedies to the employer in the event of delays by the contractor. Such remedies may include the following:

• liquidated damages – a common remedy for delay in construction contracts whereby a pre-determined amount of damages is agreed by the parties, which the contractor is required to pay to the employer for each day of delay;
• termination – the employer has the right to terminate the contract if the contractor fails to complete the work within the timelines and the right to engage a new contractor to complete the work at the cost of the defaulting contractors;
• indemnification – the employer may seek indemnification from the contractors for all the losses due to the delay in the completion of the construction/event of default; and
• invocation of the bank guarantees – the owner/employer can invoke the bank guarantee provided by the contractor.

The contractor typically requests an extension of time in writing, providing a detailed explanation of the causes of delay and the impact on the project schedule. The request for extension of time would typically be accompanied by supporting documentation, such as progress reports, delay analysis reports and any other relevant information to substantiate the request. Any extension of time is entertained only as per the provision of the contract.

The grounds on which an extension of time may be awarded include:

• variations – where changes to the scope of work or design are made by the employer, resulting in delays to the project; and/or
• force majeure – where delays are caused by events beyond the contractor’s control, such as natural disasters, epidemics, or government actions.

The specific grounds on which an extension of time may be granted will depend on the terms of the contract and any applicable laws or regulations.

Typically, force majeure events are defined in construction contracts. These events include war, flood, drought, fire, cyclone, earthquake, or any other calamity caused by nature affecting the regular development of the project. The parties can contractually limit the circumstances qualifying as a force majeure event. Typically, in cases of a force majeure event, the parties contractually agree on consequences for such force majeure event, which includes extension of time for performance of obligations and termination rights should the force majeure event subsist for more than the agreed period.

Unforeseen circumstances are similar to force majeure events and can be governed by both mandatory or regulatory law, as well as contractually agreed upon by the parties.

In construction contracts, force majeure clauses are often included to address unforeseen circumstances. These clauses typically identify specific events that would constitute force majeure, in addition to providing for the consequences of such events (eg, extension of time or termination of the contract). The parties would typically agree on the definition of force majeure events and the process for invoking force majeure in the contract.

Disruption in the provision of supplies and/or other relevant materials required for the performance of work is recognised as a ground for extension of time and/or compensation, depending upon the factual aspects related to it.

The Department of Expenditure of the Ministry of Finance (India), in a circular dated 19 February 2020, has also specified that disruption in supply chain due to COVID-19 is to be covered within the ambit of force majeure.

The burden of proving disruption is on the concerned party claiming relief under it, by way of submission to the other party of relevant documents and/or evidence in respect of such disruption.

Exclusion of liability clauses in construction contracts are deemed valid, provided they do not violate any extant law. However, there are certain liabilities that cannot be contractually excluded or limited, as they are protected by mandatory law provisions.

Some examples of such liabilities include liability for:

• fraud or wilful misconduct;
• personal injury or death, caused by the contractor’s negligence or breach of duty;
• defects in construction discovered during the warranty/defect liability period; and/or
• breach of statutory obligations, such as safety regulations or environmental laws.

A contractor may be subjected to claims for any wilful negligence and gross misconduct. A liability for gross negligence may occur for any harm caused to any individual who could foreseeably be affected by the act of the contractor.

The doctrine of “duty of care” originates from tort law and states that anyone engaging in any activity that is potential enough to harm others must exercise reasonable care. This obligation includes all people who can reasonably be anticipated to be impacted by the demonstrations of an individual. Consequently, it applies to all construction works performed by a contractor.

Any act of wilful misconduct and gross negligence by either party entitles the other party to make claim for damages in respect of such act.

Limitation of liability clauses in construction contracts are typically provided for and are considered valid. The liquidated damages clause built into construction contracts usually specify the contract price or a part thereof to be the upper limit that can be claimed as liquidated damages.

The contractor does not remain liable to the employer for any indirect or consequential loss or damage, including (without limitation) in respect of loss of production, loss of profit, loss of interest or any other kind of loss.

Almost all construction contracts include a clause related to indemnity. The extent of indemnification varies depending on the specific terms of the contract.

The various matters wherein parties agree to indemnify each other inter alia include the following:

• third-party claims – to address the risk of claims from a third party, including (without limitation) claims from adjacent property owners, environmental claims or claims arising from accidents on the construction site;
• breach of contract – for breach of any representations and obligations;
• non-performance – for claims arising due to failure or breach in performance of any obligation by the parties; and/or
• delay or disruption – for claims arising due to any delays or disruptions in the construction process.

Under construction contracts, guarantees are typically furnished by the contractor in favour of the employer and are independent contracts between the employer and contractor, governed as per the terms of the Indian Contract Act 1972. Such guarantees include the following:

• performance bonds/performance bank guarantees – furnished in respect of the effective performance of the work by the contractor;
• corporate guarantee – furnished to the employer by the parent company of the contractor;
• mobilisation advance guarantee – furnished in respect of the mobilisation advance paid by the employer to the contractor; and/or
• retention guarantee – furnished to guarantee that the contractor will continue to fulfil its contract obligations after handover of the project until the expiry of the defects liability period or until the issuance of the completion certificate.

Various insurances are obtained in construction projects to cover risks that may arise during the course of the completion of works.

Some of the insurances that are typically taken include:

• contractor’s all risks insurance – to cover physical loss or damage to the project and other associated risks such as theft, fire, flood, earthquake and other natural calamities;
• public liability insurance – to cover third-party liability for bodily injury, property damage or any other type of loss or damage due to the construction activities;
• professional indemnity insurance – usually obtained by professionals engaged in the project, in order to cover the risk of any financial loss suffered by the employer/contractor due to their professional negligence, errors or omissions;
• employer’s liability insurance – under the Employees’ State Insurance Act 1948, covers the liability of the employer towards its employees for any accidental injury, illness or death arising from their employment and is usually taken by the contractor; and/or
• product liability insurance – to cover the liability of the manufacturer or supplier for any harm caused by their products.

Construction contracts usually comprise an insolvency event clause, stating that the employer will be entitled to terminate the contract in the event of bankruptcy or insolvency of the contractor. Further, in such cases, the employer also has the right to:

• complete the contractor’s obligations itself or employ a third party at the contractor’s expense;
• recover costs incurred in connection with sale/disposal and restoring the project site by the contractor; and
• claim all amounts outstanding from the contractor under the contract.

Further, in the event of the insolvency of the employer, the contractor has the right to terminate the contract and recover all its outstanding amounts due and payable under the contract.

However, owing to the enactment of the Insolvency and Bankruptcy Code 2016, the timing of invocation/calling out of an insolvency event is changing and now contracts need to account for the law, which states that there is a moratorium imposed as soon as any entity is admitted for insolvency (meaning litigation cannot be initiated/continued against such party until the time the insolvency is resolved).

As the performance of construction contracts primarily depends on the performance of obligations by the contractor, risk associated with the construction project is borne by the contractor. However, any risk relating to a defect in the employer’s title to the immovable property, or authorisation to construct the project, etc, remains on the employer.

The personnel engaged in any construction project usually belong to the contractor group. The construction contracts typically include the following clauses in respect of the personnel:

• total number of personnel to be appointed and permitted on the construction site;
• designation, key responsibilities and liabilities of such personnel;
• reporting requirements;
• adherence to health and safety guidelines;
• dismissal/removal of the personnel; and/ or
• party responsible for the remuneration and other benefits of such personnel.

The subcontractors are usually appointed by the contractor to perform part of the contractor’s obligations under the construction contract. However, in most cases, it remains subject to approval of the employer. Further, in certain cases, the construction contract includes a pre-identified list of subcontractors that can be engaged by the contractor. The contractor remains responsible for ensuring the competence of the subcontractor to perform the work.

Subcontracting does not absolve the contractor from its obligations and liabilities towards the employer and project under the construction contract. Any breach by the subcontractor is considered a breach of the contractor and the employer remains entitled to make a claim for damages directly from the contractor, without being obligated to approach the subcontractor in such claim.

Similarly, the subcontractor in most cases does not have any right to make any claim for damages from the employer, and its only remedy is to make said claim to the contractor.

Construction contracts include a clause that entitles the employer to claim ownership of any IP created in relation to the project/work. The contractor and/or any third party engaged in the project do not have any proprietary and/or licensing rights over said IP.

The Indian Contract Act 1872 governs contracts in India, which includes the terms related to claims for liquidated damages in case of contractual breach by any party. In the event of a breach of contract, the relevant provisions of the Indian Contract Act 1872 specifically provide that the defaulting party is obligated to pay damages to the non-defaulting parties.

Accordingly, construction contracts typically include clauses relating to liquidated damages and indemnity for claiming damages as a remedy for breach of contract by either party.

In construction contracts, the parties commercially negotiate the quantum of limitation of liability. However, there are certain exclusions where the restriction is not applicable, which inter alia include fraud or wilful misconduct.

Typically, these clauses are not used in construction contracts.

The parties usually exclude or limit their liability for certain types of damages, such as indirect or consequential damages, loss of profits, loss of use, or punitive damages. However, this does not limit the liability of the parties for damages arising from fraud, gross negligence or wilful misconduct.

Retention and suspension rights are commonly included in construction contracts as a means to ensure compliance with the terms of the contract and to protect the interests of both parties.

Retention clauses generally specify that the employer will retain a percentage of the payment due to the contractor from each invoice until the performance parameters have been met and final handover of the project has occurred. In some cases, such amount is retained throughout the defect liability period.

Further, suspension rights are included in the construction contracts whereby the contractor is entitled to suspend performance of works upon the occurrence of any event ‒ for example, delay in payment by the employer, non-fulfilment of pre-requisite contingent conditions, and force majeure.

Termination Events

The legal and contractual options for termination of a construction contract may vary depending on the terms of the contract and the applicable laws. Generally, the construction contracts include the following circumstances for termination of the contract, including (without limitation):

• termination for convenience – for terminating the contract at any time, upon giving a notice period and payment of compensation to the other party, or as per mutual agreement;
• termination for breach – for termination upon breach of any material term of the contract by either party, and the other non-defaulting party issuing notice to the defaulting party along with an opportunity to cure the breach;
• termination for insolvency – for termination upon any party becoming insolvent; and/or
• termination for force majeure – for termination upon the occurrence of any force majeure event that prevents performance of the contract for a specified duration.

Consequences of Termination

The typical legal and contractual consequences of termination include the following:

• payment of compensation by the party initiating the termination to the other party for any loss suffered as a result of the termination, unless the termination was due to a breach by the other party;
• return of property belonging to the other party;
• settlement of accounts in respect of any outstanding payments or accounts; and/or
• parties invoking the dispute resolution clause for resolving said dispute in terms thereof.

Adjudication of Disputes by Courts

In India, courts have jurisdiction over construction disputes based on territorial and pecuniary limits. In construction disputes, determining the appropriate territorial jurisdiction of a court is crucial. It is determined by the place where the cause of action arises, where the construction contract was entered into, or where the project/property is situated. In addition, parties may agree to exclusive jurisdiction clauses in their construction contracts, designating a particular court or jurisdiction to hear any disputes arising from the construction contract.

However, construction contracts are usually negotiated in a manner that ensures that the resolution of any dispute is first attempted through amicable discussion between the parties – failing which, said dispute is referred to arbitration. The parties mutually negotiate the rules, seat, composition of tribunal, language, etc, in respect of such arbitration.

In India, the prevalent ADR methods are arbitration, mediation, conciliation and negotiation. Of the foregoing, arbitration is the most popular method of resolving any contractual disputes in the construction market, wherein parties have the right to approach civil courts for any interim relief.

If the contracting parties are Indian and the project is based in India, ad hoc arbitration under the Indian Arbitration and Conciliation Act 1996 is often chosen, which recognises resolution of disputes through the methods of arbitration, conciliation and mediation. Where foreign parties are involved, then parties prefer an institutionalised arbitration.

Some of the commonly used foreign arbitration institutions are:

• the Singapore International Arbitration Centre;
• the LCIA; and
• the ICC.

Some of the commonly used Indian arbitration institutions are:

• the Delhi International Arbitration Centre; and
• the Mumbai Centre for International Arbitration.