Delay and variation claims under an Indian construction contract turn on section 55, the section 74 ceiling and a narrow challenge under section 34

An engineering, procurement and construction (EPC) contract in India carries its delay and variation claims through the Indian Contract Act, 1872: section 55 decides whether late completion lets the owner end the contract or only claim compensation, and section 74 caps liquidated damages at the sum named, which on the Supreme Court's reading in Kailash Nath Associates v. Delhi Development Authority (9 January 2015) is payable in full only as a genuine pre-estimate of loss. Section 34 of the Arbitration and Conciliation Act, 1996 gives three months, and at most thirty days more, to challenge an award, and section 20A of the Specific Relief Act, 1963 bars a court from granting an injunction that would delay a listed infrastructure project.

What does time being of the essence change under section 55?

Section 55 of the Indian Contract Act, 1872 turns on whether "the intention of the parties was that time should be of the essence of the contract". If it was, a promisor who misses the specified time makes the contract, or the unperformed part, voidable at the promisee's option. If it was not, the contract is not voidable, but "the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure."

The third paragraph matters on a long project. Where the promisee accepts late performance of a contract voidable for lateness, the promisee "cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor of his intention to do so." India Code prints an Uttar Pradesh amendment (Uttar Pradesh Act 57 of 1976) that substitutes a waiver test for the notice.

The section lists no signs of intention, so the point is read from the contract as a whole.

The contractor's side of delay sits in other sections. Under section 67, a promisee who "neglects or refuses to afford the promisor reasonable facilities for the performance of his promise" excuses the promisor "as to any non-performance caused thereby". Under section 53, a party prevented by the other from performing a reciprocal promise may avoid the contract and claim compensation. Section 63 lets a promisee "extend the time" for performance, which is the root of a granted extension.

How does section 74 treat liquidated damages?

Section 74 applies where a sum is named in the contract as payable on breach, or there is "any other stipulation by way of penalty". The party complaining is entitled, "whether or not actual damage or loss is proved", to "reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for."

In Kailash Nath Associates v. Delhi Development Authority (Civil Appeal No. 193 of 2015, decided 9 January 2015, (2015) 4 SCC 136), R. F. Nariman and Ranjan Gogoi, JJ. stated the law in paragraph 43. A named sum is awarded as reasonable compensation only if it is a genuine pre-estimate of damages fixed by both parties and found so by the court. Otherwise, whether the sum is called liquidated damages or penalty, only reasonable compensation can be awarded, and the named sum is "the upper limit". Damage or loss caused is "a sine qua non" for the section. Where actual loss can be proved, proof is not dispensed with; the named sum can stand without it only where loss is "difficult or impossible to prove" and the sum is a genuine pre-estimate.

What does section 73 add?

Section 73 is the general measure: loss "which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it", and not "any remote and indirect loss or damage". Its Explanation requires "the means which existed of remedying the inconvenience" to be taken into account. Paragraph 43 of Kailash Nath says reasonable compensation under section 74 is fixed on section 73's principles.

A contractor's prolongation claim for site overheads after an owner-caused delay rests on section 73, with sections 53 and 67 supplying the breach.

How is a variation paid for?

The Act has no section on variations. Under section 62, where parties agree "to substitute a new contract for it, or to rescind or alter it, the original contract, need not be performed". A variation order signed by both sides is an alteration by agreement, priced as the parties fix.

Where extra work is done without the written instruction the contract demands, the claim has two footings. Section 70 applies where a person "lawfully does anything for another person ... not intending to do so gratuitously, and such other person enjoys the benefit thereof", and obliges the latter "to make compensation". Section 73 applies where refusing to pay for directed work is itself a breach.

What do notices do?

Three statutory notices matter. Section 55 requires notice on accepting late performance. Section 20(2) of the Specific Relief Act, 1963, in force from 1 October 2018, bars substituted performance (completion by a third party or the owner at the defaulter's cost) unless the party suffering breach has given "a notice in writing, of not less than thirty days". Section 34(5) of the Arbitration and Conciliation Act, 1996 requires prior notice before an application to set aside an award.

Notice clauses in a contract are different. Section 28 of the Contract Act makes void, to that extent, an agreement that limits the time within which a party may enforce its rights by the usual legal proceedings, or extinguishes a right on the expiry of a specified period.

How far can a court go under section 34?

Recourse to a court against an award is "only by an application for setting aside such award". The applicant must establish, on the tribunal's record, a ground in section 34(2)(a), such as incapacity, an invalid arbitration agreement, inability to present the case or an award beyond the submission. Under section 34(2)(b) the court may also set aside an award on a subject that cannot be arbitrated, or one in conflict with the public policy of India.

Explanation 1 limits public policy to fraud or corruption, violation of section 75 or section 81, contravention of the fundamental policy of Indian law, and conflict with the most basic notions of morality or justice. Explanation 2 says the fundamental policy test "shall not entail a review on the merits of the dispute". For an award in an arbitration other than an international commercial arbitration, section 34(2A) adds patent illegality on the face of the award, and an award is not to be set aside "merely on the ground of an erroneous application of the law or by reappreciation of evidence."

In Ssangyong Engineering and Construction Co. Ltd. v. National Highways Authority of India (Civil Appeal No. 4779 of 2019, decided 8 May 2019), the Supreme Court held that section 34 as amended applies to applications made on or after 23 October 2015, and that the "most basic notions of justice" ground applies "only in very exceptional circumstances when the conscience of the Court is shocked". It set the majority award aside under section 34(2)(a)(iii), because the tribunal relied on guidelines that were never before the parties, and also on the most basic notions of justice ground, because applying a circular issued by one party alone made a new contract for the parties.

The period is three months from receipt of the award, or from disposal of a request under section 33, with thirty days more for sufficient cause and "not thereafter" (six months in the Union territories of Jammu and Kashmir and Ladakh). Section 34(6) directs disposal within one year of service of the section 34(5) notice. Filing does not stop enforcement: the award stays enforceable unless the court stays it on a separate application under section 36(3), and the second proviso to section 36(3) requires an unconditional stay where a prima facie case of fraud or corruption in the agreement or the award is made out.

What does section 20A do to an injunction?

Section 20A(1) of the Specific Relief Act, 1963 provides that "no injunction shall be granted by a court in a suit under this Act involving a contract relating to an infrastructure project specified in the Schedule, where granting injunction would cause impediment or delay in the progress or completion of such infrastructure project." Section 41(ha) repeats the bar. Section 20C requires disposal of such a suit within twelve months of service of summons, with at most six months more for recorded reasons.

The Specific Relief (Amendment) Act, 2018 (Act 18 of 2018) inserted these provisions, shown on India Code as effective from 1 October 2018. The Schedule has five categories: transport (roads and bridges, ports, airports, railway track and stations), energy, water and sanitation, communication, and social and commercial infrastructure. The Central Government may amend it under section 20A(2).

What do the numbers look like?

An illustration. The contract, dates and amounts below are hypothetical.

EPC contract for a water treatment plant, price INR 200 crore
  Delay damages        0.25 per cent of price per week or part of a week
  Cap                  10 per cent = INR 20 crore (reached at 40 weeks)
  Completion date      31 March 2026; extended by 45 days to 15 May 2026
                       for late handover of part of the site
  Actual completion    26 September 2026

  Without the extension: 179 days = 26 weeks x 0.25 = 6.5 per cent
                                                      = INR 13 crore
  With the extension:    134 days = 20 weeks x 0.25 = 5 per cent
                                                      = INR 10 crore
  Contractor's section 73 claim, 45 days at INR 8 lakh = INR 3.6 crore,
                                                      if proved

A challenge, on hypothetical dates
  Award received 15 March 2028; section 34 application due by
  15 June 2028, or 15 July 2028 with the thirty-day proviso.

The extension avoids INR 3 crore of damages. If the owner proves loss of INR 6 crore from the 134 days, paragraph 43 of Kailash Nath points to compensation measured by that loss, below the INR 10 crore named. If loss is hard to prove and the rate is a genuine pre-estimate, INR 10 crore can stand.

What remains unsettled?

Whether a clause that bars an extension of time or variation claim not notified within a fixed number of days is void under section 28 of the Indian Contract Act, 1872, or is a condition of the right and so outside it.

Whether section 20A of the Specific Relief Act, 1963 reaches an application for interim measures under section 9 of the Arbitration and Conciliation Act, 1996, since section 20A speaks of "a suit under this Act".

How a tribunal is to value a variation performed and used but never instructed in the form the contract demands, as between a contract rate and section 70, which says "compensation" without saying by reference to what.