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No damage for delay clause in Arbitration Contract

When parties enter into a contract they are bound to follow the terms of the contract that are mutually agreed by the parties of such contract. One of such clauses included in the contract is that of claiming damages. As a general provision the contracting party that breaches the contract is obligated to compensate the other ,but in some of the contract, their lies 'No damage for delay clause', it is an exclusionary clause where the contractors right to claim damages is restricted.

The no damage for delay clause is of conflicting nature. In the case of Lucas Earthmovers Pty Limited v Anglogold Ashanti Australian Limited [1], the federal court of Australia took proper consideration of the clause restricting the right of the contractor. The consideration of the clause was time- related costs.

The Supreme court of India in the case of Ramnath International Construction (P) Ltd. vs. Union of India[2]( hereinafter Ramnath) held that all kind of delay including those which are attributable to the owner, no compensation howsoever is payable by the employer to the contractor of delay or damages caused. The sole remedy available to the contractor will be regarding the extension of time.

Concurrent delay and no compensation clause: International perspective

A situation where there are two or more independent cause of delay takes place results in concurrent delay. There are different approaches that are followed by different courts while dealing with a case where concurrent delay arises and the No damage for delay clause also forms the part of the contract. In the case of Henry Boot Construction Ltd. v. Malmaison Hotel[3] the technology and construction court of United Kingdom came up with Malmaison Approach , this approach holds the view that when there is two concurrent cause of delay , one of which is beyond the control of the contract and the other is not, then the contractor is entitled to an extension of time for the period of delay cause by the relevant event but no time-related cost can be recovered for the other concurrent event.

The Scottish Courts in City Inn v. Shepherd Construction Ltd[4] declined to follow the Malmaison Approach, and came up with Apportionment Approach. According to this approach when neither of the concurrent cause is dominant the delay should be shared between the contractor and the employer. Similar approach was followed by different courts such as the United Arab Emirates and the Hong Kong. The Hong Kong High Court in Hing Construction Co Ltd v Boost Investments Ltd [5]expressly approved and followed the City Inn judgment of the Scottish Courts.

Law in India

The law regarding the delay in performance of the contract is codified under the Indian Contract Act 1872, section 55 and 56. If the delay is caused in the completion of the contract and for such delay, a belated performance is accepted by the contractor then he would not be entitled to any claim for any loss caused by non-performance for such reciprocal promise unless a notice regarding the same has be delivered to the employer.

Under the Indian law where the contractor has agreed not to claim any damages as a result of delay in competition of the project, the contractor can still be entitled to damages under some situation like when the contractor repudiates the contract under section 55 of the Indian contract act or if the employer give extension of time by entering into to supplement agreement and making it clear that the escalation cost would be paid.

In the case of Northern Railway v. Sarvesh Chopra [6] (hereinafter Sarvesh Chopra;) the court held that the contractor will be entitled to claim damages provide that at the time of extension of time for the performance of contract, the contractor gives notice of his intension to claim damages for the delay. Even after the judgment given the three bench judge in the above mention case of Sarvesh Chopra, there has been a considerable amount of confusion regarding the law relating to delay in performance of the contract especially in the case of building and engineering contract.

Due to the inconsistent judgment by different benches of the Supreme Court, there has been confusion in the interpretation by various high courts on the similar contractual clause agreed upon by the parties.

In the case of Rawal Construction Company v. Union of India [7] the Delhi High Court stated that:
when the cause of delay is due to the breach of contract by the employer, and there is also an applicable power to extend the time, the exercise of that power will not, in the absence of clearest possible language deprive the contractor of his right to damages for the breach.[8] Such provision as attempt to deprive the contractor of the right to claim damages will be strictly construed against the employer.[9]

Analysis of the view of Supreme Court
The problem regarding the view on 'No damage for delay clause' had been compounded by the case of Ramnath International Construction, where the contractor would not be able to recover any damages including those which are attributable to the employer as mentioned earlier.

The Supreme Court in one of its judgment in the case of Asian Techs Ltd. v. Union of India[10] held that the exclusionary clause prohibits the department from entering any claim for damages, but does not prohibit the arbitrator from entering it.

The court after going to the factual analysis was of the conclusion that the department was solely responsible for the delay in the execution of the contract therefore the department cannot go way with its responsibility by taking advantage of no liability clause. The supreme court relied on the judgment of the earlier decision of the court in the case of Port of Calcutta v. Engineers-De-Space-Age[11].

This view has also been supported in the case of Bharat Drilling & Foundation Treatment (P) Ltd. v. State of Jharkhand[12] by the supreme court.

In the case of Associated Construction v. Pawanhans Helicopters Ltd[13] wherein under the clause of the contract, there was a bar on the payment of price escalation charges if the contract gets extended for any reason whatsoever. The Supreme Court held that such an embargo can only be during the contractual period and not thereafter. The no damage or no escalation or exclusionary clause operates during the period of the contract.

The Supreme Court relied upon its earlier judgment in the case P.M. Paul v. Union of India[14] and K.N. Sathyapalan v. State of Kerala[15] where price escalation cost to the contract was upheld during the extended period of the contract despite there being exclusionary clause.

In one of the recent judgment by three benched judges of the Supreme Court in the case of Assam SEB v. Bulidworth (P) Ltd.[16]( hereinafter Bulidworth) upheld the award passed by the arbitrators granting price escalation costs to the contractor during the extended period of the contract.

The Division Bench of the Calcutta High Court in State of W.B. v. Pam Developments (P) Ltd.[17] and the Division Bench of the Andhra Pradesh High Court in T.A. Choudhary v. State of A.P[18] came to the conclusion by considering all the judgment of all the Supreme Court and High Court on the lines laid down in the case of BULDWORTH and SARVESH CHOPRA that no damages clause or exclusionary clause are not valid during the extended period of the contract.

Legality of no compensation of damage clause
No damage clause vis-Ó-vis provision of Indian contractor act 1872 .The enforceability of the no damage clause deals under section 23 of the Indian contract act 1872. The section provides that the object of an agreement is unlawful if is opposed by public policy.

The Delhi High Court in the case of Simplex Concrete Piles (India) Ltd. vs. Union of India[19](hereinafter simplex) referred to section 73 and 55 of the Indian contract act 1872 , the court was of the view that where any clause of the contract takes away the right to claim damages under section 73 and 55 would violate public policy under section 23. The court held that both of the section 73 and 55 forms the heart of the Indian contract act 1872.

The Delhi High Court dealing in the same context in the case of Public Work Department vs. M/S Navayuga Engineering Co. Ltd[20](hereinafter PWD) distinguished the Simplex case , was of the view that such clause to be in conformity with public policy. The court pointed out in Simpelx case the contractor did not had an option to sue for the breach whereas in PWD the contractor had an option to sue for damages by not agreeing the time extension of the contract.

However the contractor can claim damages under certain circumstances with the existence of no compensation for delay clause in the contract.
Some of these circumstance my include:
  1. Delays due to owner's bad faith or malicious or negligent conduct
  2. Uncontemplated delays
  3. Delays due to owner's active interference
  4. Delays so unreasonable that they constitute an abandonment of the contract
  5. Delays resulting from an owner's breach of a fundamental contract obligation

Impact On The Award Passed Bt The Arbitrator

Most the contracts dealing with construction comes with a case of Arbitration in case of dispute. One of the major reasons for an arbitration proceeding in the construction contract is that of delay in performance. One of the major issue while deciding such contract is that whether the Arbitrator is bound by the clause of compensation as provided in the contract.

In Ramnath Case the arbitrator held that the contractor would be entitled to compensation even with the presence of 'No damage for delay clause'. The same order was set aside by the Supreme Court and was held that the contractor would not be entitled to any compensation as the contractor and the employer have mutually agreed upon the 'No damage for delay clause'. However in the case of Asian Tech the court held that the arbitrator is not bound by such clause.

It is to be noted that both the judgments, Ramnath and Asian techs are decided by two judge bench and both cases deal with identical clauses. Further, Asian techs was decided after Ramnath but it does not refer to the latter in the judgment. However, Ramanath has been followed in subsequent cases[21] also by the Apex Court.

The Punjab and Haryana High Court in Union of India v. Om Construction Company[22], set aside the award of damages awarded by the Arbitral Tribunal to the contractor. The court held that the Arbitral Tribunal is exceeding the jurisdiction by awarding damages to the party. The court held the parties mutually agreed upon such clause and they are bound to follow the consequence of such clause. The tribunal by delivering award is altering the clause of the contract which is beyond its jurisdiction.

The Delhi High Court in PWD case, distinguished Asian Tech and held that in the latter case the respondent gave a clear assurance to work in the extended period and the price of such extension would be decided across-table. The respondent cannot take the plea that the appellant cannot claim the damages that the prices where never decided across-table and thus the court in the case held that the arbitrator had jurisdiction to award the same.

Therefore the Delhi High Court observed that in case of No damage for delay the Arbitral tribunal cannot award damages. The court pointed out by distinguishing Asian Tech case, the court upheld that arbitration award because the respondent assured the appellant that the price would be decided across-table.

The clause to impede compensation to the contractor is relatively uncommon. A no damage for delay clause are designed to protect the owner from the claims made by the contractor and the contractor from the claims made by the sub-contractor. No damage for delay clause requires contractors to contemplate the impact on their pricing due to the acceptance of risk for delay whatsoever. The courts while deciding such matters should take into account the party autonomy in deciding the terms of the contract, intention behind and the purpose of such clause.

  1. [2019] FCA 1049
  2. (2007)2 SC 453
  3. [1999] 70 Con LR 32
  4. [2010] CSIH 68
  5. [2009] BLR 339
  6. (2002) 4 SCC 45
  7. 1981 SCC OnLine Del 315 : ILR (1982) 1 Del 44
  8. Hudson & Alfred Arthur, Hudson's Building and Engineering Contracts (9th Edn., Sweet & Maxwell, London, 1965) p. 492.
  9. Id, p. 493
  10. (2009) 10 SCC 354
  11. (1996) 1 SCC 516
  12. (2009) 16 SCC 705
  13. (2008) 16 SCC 128
  14. 1989 Supp(1) SCC 368
  15. (2007) 13 SCC 43
  16. (2017) 8 SCC 146
  17. 2017 SCVC OnLine Cal 13272: (2017) 4 Cal LT 366
  18. 2003 SCC OnLine AP 494 : (2004) 3 ALD 357.
  19. (2010)115 DRJ 616
  20. 2014 SCC Online Del 1343
  21. Oil & Natural Gas Corp v M/S Wig Brothers Builders & Engineers Pvt. Ltd. (2010) 13 SCC 377
  22. 1996 SCC OnLine P&H 1042 : PLR (1997) 116 P&H 92

    Award Winning Article Is written By:áMs.Vartika Singhania

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