UNIT IV

Ref Text :

1. Phillip Davenport-Fundamentals of Building Contract Management-University of New

South Wales Press (2002)
2. Building-Engineering-Contracts-B-S-Patil
3. A Guide to Contract Interpretation, Vincent R. Martorana, July 2014 Reed Smith LLP
1. CONTRACT INTERPRETATION
2. POST-CONSTRUCTION CONTRACT ADMINISTRATION

Claims by the contractor against the principal for additional recompense may go beyond the
normal claims expected in a contract. Variations and limited delay cost claims can be handled
under appropriate contract clauses, but major claims may occur due to:

1. differences of opinion as to what is required (poor specification)

2. additional expenses to the contractor caused by a matter the contractor claims could not
have been foreseen (e.g. a latent condition)
3. disruption to or prolongation of the work by the principal
4. misleading or deceptive conduct (breach of s. 52 of the Trade Practices Act or the
equivalent section of the Fair Trading Act of a particular State)
5. variations to which agreement on price and time cannot be reached
6. differences of opinion as to whether work has been omitted or is defective
7. differences of opinion as to the amount of liquidated damages imposed
8. work outside the contract (claims for restitution based on unjust enrichment)
9. ‘try-ons’ (claims with no real substance caused by losses, a low tender, or bad
administration).

Additional causes of costs which may not be covered under the contract include:
• Strikes or selective work bans
• Weather conditions
• Public holidays
• Unavailability or delay in obtaining labor or materials
• Vandalism and accidents not covered by insurance
• Mistakes and poor workmanship by the contractor’s own employees
• Breaches of contract and delays caused by consultants, subcontractors and suppliers
• Poor design that is difficult to assess
• Delays by or restrictions imposed by public authorities
• Injunctions by neighbors or others
• Financial difficulties of the contractor, major subcontractor or principal.

2.1 COMMON SOURCES OF CONTRACTOR’S CLAIMS

Documentation
• Late issue of drawings
• Inadequate information on, or errors and/or inconsistencies contained in drawings
• Frequent reissue of drawings
• Disputes relating to the precedence of documents where inconsistencies arise
• Failure to clearly identify and execute contract documentation.

The site
• Late or insufficient possession of site
• Incorrectly set out information provided by principal
• Disputes with adjoining principals (injunctions etc.)
• Changed site conditions (misrepresented or unexpected).
Execution of works
• imposed changes on contractor’s construction methods
• changes relating to the requirements of statutory authorities
• Defective workmanship or materials.

Subcontracting
• Late nomination of nominated subcontracts
• Default by nominated subcontractors.

Time
• Changes in the order and sequence of the works
• Delays caused by the principal or the principal’s agents
• Delays caused by weather, industrial disputation or other causes outside the
contractor’s control
• Accelerated completion
• Loss of productivity.

Payment and adjustments of contract sum

• Variations, including whether or not an item is a variation and disputes over quantum
and value of variations
• delayed completion
• Adjustments to measured quantities and/or relevant applicable rates
• Late of ‘under-certification’ of progress payments by architect or superintendent
• Late payment by principal
• Inconsistencies in interpretation of cost adjustment formulas
• Deduction of liquidated and ascertained damages by the principal.

3. TERMINATION
Termination can occur by:
1. Performance by both parties of their respective obligations: If a contractor has finished
all the work and the principal has paid the contractor in full, the contract is at an end.
2. Both parties agreeing to terminate: If the parties agree to terminate a contract, then they
have made another contract that extinguishes rights under the first contract.
3. One party pursuant to a power given in the contract: Under many standard forms of
contract there are provisions entitling one party to terminate if the other party commits
certain breaches and thereafter fails to show reasonable cause to the other why the
other should not terminate.
4. One party upon the repudiation of the other party: Repudiation by a party to a contract is
where the party refuses to perform the party’s obligations or acts in such a manner as to
demonstrate that the party does not mean to be bound by the contract. It may occur
when a contractor abandons the work and demonstrates no intention to ever finish the
work. It may occur when the principal fails to make the site available for a long time and
fails to indicate when it will be available
5. Operation of law, for example the doctrine of frustration or an order of a court under a
statutory power to review contracts (usually consumer contracts or contracts for
residential building work).
4. DISPUTE RESOLUTION
A dispute arise when one party makes a claim against the other and the other party disputes
liability either expressly or by conduct.

There are six ways in which a dispute under a construction contract can be resolved:
1. negotiation
2. alternative dispute resolution
3. adjudication
4. expert determination
5. arbitration
6. litigation

These methods fall into two categories, namely resolution by agreement or resolution by a
binding decision of a third party.

4.1 RESOLUTION BY AGREEMENT

Disputes may be resolved by negotiation between the parties, or a third party may be called in
to assist with negotiations. The third party may be described as a facilitator, mediator, appraiser
or expert. Eg. ACDC (the Australian Commercial Disputes Centre), LEADR and the Institute of
Arbitrators and Mediators Australia,
Experienced facilitators, mediators or expert appraisers usually require the disputing parties to
sign a three-party agreement covering the terms of reference, the fees to be paid and the
procedures to be followed. The agreement will probably also include a clause exempting the
third party from liability.
Claims are extinguished, in the sense that they cannot thereafter lawfully be pursued, when the
claimant and the respondent to the claim reach accord (agreement) and the agreement is
satisfied (satisfaction). ‘Accord and satisfaction’ extinguishes a claim.

4.1.1 Negotiation Strategies.

The intentions of the negotiator determine his choice of conflict resolution strategies. The
strategy adopted has a tremendous impact on the outcome of conflict.

Depending on the level of concern the negotiator has for one’s own outcomes and for
the outcomes of others, the negotiator may adopt one of the following five strategies:

1. Compromising: This strategy aims at finding a middle ground. Often the person gives
away something in exchange for something, else. A person using this strategy has a moderate
degree of concern for one’s own interests and the interests of others. There is no clear outcome
when this strategy is used.

2. Forcing: This is an aggressive and dominating strategy aimed at achieving one’s personal
goals at the expense of others. This style of conflict resolution reflects a high concern with one’s
own interests but low concern with the interests of others.
3. Avoiding: In this strategy the negotiator has little concern for one’s outcomes as well as
those of others. The individual physically and mentally withdraws from the conflict. This often
results in a lose-lose outcome.

4. Smoothing: In this strategy the negotiator is more concerned with others outcomes than
one’s own outcomes. The participant does not mind giving the other side whatever they want.
The negotiator deliberately seeks a solution that is beneficial to the other side even though it
may not be in his best interests.

5. Confronting: In this strategy the negotiator participant faces the conflict head-on and
aims at a solution that is mutually satisfactory. The negotiator strives to find a solution that is
acceptable to both the parties. This strategy seeks to maximize the outcomes for both the sides.
This strategy is also known as problem solving or integrating.

Of the five negotiation strategies mentioned above, the confronting strategy is viewed as the
best one. It is a strategy that really seeks a resolution to the conflict.

The benefits of the confronting approach are:

(a) It is productive since both parties gain.

(b) It examines the cause of differences between the two parties and seeks a creative
solution of the problem.

(c) It aims at a solution that integrates the interests of all concerned parties.

(d) It maintains the self-respect of both the parties and creates mutual respect
between them.

In contrast to the confronting strategy, the avoiding and smoothing strategies have the following
effects:

(1) They are helpful in managing the conflict process.

(2) They are useful in controlling the intensity of conflict and reduce its harmful effect.

(3) The source of conflict continues to exist even after the conflict is over.

4.2 RESOLUTION BY A BINDING DECISION OF A THIRD PARTY

Mechanisms for resolving disputes by a binding decision of a third party fall into five categories:

1. litigation
2. arbitration
3. expert determination
4. alternative dispute resolution
5. adjudication

4.2.1 LITIGATION
Litigation is the process whereby one party commences an action in a court or statutory tribunal
against the other party. Generally speaking, anyone can start litigation by lodging a written claim
in the appropriate court or tribunal. However, if the claimant is party to an arbitration agreement
with the person being sued, who is the respondent to the claim, the respondent can apply to the
court for an order ‘staying’ (stopping) the litigation, thereby forcing the claimant to proceed by
way of arbitration

Essential sequence of the litigation process:

 submission of the initial claim
 issue of the defense
 mutual disclosure of all documents on which a party relies as well as all which could
adversely affect his case
 exchange of witness statements
 the trial itself

Disadvantages
 Litigation is time consuming
 Litigation process is a very complicated process
 Litigation is very costly and financially.
 More benefit to wealthier party.
 Litigation is not a process of solving problems, but a process of winning arguments.
 Win- Lose situation
 Litigation is unsuited to disputes involving technical issues. The fact that neither the
judge or the jury may not have enough knowledge nor experience with the subject
matter of the dispute between the parties.
 Litigation is adversarial, which means less regard to fair solution.

4.2.2 ARBITRATION
This is a legal process where the parties have agreed that they will have a dispute or disputes
decided by a third party of their choice or, if they cannot agree, appointed by someone for them.
By agreement, the parties can set their own rules for arbitration. Unless the parties have agreed
otherwise, the arbitrator is bound to decide according to law. However, by agreement (as in the
example above), the parties can empower the arbitrator to decide otherwise than according to
law, for example, according to what the arbitrator thinks is fair and reasonable irrespective of the
legal position. Arbitrations tend to be long drawn out, expensive affairs. To avoid the perceived
disadvantages of arbitration, there has in recent years been a move to incorporate ‘expert
determination’ clauses in construction contracts

4.2.3 EXPERT DETERMINATION

Parties may appoint a third person (the expert) to give an opinion on a value, quantity, fact or
legal entitlement. They can agree to abide by that opinion. That is a valid contract that the
courts will enforce, even though the expert may have negligently undervalued or overvalued. If
the expert has failed to do what the expert agreed to do, the parties can sue the expert, but
nevertheless they are bound by their agreement to abide by the expert’s opinion. An advantage
of expert determination is its flexibility, unrestrained by legislation. Expert determination is
particularly useful where there is a dispute involving subcontract work which the principal claims
is defective and where the contractor does not know which side to take. When in an expert
determination agreement the expert is required to ‘decide’ a dispute, what in fact the expert
does is give an opinion on an issue.

Differences between Experts and Arbitrators

An arbitrator decides the legal rights of the parties in dispute. An expert makes a valuation or
measurement of an item or tests an item or gives an opinion. The expert does not decide the
rights of the parties. The decision of the expert will decide the rights of the parties because the
parties have agreed that their respective rights depend on the decision of the expert. Arbitration
is a procedure governed by the Arbitration Act. It provides that the arbitrator will not be liable for
negligence but requires the arbitrator to comply with certain formalities, including giving reasons
in writing, deciding according to law, and giving both parties a fair hearing. If one party fails to
pay an amount awarded by an arbitrator, the other party can register the decision as an order of
the court and enforce it just as a judgment of the court can be enforced. On the other hand, if a
party fails to pay an amount decided by an expert, the other party can only sue for breach of the
contract to abide by the decision of the expert.

4.2.4 ALTERNATIVE DISPUTE RESOLUTION

Alternative dispute resolution is a form of structured negotiation in which the parties are
facilitated in resolving their dispute themselves through the employment of a conciliator or
mediator. The essential difference between ADR and other forms of dispute resolution is that
there is no judgment, decision or award imposed on the parties. If they reach an agreement
then it is their agreement which they have entered into voluntarily.
The mediator is sent a brief by each of the parties which summarize their case together with
copies of the relevant documents.
The mediator will call the parties together on his appointment and give directions as to the
documents which he wishes to see and the form which the mediation is to take
There will be an initial meeting of the parties together with the mediator at which each will have
the opportunity of presenting his case.
The parties will then retire to separate rooms and the mediator will discuss their case with each
individually and seek to find some common ground upon which a settlement could be based.

The advantages of ADR are:

 it is quicker than either arbitration or litigation procedure

 the costs are a fraction of what it would cost to go to arbitration or law
 it does not tie up for as long the time of the executives of the companies
 because it does not result in a decision, but in a mutually acceptable agreement
between the parties, it does not prejudice their future business relationship - no one has
'won' or 'lost' - which makes it an ideal method for resolving disputes in the context of
partnering-type agreements
 unlike litigation, it is private costs are borne by each party and they share the costs of
the mediator equally
There are disadvantages, but only if one party abuses the ADR process and is not interested in
coming to agreement. If that party is so inclined he can use the ADR process as a delaying
tactic and also as a means of assessing the strength or otherwise of the other party's case. The
ideal situation for the use of ADR is when the time and the costs which would be involved in
either arbitration or litigation are excessive in relation to the sums of money in dispute, and the
parties want to negotiate a settlement and go on doing business with each other.

4.2.5 ADJUDICATION

Adjudication is a compulsory dispute resolution mechanism. It is the most commonly used

dispute resolution process for resolving such disputes.

Adjudication is quick and cost effective. Most disputes are resolved in less than six weeks from
the time the process is initiated. The Act applies with very few exceptions to every construction
contract that relates to the carrying out of construction work. Any party who has a dispute or
difference with any other party to that contract can refer that dispute to adjudication.

Adjudication is appropriate for resolving claims relating to:

 Interim payments.
 Delay and disruption of the works.
 Extensions of time for completion of the works.
 The final account.

Although not originally designed for complex claims, an adjudication can relate to:
 Breach of contract.
 Termination of a contract.
 Professional negligence.

5. THE ARBITRATION AND CONCILIATION ACT, 1996

The Arbitration and Conciliation Act, 1996 is the prime legislation relating to domestic
arbitration, international commercial arbitration and enforcement of foreign arbitral awards and
also to define the law relating to conciliation and for matters connected therewith or incidental
thereto. It repealed the three statutory provisions for arbitration:- (i) the Arbitration Act, 1940;
(ii) the Arbitration (Protocol and Convention) Act, 1937; and (iii) the Foreign Awards
(Recognition and Enforcement) Act, 1961.

The major provisions relating to Arbitration in the Act are:-

 The parties to a present dispute may make an agreement called as the 'arbitration
agreement' that instead of going to the court; they shall refer the dispute to arbitration.
 Although no formal document is prescribed, an arbitration agreement/clause must be in
writing.
 An arbitral award shall be made in writing and shall be signed by the members of the
arbitral tribunal.
  An arbitral award is itself enforceable as a decree of the court, normally after three
months from the date on which it was received by the parties, provided no application for
setting aside the award is made or if it is made the same has been rejected.

The disputes that cannot be referred to arbitration are:-

 Insolvency proceedings.
 Lunacy proceedings.
 Proceedings for appointment of a guardian to a minor.
 Question of genuineness or otherwise of a will or matter relating to issue of a probate.
 Matter of criminal nature.
 Matters concerning public charitable trusts.
 Disputes arising from and founded on an illegal contract.

The Arbitration and Conciliation Act provides statutory recognition to conciliation as a distinct
mode of dispute settlement. Conciliation is defined as the process of amicable settlement of
disputes by the parties with the assistance of a conciliator. It differs from arbitration in the sense
that in arbitration the award is the decision of the third party or the arbitral tribunal, while in the
case of conciliation the decision is of the parties which is arrived at with the mediation of the
conciliator.

The major provisions relating to Conciliation in the Act are:

A party initiating the conciliation shall send a written notice to the other party, briefly identifying
the subject of the dispute and inviting it for conciliation.

Unless otherwise agreed there shall be one conciliator. The parties may however, agree that
there shall be two or three conciliators, who shall act jointly. The sole conciliator shall be
appointed by mutual consent of the parties.

Each party shall submit to the conciliator a brief written statement describing the general nature
of the dispute and the points at issue. A copy of the same shall be sent to the other party
The conciliation proceedings shall be terminated when:-

 A settlement agreement is signed by the parties,

 A written declaration is made by the conciliators after consultation with the parties, that
further efforts at conciliation are no longer justified,
 A written declaration is made by the conciliator, after the deposits required in relation to
costs of the proceedings are not received from the parties, that the proceedings are
terminated,
 A written declaration is made by the parties to the conciliator, that the conciliation
proceedings are terminated,
 A written declaration is sent by a party to the other party and the conciliator, that the
conciliation proceedings are terminated.

6. LIQUIDATED DAMAGES

Damage: Damage means and includes loss of money, comfort, health or the like.
Damages: Damages mean money compensation claimed by the injured party for the injury
done.

Compensatory Damages: Damages, which are ascertained with the fundamental consideration
to place the innocent party in the position he would have occupied had the contract been
performed according to its terms, are said to be compensatory.

Penalty: is to be paid to the injured in case of contract breach. Unlike the liquidated damages it
is not based on genuine calculation but simply an arbitrary amount. Usually it will an unfairly
high sum expressed as percentage of contract sum.

Un-liquidated Damages (Actual Damages): actual monetary loss suffered by one contracting
party due to other party’s breach of contract. Usually not found in contraction contracts due to
the difficulty is assessing it.

Liquidated Damages: Liquidated damages are the actual sums named in the Contract, which
the parties have themselves calculated, would be a fair compensation for the breach of the
contract.
or

A ‘liquidated damages’ clause appears in practically all subcontracts. Its purpose is to

recompense the contractor for loss resulting from the subcontractor’s failure to complete the
work by the date for completion stated in the subcontract.

6.1 Features

The purpose of liquidated damages is to compensate the injured party for the loss suffered. The
injured party is not to make profit out of this provision. Compensation is the value of the
performance of the contract that is what the injured party would have made had the contract
been performed

Although frequently applied in subcontracts, general contractors rarely enforce the ‘liquidated
damages’ clause. This is because general contractors know that its imposition would likely
result in costly and lengthy arbitration or litigation. Even if successful, the general contractor
would have little chance of collecting any damages.

The insertion of a ‘liquidated damages’ clause in subcontracts appears to be intended purely as

a threat without a conscious intend to apply it. But the risk of possible liability under ‘liquidated
damages’ is too great to be ignored by subcontractors. They generally respond by making an
appropriate risk allowance for such a risk in their bid prices.

Where parties name in a contract reduced to writing a sum of money to be paid as liquidated
damages they must be deemed to exclude the right to claim unascertained sum of money as
damages. The right to claim liquidated damages is enforceable under S. 74 of the Contract Act
and where such a right is found to exist no question of ascertaining damages really arises.
Where the parties have deliberately specified the amount of liquidated damages there can be no
presumption that they at the same time intended to allow the party who has suffered by the
breach to give a go-by to the sum specified and claim instead a sum of money which was not
ascertained or ascertainable at the date of the breach.