By Nilava Bandopadhyay (senior partner) & Adhip K Ray (partner) at S&A Law Offices
In most large-scale construction projects, often being projects of public interest, time is of the essence of the contract. These contracts contain strict schedules of compliance which have to be adhered to by both the awarding authority as well as the contractor. Therefore, when the project is delayed, the analysis has to entail why there was a delay, whether the parties were able to perform their respective obligations as per schedule, whether the contractual machinery for time relief was properly used, and whether the claiming party can prove compensable loss.
Delay allocation and Extension of time
Coming to the question of “who pays when projects run late?” It is settled law that a breaching/delaying party can be made liable for compensation for breaches/time overruns for the delays/breaches directly attributable to it.
Extension of time, or EOT, clauses are central to delay allocation. They move the completion date where the contractor is delayed by employer instructions, late drawings, delayed site handover, variations, force majeure or authority approvals. Properly operated, an EOT protects the contractor from LDs for excusable delay while preserving the employer’s right to claim LDs for contractor-caused delay. Closely related to the issue of EOT is concurrent delay. Where employer and contractor delays overlap, it is critical for the party claiming damages to isolate the effect of critical delays by the other party.
In the absence of clear attribution/allocation of delays, where employer and contractor delays overlap, Courts/Arbitral Tribunals may grant the contractor time relief but not necessarily monetary compensation. The employer may also lose LDs if it cannot isolate contractor-responsible critical delay.
While coming to a conclusion regarding the attribution/allocation of delays, Indian courts/arbitral tribunals look closely at notices, hindrance registers, correspondence, engineer determinations and reservations of rights and evidence of a similar nature. Thereafter, the question of damages payable to the suffering party is decided.
Liquidated damages
Liquidated damages clauses or “LD” clauses are generally the standard remedy for delays which are included in the agreement for foreseeable delays/breaches. They are governed by Section 74 of the Indian Contract Act, 1872. A contract may prescribe a daily, weekly or monthly rate and cap liability, often at five or ten per cent of the contract price. But the named amount is not always payable automatically. It is a ceiling on reasonable compensation. The landmark judgments of the Hon’ble Supreme Court in the cases of ONGC v. Saw Pipes Ltd., (2003) 5 SCC 705 and Kailash Nath Associates v. DDA, (2015) 4 SCC 136, still guide the analysis. Courts examine whether there has been a breach of the agreement, whether the LD clause is a genuine pre-estimate of loss, and whether the damage is difficult to prove. Accordingly, in cases where it is possible to prove actual damage or loss, such damages must be proved. In cases where damage or loss is difficult or impossible to prove, the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, is to be awarded.
Cost overruns
Prolongation costs, idle plant, extended site overheads, bank guarantee charges and loss of profit require proof of entitlement and loss. Recent Supreme Court decisions make proof through cogent evidence a sine qua non. Recent judgments of the Hon’ble Supreme Court including Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd., (2024) 2 SCC 375 and Unibros v. All India Radio, 2023 SCC OnLine SC 1366 make it clear that formulae (such as Hudson’s formula) cannot prove loss by themselves. They may help quantify a proven claim, but damages cannot be awarded in the absence of cogent evidence such as contemporaneous records, financial statements, tender opportunities, deployment records and proof that resources were actually blocked by employer delay. At the same time, employers cannot always hide behind broad “no damages for delay” clauses. Therefore, the best practice would be to substantiate all claims made through the best evidence available.
Conclusion
Therefore, to sum up, the party who caused compensable critical delay usually pays. However, this is only within the framework of the contractual terms and based on cogent evidence. During the contemporaneous period, contractors should issue notices, reserve monetary claims and preserve delay and cost records. In Indian construction arbitration, a coherent chronology supported by contemporaneous records usually decides the outcome.
