Time as Essence in Construction Contracts: Need for a Comprehensive Relook

The issue of time as essence in construction contracts is controversial and is frequently litigated. The law on the subject is largely unsatisfactory. In a paper titled "The Law on Time as Essence in Construction Contracts: A Critique" published in Volume 8 Issue 1 of the RGNUL Financial and mercantile Law Review (here), the law on the subject is critically evaluated. The paper argues that the precedent on the issue, Hind Construction Contractors v. State of Maharashtra, AIR 1979 SC 720 ("Hind Construction"), was wrongly decided and requires reconsideration. It also argues that:

• Hind Construction is no more relevant to the current times and provides incentives to inefficient contractors leading to delay in project completion; 
• Contracting parties do not appear to have circumvented the adverse effect produced by Hind Construction through the use of appropriate language in their contracts despite various decisions following the said decision; and 
• One of such reasons for the phenomena appears to be a lack of direction by courts as to what contracting language could constitute future courts to construe a contractual condition providing that time is of the essence as such.

The paper concludes by arguing that concludes by highlighting possible contractual clauses and contract management strategies that could further party intent that time is of the essence in construction contracts notwithstanding Hind Construction and later decisions following it.

Abstract of the Paper is provided below:

"The concept of time as essence in construction contracts is a controversial topic. Even though parties routinely provide in their agreements that time is of the essence, these clauses inevitably figure in construction disputes. Arbitral tribunals and courts have mostly decided such disputes holding those clauses to be of no legal effect, mainly by relying on the decision of a three-judge bench of the Hon’ble Supreme Court in Hind Construction Contractors v. State of Maharashtra. This paper argues that Hind Construction was wrongly decided, that it is not good law and that it requires reconsideration given the changing times. The paper further notes that parties do not appear to have circumvented the adverse effect of Hind Construction. Usually, in such situations, there is a change in contracting behaviour by the use of appropriate contracting language. Perhaps, this is due to the lack of direction by courts as to what appropriate language could be used in contracts to make time as the essence of the contract. This paper concludes by suggesting possible methods by which courts and arbitral tribunals could validly enforce time-as-essence clauses."

Critique of the paper is welcome as comments to this post. Readers can also write to lawbadri@gmail.com

* Image from here.

Supreme Court's Suggestion on Providing for Appeals against Orders U/s 11: Whether Correct?

This short post discusses the supposed anomaly identified by the SC in Section 11 of the 1996 Act (as amended) in that it provides that while an order in Section 8 is appealable under Section 37 and an order under Section 11 is not. The relevant quotes from the judgment of the SC in the recent case of Pravin Electricals Pvt Ltd v Galaxy Infra and Engineering Pvt Ltd. are posted at the end of this post.

In short, the suggestion of the SC may not be workable and could lead to further delays in the constitution of the Tribunal. The law as it stands today is that an appeal from an order under Section 11 is not appealable except through the SLP route.  Note that S. 11 is not a trial  by itself but is only intended to aid the parties to constitute the arbitral tribunal. If the suggestion of the SC is accepted, it would simply add one more layer to the current process which is already time-consuming, costly and cumbersome. See, this article, which empirically provides an overview of how long it takes for the arbitral tribunal to be constituted where appeals are filed to the SC from HC orders. 

The following table, noted in the above article, represents the time taken from the date of application to the High Court (HC) for appointment of arbitrator till the date of final disposal by the Supreme Court of appeal from the order of the HC: 

Time taken (Months)	Petitions from date of appointment to final disposal by Supreme Court	Petitions from date of arbitration notice to final disposal by Supreme Court
Up to 12	3	2
13-36	40	38
37-60	17	18
61-84	15	15
Over 84	8	10
Total	83	83

The data collected up to 2011 is available here. 

As the data shows above, in most cases, it has taken more than a year for the courts from the date of notice of arbitration till the data of final disposal (of appeal) appointing or rejecting appointment petition for arbitrator. The data since 2011 could be collected and analysed but this blawgger is not really sure if there would be a remarkable improvement in the disposal rate necessitating a contrary view from what is noted above. [this para has been slightly modified after posting]

The purpose of Section 8 is totally different from that of Section 11. The limited purpose of Section 11 is to enable constitution of tribunal. Whether any point would be served if an additional layer of courts would be added needs to be examined. There might be an "anomaly" in treatment of S. 8 petitions and S. 11 petitions insofar as appeal is concerned but that does not mean that an amendment has to be carried out. Doctrinal consonance cannot triumph necessity.

Extracts from Pravin Electricals Pvt Ltd v Galaxy Infra and Engineering Pvt Ltd. 

"21. However, by a process of judicial interpretation, Vidya Drolia (supra) has now read the “prima facie test” into Section 11(6A) so as to bring the provisions of Sections 8(1) and 11(6) r/w 11(6A) on par. Considering that Section 11(7) and Section 37 have not been amended, an anomaly thus arises. Whereas in cases decided under Section 8, a refusal to refer parties to arbitration is appealable under Section 37(1)(a), a similar refusal to refer parties to arbitration under Section 11(6) read with Sections 6(A) and 7 is not appealable. In the light of what has been decided in Vidya Drolia (supra), Parliament may need to have a re-look at Section 11(7) and Section 37 so that orders made under Sections 8 and 11 are brought on par qua appealability as well."

Take or Pay Obligations in Fuel Supply Agreements: An Overview

Contractual clauses that obligate the buyer to take delivery of a pre-determined quantity of natural gas or other fuel or pay the monetary equivalent of the pre-determined quantity of fuel in case of failure to take delivery are known as take or pay (TOP) clauses. TOPC (TOPC) have been justified from the seller’s point of view on the ground that these clauses help the seller recoup substantial capital investment.

TOPC have been in vogue in the natural gas industry for more than half a century. At the same time, they have been criticised as anti-competitive and anti-consumer. Consequently, the validity of TOPC has been challenged in judicial forums on numerous legal grounds.

The challenges have been more frequent when end-consumers, such as power-producers (using gas as the raw material), are unable to use the committed quantity of gas for consumption owing to circumstances beyond their control. TOPC have also been questioned especially when the prices of natural gas supplied are higher than those of alternative fuels or spot market prices, thereby encouraging buyers to go for such sources, and in economic rescission where demand for gas would be considerably lower than anticipated by the buyer.

Consonant with international practice, TOPC are prevalent in fuel supply agreements in India. In the forthcoming paper to be published in the Dr. Ram Manohar Lohiya National Law University Journal (2020), the manner in which these clauses have continued to be used in fuel sales agreements despite legal challenges under the rubrics of various laws in India has been analysed.

The paper first provides a brief overview of the history and the economic rationale for the continued use of TOPC. It describes the legal developments pertaining to the clause from competition law, contract law and electricity law perspectives. Considering the use of such clauses world over, an international perspective is also provided. The paper concludes by arguing that although TOPC are here to stay, various abuses surrounding TOPC have been, and are being, duly addressed in Indian law.

Padia Timbers & Contracting Through Tendering Process

A recent decision of the Supreme Court in Padia Timber v Vishakapatnam Port Trust is interesting on many counts. One, it is a rare decision by the Supreme Court construing general contract law (Sections 4 and 7 of the Indian Contract Act, 1872. Two, the Supreme Court overturned the decision of the trial court and the High Court notwithstanding that the case does not involve any new question of law that courts previously had not dealt with but that the lower courts (trial court and the High Court) did not deal with in this case. Three, the decision throws considerable light on government contracting practices and can act as a context in discussing such practices.  Four, this case relates to a notice inviting tender that was floated more than thirty years back (1990)! The matter was heard in the SC several times between 2007 and 2011 but it appears that the matter was not heard between 2011 and 2018.

The judgment reiterates the position that acceptance should be unconditional as per Section 7 and various decided cases. 

On facts, when  the appellant, Padia Timbers, submitted its bid, it made a revised quotation stating that inspection would have to be conducted at Padia Timber's depot an not otherwise. This is where government tendering practices are to be noted. Given the requirement of a rigorous and complaint free tendering process, government contracts usually state that the bidder must "accept" all the conditions stated in its offer.  If that is not the case, the Government entity generally rejects the bid if the non-acceptance pertains to a material provision. In this case, the error committed was that the Government entity went ahead with the tendering process and awarded the contract to the bidder despite deviation from the condition regarding inspection. What really happened making the port trust to proceed with the tendering process and awarding the contract is not clear and will be known if the tender file is perused.

The Court ultimately ordered the Port Trust to refund the earnest money to Padia Timber at an interest rate of 6% per annum from the date of institution of the suit (1994) till the date of refund.