Contracts And Legal Aspects


           The law of contracts in India is contained in the Indian Contract Act, 1872, which lays down the general principles relating to formation, performance and enforceability of contracts and the rules relating to certain special types of contracts such as indemnity, guarantee, bailment, pledge and agency.  The Act is, however, not a complete and exhaustive law; some of the special contracts such as those relating to partnership, sale of goods, negotiable instruments, insurance, etc. are dealt with by separate legislations.  However, the general principles of contract law are the basis for such special contracts too.
Essential elements of a Contract:  From the foregoing discussion, the essential elements of a contract may be enumerated as under:

  1. Minimum two parties – At least two parties are necessary to form a contract because one person cannot enter into a contract with himself.  To form a contract, one party has to make an offer ad the other must accept it.  The person who makes the ‘proposal’ or ‘offer’ is called the ‘promisor’ or ‘offeror’, the person to whom the offer is made is called the ‘offeree’ and the person who accepts the offer is called the ‘acceptor’.
  2. Offer and acceptance – There must be an ‘offer’ and an ‘acceptance’ to the offer, resulting into an agreement.  Both ‘offer’ and ‘acceptance’ should be lawful.
  3. Intention to create legal obligation – The parties must intend to create legal obligation.  In commercial agreements. an intention to create legal relations is presumed, unless the parties have expressly agreed to otherwise.
  4. Lawful consideration – An agreement is legally enforceable only when each of the parties thereto gives something and gets something, that is, consideration.  Consideration may be past, present or future, but it must be ‘lawful’, that is, it must not be illegal or fraudulent or immoral or opposed to public policy, or must not imply injury to the person or property of another.
  5. Competent Parties – The parties to a contract must be competent, that is of the age of majority (over 18 years), of sound mind and not disqualified from contracting by any law to which they are subject.  Thus, a minor, lunatic, idiot drunkard. etc., cannot, except for some special cases, enter into a valid contract
  6. Free consent – All the parties give their free consent, to form a valid contract.  Consent means that the parties must agree about the subject-matter of the agreement in the same sense and at the same time.  Consent is said to be free unless it is induced by coercion, undue influence, fraud, misrepresentation or mistake.
  7. Lawful Object – The object of an agreement must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or property of another.
  8. Not Expressly Declared Void – An agreement expressly declared to be void under sections 24 to 30 of the Act or under any other law, is not enforceable and is, thus, not a contract.  For example, an agreement in restraint of trade or wagering agreements, are not enforceable.
  9. Certainty and Possibility of performance – The terms of a contract must not be vague or uncertain.  If an agreement is vague and its meaning cannot be ascertained, it cannot be enforced.  The terms of a contract must be such as are capable of performance.  An agreement to do an impossible act is void and not enforceable at law.
  10. Legal Formalities – Generally, a contract may be oral or in writing.  However, certain contracts are required to be in writing and may even require registration.  For instance, an agreement to a pay a time – barred debt must be in writing; an agreement to make a gift must be in writing and registered.  In such cases, these additional formalities must be complied with.



  1. Agreement – Every promise and every set of promises, forming the consideration for each other, is an agreement.  When one person conveys to another his proposal, and that other person assents thereto, the proposal is said to be accepted.  A proposal when accepted becomes a promise.
  2. Contract – An agreement enforceable by law is a contract.  In other words, a contract is an agreement made with an intention to create a legal obligation i.e. a duty enforceable by law.
  3. Offer or Proposal – When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal.
  4. Acceptance – When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.  In other words, acceptance is the manifestation by the offeree of his assent to the terms of the offer.
  5. Consideration – When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.
  6. Consent – Two or more persons are said to consent when they agree upon the same thing in the same sense.


                   The members of the construction team should be fully aware of their rights and obligations under the contract.  they should be thoroughly conversant with the precise provisions and true importance of each clause in the contract agreement.
Following are in important conditions of contract:

  1. Time of completion.
  2. Delay and extension of time.
  3. Penalty
  4. Compensation for delay in completion of work.
  5. Liquidated damages.
  6. Debitable agency
  7. Valuation of variations
  8. Settlement of disputes
  9. Force of nature and natural disasters
  10. Price escalation
  11. Termination of contract
  12. Time of Completion:  The Contractor is required to complete the work within the agreed time of completion which is specified in a suitable unit of time (year, month, week etc) depending upon the nature and scope of work.  The contractor is also required to maintain a proportionate progress of work.
  13. Delay and Extension Time:  Delay in completion of work not attributed to the contractor should be brought to the notice of the owner by the contractor in writing, within the time specified in the contract, for seeking extension of time.  The owner will satisfy himself that the delay is not on account of a lapse on the part of the contractor before granting suitable extension of time.
  14. Penalty:  It is a fine imposed on the contractor for non-fulfillment of his contractual obligations such as failure to maintain required progress of work, delay in completion, poor quality or work, bad workmanship etc.
  15. Compensation for delay in completion of work:  The contractor is liable to pay compensation to the owner for delay attributed to him in completion of work.  The amount of compensation may be stated as a percentage of the estimated cost of work for each unit of time delay.  The maximum limit of compensation may be 10% of the contract price.
  16. Liquidated Damages:  It is a fixed stipulated sum payable by the contractor on account of penalty for delays and does not bear any relationship to the real damage to the owner.  It is generally high and fixed per day for excess period over the specified in the contract for completing the work.
  17. Debitable Agency: Whenever the contractor fails to fulfil his contractual obligation in respect of progress or quality of work even after giving due notice by the owner, it becomes necessary to appoint a debitable agency which works at the cost and risk of the contractor.  This agency is in the form of labour or other contractor to fulfill the contractual obligations of the main contractor.  The expenses incurred are charged from the bill or security of the original contractor.
  18. Valuation of Variations: The valuation of variations is based on change orders issued in writing by the owner.  Generally, the variation in individual items of work should not be more than 25% and variation in total cost should not exceed 10%.
  19. Settlement of Disputes:  Efforts should be made to resolve disputes amicably between the owner and the contractor through mutual discussions and negotiations.  Arbitration clause may be incorporated in the contract to settle disputes not resolved through mutual discussions and negotiations.
  20. Forces of Nature and Natural Disasters:  Natural disasters are acts of nature, such as unprecedented floods / rainfall, earthquake, hurricanes, typhoons, fire etc.  These disasters along with occurrence of riots, civil commotion, revolt etc. are beyond the control of the contractor and may lead to financial and time loss.  The contractor should obtain an insurance policy for such risks as can be covered by insurance.  In the event of financial or time loss, the contractor can claim financial compensation from the owner for risks which are not insurable and an extension of time for all such risks.
  21. Price Escalation:  During execution of the work, labour wages and material prices may increase as a result of inflation.  The contract conditions should therefore, include on appropriate clause for payment of escalation to the contractor. Generally, escalation payments is made for increase in the cost of labour materials and petrol, oil and lubricants (POL) and the percentage of three components are taken as under:

Labour                  -        30% of contract price
Materials              -        65% of contract price
POL                      -        5% of contract price
The Central Public Works Development (CPWD) adopt the following formulae for computing escalation.
(i)  The compensation for escalation for labour is worked out as per the formula given below:
V       =        W x Y / 100 x (L1 – L1o) / Llo
V         =      Variation in labour cost i.e. increase or decrease in the amount in rupees to be paid or recovered.
W        =      Value of work done
Y         =      Component of labour expressed as percent of the total value of work (30%)
L1o     =      Minimum daily wage in rupees of an unskilled adult male mazdoor, as fixed under any law, statutory rule or order as on the last date on which tenders for the work were to be received.
L1       =      Minimum wage in rupees of an unskilled adult male mazdoor, as fixed under any law statutory rule or order as applicable on the last day of the quarter previous to one during which the escalation is being paid.
(ii)  The compensation for escalation for materials is worked out as per the formula given below:
VM      =        W x X / 100 x (M1 – M1o) / Mlo
VM        =     Variation in material cost i.e. increase or decrease in the amount in rupees to be paid or recovered.
W        =      Cost of work done.
X         =      Component of materials expressed as percent of the total value of work (65%)
MI        =     All India whole sale index for commodities as
MIo      =     Published by the Economic Advisor to Govt. of India, Ministry of Industry and Commerce, for the period under consideration, and that valid at the time of tenders, respectively.
(iii)  The compensation for escalation for POL is worked out as per formula given below:
VF     =        W x Z / 100 x (FI – FIo) / FIo
VF     =        Variation in cost of fuel, oil and lubricant i.e.
increase or decrease in rupees to be paid or recovered.
W       =        Component of POL expressed as percent of total
value of work as indicated under the special conditions of contract (5%)
FI&FIo=      Average index number of wholesale price of group (fuel, power, oil and lubricants) as published weekly by the Economic Advisor to Govt. of India, Ministry of Industry for the period under reckoning, and that valid at the time of receipt of tenders, respectively.
The compensation for escalation is normally worked out at quarterly intervals with respect to the cost of work executed during that period.
k.       Termination of Contract:   The owner can terminate the contract in the event of default or bankruptcy of the contractor and may impose penalty as per the contract agreement.  Default on the part of the contractor includes abandoning the work, failure to maintain required progress, non-observance of rues / instructions etc. for which the owner may rescind the contract and impose penalty upto 10% of the estimated cost of work.  Due notice must be served on the contractor before termination of the contract.