Construction Law/Delays in Signing Contract and Commencing Work
QUESTION: Dear Mr. Sivaraman,
Project: Supplying and Laying DI Pipes
General Conditions of Contract: Conditions of Contract for Building and Engineering Works Designed by the Employer, Multilateral Development Bank Harmonized Edition prepared by FIDIC (FIDIC MDB June 2010)
1.0 Contract Agreement/Signing of Contract
1.1 Contract Agreement
As per clause 1.6 of GCC, "The Parties shall enter into a
Contract Agreement within 28 days after the Contractor receives
the Letter of Acceptance".
1.2 Signing of Contract
As per Instruction to Bidders, "Promptly after Notification of
Award, the Employer shall send the Contract Agreement.
Within 28 days of receipt of Contract Agreement, the successful
Bidder shall sign, date and return it to the Employer."
At the same time, as per Instruction to Bidders and clause 4.2
of GCC, Performance Security shall be furnished within 28 days
of the receipt of Letter of Acceptance/Notification of Award.
2.0 Clarifications Requested
2.1 With regard to signing Contract Agreement, there is some Change
between the said two documents.Please clarify, what is valid?
2.2 Irrespective of above, though number of months have already
been elapsed, no action has been taken by the Employer to sign
the Agreement and to allow Commence Work.
The Contractor has handed over the Performance Bond in time.
I. Is the Contractor entitled for some Compensations?
II. If so what are the Compensations available?
An early clarification is highly appreciated.
ANSWER: Dear Mr Jayan,
I understood the case.
2.1 - Statements 1.1 and 1.2 are almost conveying hte same meaning. But for contractual interpretation, clause 1.6 prevails over the instruction to bidders. Clause 1.6 may superseded by a specific time duration in particular conditions of contract. If the particular conditions of contract does not say anything, you need to refer to clause 1.6 of GCC.
2.2 - It is clearly a breach of contract from owner. But in many practical cases, the contract agreements are signed even after 3 months after settling some minor issues and after incorporating the latest terms and conditions in the final negotiations. Irrespective of date of actually siging the agreement, the contract commencement date would be normally 15 days from the date of letter of acceptance or 7 days from the date of notice to commencment. However, signing of contract agreement is not a hindrance to commencment of works. Since the contractor has already given the performance bond within the specified time, he already agrees to satisfy the provisions of contract.
Once the letter of acceptance is issued, the owner does not have any drive to followup for signing the contract. But for a contractor, the signed contract number has to be fed in to his internal ERP or SAP system to raise claim for mobilisation advance, approve the funds and allot other resources for mobilsation activities. So, there is more onus on the contractor to followup for contract signing.
In this case, the cotnractor is NOT entitled for any compensation directly on account of this default by the owner. This default will be a suporting document for contractor in future when he makes any claims on account of other delays and defaults by the owner.
Long reply and I hope I have clarified your doubt.
---------- FOLLOW-UP ----------
QUESTION: Mr. Sivaraman,
Thank you very much for your quick response, long reply and your valuable time spent for me.
I am grateful, if you would kindly clarify the following points too.
1.In a case like this, disregarding the priority of documents, can't a Bidder
argue that, at the time of Bidding he completed the Bid as per the Instructions
to Bidders and therefore content in the Instructions to Bidders supersede that
in Conditions of Contract.
2.As per cl. 8.1 of GCC applicable for this Contract, four conditions including
Signing Agreement are there to fulfill first,after which the Engineer should
instruct to Commence Work.
3.May I know, what are ERP & SAP?
4.Why I thought certain compensations to the Contractor should be inevitable,
because the late Signing of the Contract will delay the Commencement of work
and the Contractor may have to spend more money for the Project due to the
I.Price escalation from the beginning, which makes the quoted rates and prices
II.He might have recruited employees, bought plants and other resources and he
has bone cost for these idling resources and so on.
Dear Mr Jayan,
Sorry for the late response. Here are the answers to your follow up questions:
1. In this case, we can't disregard the priority of documents (clause 1.5 of FIDIC GCC). Because, the instruction to bidder is meant for directions to submit the bid. Once the bid is submitted, negotiated and the offer is accepted by the owner, the provisions of contract to be referred. Only the basis and assumptions of ITB can be referred in case of dispute in future - but not for priority of document.
2. I do agree. See my earler reply also. It is a definite case of default by the owner. But this alone does not qualify for a compensation.
3. ERP and SAP are office automation software programs to integrate the processes within an organisation in order to improve the operational efficiency. This includes all functions within an organisation (tendering, finance, procurement, stores etc). Many construction companies in india and abroad are using this.
4. Here I presume that the contractor has not yet mobilised and not commenced the work, waiting for the agreement to be signed. Any compensation as the name implies, is meant for compensating the additional expenses made by OR the losses incurred by the owner or contractor. This means, the claim for compensation can be made ONLY after the expenses / losses have occured. The effect of escalation due to late signing of agreement could be known at the end of project - not before you commence the project.
If the contractor has already recruited people, mobilised the plants and equipment, then contract signing is not a hindrance to commence the works. This default by the owner will be a part of claim to justify the compensation provided, the contractor is able to provide suitable document evidences for price escalation during this period, mobilisation of resources and notice of idle resources.