Law Relating to Engineering Arbitration in India

Contracts for engineering works such as the construction of roads, buildings and other works
present certain special features from the legal perspective. In view of this, it is proper that
their legal significance be examined in some detail. A deal of engineering activity has been
going on in the country since independence. Both the public sector and private sector have
been engaged in projects of varying magnitude. One feature common to most engineering
activities is that they involve a good deal of “contracting among the parties”. There may be a
single or multiple contracts, depending upon the magnitude of the work. This is called
“horizontal multiplicity”. If the contract is a complex one, then there may be a hierarchy of
contractors, involving several “sub-contractors”. That can be called “vertical multiplicity”. The
transaction obviously has to be a consensual one. In this respect, the law of contract
becomes very relevant. The law relevant to the contract is to be derived from the same
sources of law, as are the relevant sources for any other contract. These sources are mainly,
the law of contracts and the law of dispute resolution.

I. ENGINEERING CONTRACT AND GENERAL FRAMEWORK

OF LAW OF CONTRACT
The Indian Contract Act, 1872 deals with the general principles of the law of contract in
India. According to the ordinary meaning attached to the word “contract”, all agreements
made by persons are contracts. However, according to the Indian Contract Act, only those
agreements are contracts which are enforceable as such, having been made by free
consent of the parties, by persons competent to contract, for a lawful consideration and
lawful object and which are not expressly declared to be void by any statute. This is subject
to any special law, according to which a contract should be in writing, attested by witnesses
and registered according to the law of registration in force at the time. A contract has been
defined as an agreement enforceable in law. In order to constitute an agreement, there must
be a proposal and an acceptance of the same. For an agreement to become legally binding
in a valid contract, it is essential that:
● There must be free consent of the parties
● The parties must be competent to contract
● The consideration must be lawful
● The object must be lawful
● The agreement, must not be expressly declared to be void
● The agreement must comply with the provision of any law requiring it to be in writing
or attested or registered
The law of contract restricts itself to voluntarily create civil obligations. It is not the whole law
of civil obligations. Civil obligations created by Tort or Trust law are outside the field of
contract because they are not necessarily voluntary choices. The law of contract is also not
the whole law of agreements, because there are many agreements that the law will not
enforce and therefore, they remain outside the purview of the law of contract. Many
agreements are, e.g., excluded from the range of enforceability under the legal device that
the parties must not have intended legal consequences.

1. Proposal or Offer
A valid binding contract originates from an offer given by a person, who signifies to any other
person his willingness to do or to abstain from doing anything, with a view to obtaining the
assent of that other two such acts of abstinence, which is called a proposal. In view of the
definition, a proposal has two essential parts. It is in the first place an expression of the
offeror's willingness to do or to abstain from doing something. Secondly, it is made with a
view for obtaining the assent of the offering to the proposed act or abstinence. The first part
of the definition of "proposal" lays emphasis upon the requirement that the willingness to
make a proposal should be "signified". To signify means to indicate or declare. In the
traditional language of the law of contract it means that the proposal should be
communicated to the other party.
The process of making a proposal is completed by the art of communicating it. Section 3
recognises the modes of communication. Thus a proposal may be made in any way which
has the effect of laying before the offeree the willingness to do or abstain. It may for
example, be made by word of mouth, or by writing, or it may even be made by conduct. A
man expresses his desire to do something or to get something done by his actions. Words
are not the only medium of expression. Conduct may often convey as clearly as words a
promise, or an assent to proposed promise. An offer which is made by conduct is called an
"implied offer" and the one which is expressed by words, written or spoken, is called an
"express offer". An acceptance may likewise be made expressly or impliedly, as section 9
declares its affirmative. Thus, when the offeree accepts in a manner other than the method
prescribed by the offeror  and the offeror does not protest in a reasonable time, the offer is
deemed to have accepted the new method of acceptance. The acceptance of an offer at the
time prescribed by the offeror has elapsed, will not avail to turn the offer into a contract; but if
no time is prescribed for the acceptance, the offer will come to an end after the lapse of a
reasonable time. According to Section 4 the "communication of a proposal is complete when
it comes to the knowledge of the person to whom it is made."
Obviously  therefore, "an offer cannot be accepted unless and until it has been brought to
the knowledge of the person to whom it is made." This principle was acted upon by the
Allahabad High Court in Lalman v Gauri Datta. In this case the defendant's nephew
absconded from home. He sent his servant in search of the boy when the servant had left,
the defendant by hand-bills offered to pay Rs. 501 to anybody discovering the boy. The
servant came to know today's offer only when he had already traced the missing child. He,
however, brought an action to recover the reward but his action failed. Explaining the
principle, BANERJI. J. said: "In my opinion in a suit like the present can only be found on a
contract in order to constitute a contract there must be an acceptance of an offer and there
can be no acceptance unless there is knowledge of the offer." There is no provision in the
Indian Contract Act 1872 requiring that an offer or its acceptance should be made with the
intention of creating legal relations. But it is a settled principle that to create a contract there
must be a common intention of the parties to enter into legal obligations. The intention of the
parties is naturally to be known from the terms of the agreement and the surrounding
circumstances. It is for the court in each case to find out whether the parties must have
intended to enter into legal obligations.                     
Thus, a tender is an offer and the contract arises when a bid is accepted. An advertisement
inviting tenders is not a proposal or offer. It is only an invitation to offer. No contract would
arise between the parties, unless and until the bid is accepted and the acceptance is
communicated to the highest bidder. A tender notice does not amount to an offer or
proposal, but merely an invitation to the contractors for making an offer. An advertisement
for tenders is not a proposal, which would bind the authority to sell to the person who makes
the highest tender. It is merely an attempt to ascertain whether an offer can be obtained with
such a margin, as the seller is willing to adopt. Unless the bid is accepted and the
acceptance is communicated to the bidder, there is no binding contract between the parties
and no title to the goods accrues in favour of the highest bidder, pursuant to the fact that his
bid was the highest one and that he had deposited the earnest money in accordance with
the conditions laid down in the sale notice. The use of the word “willingness” shows that
intention to be bound by the proposal when accepted is an integral part of agreement.

2. Acceptance of Proposal
When the person to whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted. A proposal when accepted becomes a promise. Thus “acceptance” is
the assent given to a proposal, and it has the effect of converting the proposal into promise.
The definition clearly requires that assent should be signified. It may be signified or
expressed by any act or omission by which the party accepting intends to communicate his
assent or which has the effect of communicating a very common instance of an act
amounting to acceptance is the fall of the hammer in the case of an auction sale. The
principle is that there should be some external manifestation of acceptance. A mere mental
determination to accept unaccompanied by any external indication will not be sufficient.
Another common example of acceptance by conduct is action in terms of the offer. All cases
of general offers, which are kind of unilateral promises, demand some action in return for a
promise to pay. In express recognition of this principle, Section 8 provides that performance
of the conditions of a proposal, of the acceptance of any consideration for a reciprocal
promise which may be offered with the proposal, is an acceptance of the proposal. Such
proposals demand acceptance by performance. Acceptance of money after prior information
that higher rates of interest would be charged and retention of goods sent on approval
amount to acceptance of the consideration offered along with the proposal. Further,
acceptance must be communicated to the offer himself. A communication to any other
person is as ineffectual as if no communication has been made.
In Felthous v Blindly, the plaintiff offered by means of a letter to purchase his nephew’s
horse. The letter said “If I hear no more about the horse I consider the horse mine at $ 33.
15.” To this letter no reply was sent. But the nephew told the defendant, his auctioneer, not
to sell the horse as it was already sold to his uncle. The auctioneer by mistake put up the
horse for auction and sold it. The plaintiff sued the auctioneer on the ground that under the
contract the horse had become his property and therefore the defendant’s unauthorised sale
amounted to conversion but the action failed. The court said “It is clear that the nephew in
his own mind intended the uncle to have the horse but he had not communicated his
intention to the uncle. The case is also an authority for the proposition that an offeror cannot
impose upon the offeree the burden of refusal. The offeror cannot say that if no answer is
received within a certain time the offer shall be deemed to have been accepted. The natural
corollary of this principle is that the communication of acceptance should be from a person
who has the authority to accept. Information received from an unauthorised person is
ineffective and acceptance by a person to whom a proposal is not addressed is no
acceptance.
Acceptance has to be made in the manner prescribed or indicated by the offeror. An
acceptance given in any other manner may not be effective, particularly when the offer
clearly insists that the acceptance shall be made in the prescribed manner. Section 7 deals
with the matter relating to mode of communication. Where a certain quantity of a thing was
offered to be sold but the other party agrees to buy a lesser quantity of the thing offered, the
consent to buy a lesser quantity is neither absolute nor unqualified or unconditional hence no
valid acceptance to offer. In absence of fixed duration for the acceptance of offer acceptance
has to be communicated within a reasonable time. When no mode of acceptance is
prescribed acceptance must be expressed in some “usual and reasonable manner”.
In Adams v Lindson, in England, the court held that a complete contract rises on the date
when the letter of acceptance is posted in due course. This rule was affirmed by the Court of
Appeal in Household Fire and Accident Ins. Co. v Grant. THESIGER, J. stated the rule thus
“An acceptance which only remains in the breast of the acceptor without being actually and
by legal implication communicated to the offer is no binding acceptance….but if the post to
be treated as agent of both parties then as soon as the letter of acceptance is delivered to
the post office the contract is made as complete and final. The Indian Contract Act, 1872 in
section 4 adopts a rather peculiar modification of the rule. According to the section, when a
letter of acceptance is posted and is out of the power of the acceptor the proposer becomes
bound. But the acceptor will become bound only when the letter is received by the proposer.

3. Revocation
The provisions relating to communication of proposal, acceptance and provocation are to be
found in sections 4 and 5. According to Section 6, there are four ways by which a proposal
or an acceptance can be revoked, namely, by notice of revocation, with lapse of time, by
failure to accept condition precedent, by death or insanity of the offeror. Section 4 provides
that “the communication of revocation is complete as against the person who makes it, when
it put into a course of transmission to the person to whom it is made, so as to be out of the
power of the person who makes it" and as against the person to whom it is made, “when it
comes to his knowledge”. Section 5 provides that “A proposal may be revoked at any time
before the communication of its acceptance is complete as against the proposer but not
afterwards”. As against the proposer, the communication of acceptance is complete “when it
is put in a course of transmission to him so as to be out of the power of the acceptor”. It
means, therefore, that the communication of revocation to be effective must reach the
offeree before he mails his acceptance putting it out of his power. When an offeror gives the
offeree an option to accept within a specified period it may be withdrawn even before the
expiry of that period unless there is some consideration for keeping it open. The decision of
the Madras High Court in Alfred Schonlank v Muthunayna Chetti is an illustration in point.
The defendants left an offer to sell a quantity of indigo at the plaintiffs office allowing him
eight days time to give his answer, on the fourth day, however, the defendant revoked his
proposal. The plaintiff accepted it on the fifth day. Holding the acceptance to be useless, the
court said both on principle and on authority it is clear that in the absence of consideration
for the promise to keep the offer open for a time, the promise is mere nudum pactum.” An
offer lapses on the expiry of the time, if any, fixed for acceptance. Where an offer says that it
shall remain open for acceptance upto a certain date it has to be accepted within that date.
When no time for acceptance is prescribed, the offer has to be accepted within a reasonable
time. What is ‘reasonable time’ will depend upon the facts and circumstances of each case.
Where the subject matter of the contract is an article, like gold, the prices of which rapidly
fluctuate in the market, a very short period will be regarded as reasonable, but not so in
reference to land. Where the offer is subject to a condition precedent, it lapses if it is
accepted without fulfilling the condition. Where a salt lake was offered by way of leaves on
deposit of a sum of money and the intended lessee did not deposit the amount for 3 long
years it was held that this entailed cancellation of the allotment. An offer lapses on death or
insanity of the offerer provided that the fact comes to the knowledge of the offeree before he
makes his acceptance.

4. Free Consent
Free consent is an essential requirement of a valid contract. The expression ‘free consent’ is
defined in Section 14. Consent is said to be free when it is not caused by--
● Coercion (Section 15)
● Undue influence (Section 16)
● Fraud (Section 17)
● Misrepresentation (Section 18)
● Mistake (Section 20)
Where consent to an agreement is caused by coercion, undue influence, fraud or
misrepresentation, the agreement is a contract voidable at the option of the party whose
consent was so caused. If, for example, a person is induced to sign an agreement by fraud,
he may on discovery of the truth, either uphold the contract or reject it. If he confirms it, the
contract becomes binding on both parties. It is a contract which is enforceable at the option
of only one of the parties, namely, the party whose consent was not free. An agreement to
which consent is caused by coercion when it is obtained by pressure exerted by other by the
following techniques:
● committing or threatening to commit any act forbidden by the Indian Penal Code
 ● unlawfully detaining or threatening to detain any property
Similarly, a contract is said to be induced by “undue influence” where the relations subsisting
between the parties are such that one of the parties is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage over the other. It applies to all
varieties of relation in which domination may be exercised by one person over another. In
particular, however, and without prejudice to the generality of the principle, the Act lays
down, in sub-section (2) of section 16, that a person is deemed to dominate the will of
another and the two cases:
● Where he holds a real or apparent authority over the other, or where he stands in a
fiduciary relation to the other; or
● Where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
According to Section 16(3), “unconscionable” is a ground of voidable contract. According to
the Indian Contract Act “fraud”, not only renders the contract void but it also gives rise to an
action for damages in respect to the deceit. Fraud is proved when it is shown that a false
representation has been made:
● Knowingly, or
● Without belief in its truth, or
● Recklessly careless whether it be true or false.
Section 17 provides five kinds of fraud, namely, assertion of facts without belief in their truth,
active concealment, a promise made without any intention of performing, any act or omission
specially declared to be fraudulent.
Where consent to an agreement is caused by coercion, undue influence, fraud or
misrepresentation, the agreement is a contract voidable at the option of the party whose
consent was so caused. If, for example, a person is induced to sign an agreement by fraud,
he may on discovery of the truth, either uphold the contract or reject it. If he confirms it, the
contract becomes binding on both parties. It is a contract which is enforceable at the option
of only one of the parties, namely, the party whose consent was not free. An agreement to
which consent is caused by coercion when it is obtained by pressure exerted by other by the
following techniques:
● committing or threatening to commit any act forbidden by the Indian Penal Code
● unlawfully detaining or threatening to detain any property
Similarly, a contract is said to be induced by “undue influence” where the relations subsisting
between the parties are such that one of the parties is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage over the other. The first kind of
fraud identified by Section 17 (1) is an act of a person making a false representation without
belief in its truth, thus intentional misrepresentation is of the essence of this kind of fraud.
The second kind of fraud identified under Section 17 (2) is that of “active concealment” is
something different from mere “passive concealment”. Passive concealment means mere
silence as to material facts. In active concealment a party takes possible steps to prevent the
information from reaching the other party and this is a fraud. Mere silence, accepting the few
cases, does not amount to fraud. The third type of fraud is included in the definition and
Section 17 (3). A purchase of goods without any intention of paying the prices is a fraud of
this species. The fourth kind of fraud identified by section 17 (4) is any act which is fitted to
deceive. The expression “any other act fitted to deceive” naturally means any act which is
done with the obvious intention of committing fraud. The first and the last category of frauds
introduced in the definition of section 75 is intended to cover all subjects which are under
any other branch of law and are regarded as fraudulent in insolvency law. There is for
example, the concept of fraudulent preference and in the Transfer of Property Act, there is
the concept of fraudulent transfer. A contract, the consent to which is induced by
misrepresentation is voidable at the option of the deceived party. Miss Representation
means misstatement of a fact material to the contract. Section 18 includes three types of
misrepresentation namely, unwarranted statements, breach of duty including mistakes about
subject matter. Though representations are not usually contained in the written instrument of
contract, yet sometimes they are. But it is clear that their insertion therein cannot alter their
nature. If a consent is caused by mistake, the agreement will not be considered as valid
subject to the provisions of section 20, 21 and 22 of the Indian Contract Act. Section 20
provides that where both the parties to an agreement are under a mistake as to a matter of
fact essential to the agreement, the agreement is void.This is called mutual mistake which
goes to the root of the contract and is a good ground for avoiding contract. Section 20 will
come into operation:
● When both the parties to an agreement are mistaken
● Their mistake is as a matter of fact
● The fact about which they are mistaken is essential to the agreement.
Two of these points are further supplemented by Section 21 and 22. Section 21 emphasizes
that mistakes should be of fact and not of law. Thus a contract grounded on the erroneous
belief that a particular debt is offered by the Indian law of limitation, the contract is not
voidable. Section 22 deals with the situation where only one part is mistaken as to matter of
fact, the contract is not voidable.

5. Legality of Object
One of the essential requirements of a valid contract is that the parties must contract for a
lawful object. A contract, the object of which is os[osd to the law of the land may be either
unlawful or simply void, depending upon the provisions of the law to which it is opposed. The
source of the illegality may arise by statt or by virtue of the principles of common law. In
some instances the law strikes at the agreement itself, and the contract is then by its very
nature illegal but in the majority of cases the illegality liees in the object which one or both
parties have in mind or in the method of performance. As a general rule, although all the
other requirements for the formation of an agreement are complied with, an agreement that
is illegal in one of these ways will not be enforceable. The subject of illegality is one of great
complexity and the effects of illegality are by no means uniform. The reason for this is not
hard to find. The seriousness of illegality is not the same in all cases. Illegal objects may
range from those which are tainted with gross moral turpitude, e.g., mourder, to those where
the harm to be avoided is relatively small. Attempts have been made to distinguish between
‘Illegal’ contracts and those which are 'nugatory’ or ‘void’. Undoubtedly some contracts can
thus be classified; but it is both impractical and impossible to apply this classification over
the whole field of the subject. However, the legality of the object of a contract can be
discussed under two headings: (i) unlawful agreement (ii) void agreement.

(i) Unlawful Agreement

Section 23 covers the illegality of both the object of the contract and the consideration for it.
The “object” and”consideration” may in some cases be the same thing but may also be
different where the object or consideration falls within any of the categories, like forbidden by
law, defeat the provisions of any law, fraudulent, injurious to the person or property, immoral
or against public policy, the resulting agreement is unlawful. In Ram Swarup v Bansi Mandai
the plaintiff borrowed a sum of one hundred rupees and executed a bond promising to work
for the plaintiff without pay for a period of two years. In case of default the borrower has to
pay exorbitant interest and the principal sum at once. The court hld tht thecontract contained
in the bond was indistinguishable from slavery, which involves injury to the person and was,
therefore void. The law does not allow an agreement tainted with immorality to be enforced.
An agreement is unlawful if the courts regard it as opposed to public policy. The term “public
policy” in its broadest sense means that sometimes the courts will, on considerations of
public interest, refuse to enforce a contract.The following heads usually cover the
agreements/opposed to public policy:
❖ Agreements for trading with enemy countries;
❖ Agreements for stifling prosecutions.
❖ Agreements included under “Champerty and Maintenance” under the English Law.
Such agreements relate to the promotion of litigation. However, these are not
declared void in India.
❖ Agreement creating interference with the course of justice, e.g., agreements to use
any kind of pressure of influence on judges or officers of justice shall be void.
❖ Marriage brokerage contracts e.g., agreement to pay brokerage for getting a spouse
shall be void.
❖ Agreements tending to create interest against duty e.g., agreement by agents to deal
in their own name instead in the name of their principals, without the principal's
knowledge.
❖ Agreements for sale of public offices e.g. agreement to pay some money in return for
getting a job in an office, shall be declared void.
❖ Agreements to create monopolies.
❖ Agreements not to bid in an action sale.
❖ Agreements in restraint of trade.
The above discussion, on agreements opposed to public policy, clearly states the grounds
and explains that all such agreements which are contrary to the welfare of the state by
interfering with the civil or judicial administration or with the individual freedom of the citizens
shall be unlawful as opposed to public policy.

(ii) Void Agreement

Void agreements are those agreements which are not enforced by law courts. Section 2 (g)
of the Indian Contract Act defines a void agreement as, “an agreement not enforceable by
law”. Thus the parties to the contract do not get any legal redress in the case of void
agreements.Void agreements arise due to the non-fulfillment of one or more conditions laid
down by Section 10 of the Indian contract Act. This Section states as follows: “All
agreements are contracts if they are made with free consent of parties competent to
contract, for a lawful, consideration and with a lawful object, and are not hereby expressly
declared to be void.Nothing herein contained shall affect any law in force in India, and not
hereby expressly repealed, by which any contract is required to be made in writing or in the
presence of witnesses, or any law relating to the registration of documents.From the above,
it is quite clear that non-fulfillment of any of these conditions by one of the parties to a
contract shall make an agreement void.” These conditions being:-
● Free consent of the parties;
● Competency of the parties to contract;
● Existence of a lawful consideration;
● Existence of a lawful object;
● Agreement being not included in the list of those specially declared to be void by the
Indian Contract Act by its Section 26, 27, 28, 29, 30, and 56;
● Completion of certain formalities required by any other law of the country like transfer
of Property, Act, Company Act, etc.
Some agreements declared void are:
❖ Agreements made by parties not possessing capacity to contract.--S. 11
❖ Agreements made under Mistake of Facts--S.23
❖ Agreements having unlawful objects and consideration--S.23
❖ Agreements having unlawful objects and consideration in part--S.24.
❖ Agreement made without considered as S.25
❖ Agreement in restraint of marriage. --S.26
❖ Agreement in restraint of trade. --S.27
❖ Agreement in restraint of legal proceedings-- S.28.
❖ Agreements to do impossible acts.--S.56.

6. Discharge of Contract
A contract is said to be discharged when the obligations created by it come to an end. In
other words discharge of contract means ' termination of the contractual relationship
between the parties'. There are various modes of Discharge of Contract, a contract may be
discharged either in a positive way (Positive - by performance) or in negative. (Negative - by
breach or failure to perform contractual obligation by either of the parties). There are various
modes of discharge of a contract which are as follows :
● By performance
● By agreement or consent
● By impossibility
● By lapse of time
● By operation of law
● By breach of contract

(i) By performance -
A contract is said to be discharged if the parties to a contract fulfill their obligations arising
under the contract within the time and in the manner prescribed. In such a case, the parties
are discharged and the contract comes to an end. Performance of a contract is the most
usual mode of its discharge. It may be Actual Performance or Attempted Performance.
(a) Actual performance: When both the parties perform their promises, the contract is
discharged. Performance should be complete, precise and according to the terms of the
agreement. Most of the contracts are discharged by the performance in this manner.
(b) Tender or Offer of Performance: Tender or offer of performance means "offer made by
the promisor to the promisee expressing his willingness to perform his part of the obligation
under the contract. It is also known as attempted performance. Example- 'A' offers to sell his
house to 'B' for $100000 and 'B' accepts the same letter 'B' paid the amount in full and 'A'
handed over the house to 'B'. Here the parties have fulfilled their obligations.The contract is
said to be discharged by performance.
If only one party performs the promise, he alone is discharged. Such a party gets a right of
action against the other party who is guilty of breach of contract.

(ii) Discharge by agreement or consent:

A contract rests on the agreement of the parties. As it is an agreement which binds them, so
by their agreement or consent they may be discharged. A contract may be terminated by
subsequent agreement. The new agreement may be by way of :
● Novation- Section 62 of the Indian Contract Act deals with the doctrine of novation.
when a new contract is substituted for an existing one, either between the same
parties or between the new parties. If the parties to a contract agreed to substitute a
new contract for it or to rescind or alter it, the original contract need not be
performed.
● Alteration-. i.e., when one or more of the terms of the contract is/are altered by the
mutual consent of the parties to the contract.
● Rescission- i.e., when all or some of the terms of the contract are canceled.
 ● Remission- Section 63 of the Indian Contract Act 1872 speaks about the discharge
of a contract by remission. i.e., acceptance of a lesser fulfillment of the promise
made.
● Waiver - which means intentional relinquishment or giving up of a right by a party
entitled thereto under a contract.
● Merger- i.e., when an inferior right accruing to a party under a contract merges into a
superior right accruing to the same party under a new contract.

(iii) Discharge by Impossibility of Performance:

If the performance of a contract is impossible, it is void. In other words, the impossibility of
performance renders the contract void. Section 56 of the Indian Contract Act 1872 lays down
the provisions relating to the impossibility of performance, which runs as follows: "An
agreement to do an act impossible in itself is void." Impossibility which arises subsequent to
the formation of a contract ( which could be performed at the time when the contract was
entered into ) is called subsequent or supervening impossibility included-
a) destruction of the subject-matter of the contract;
b) non-existence or non-occurrence of a particular state of things;
c) death or incapacity for personal service;
d) change of law or stepping in of a person with statutory authority;
e) outbreak of war. The contract is discharged in these cases.
The following cases are not covered by supervening impossibility ;
a) difficulty of performance;
b) commercial impossibility;
c) failure of a third person on whose work the promisor relied;
d) strikes, lockouts and civil disturbances;
e) failure of one of the objects.
The contract is not discharged in these cases.

(iv) Discharge by lapse of time:

The limitation act 1963, imposed an obligation on the parties in respect of certain contacts to
perform within a specified period. If a contract is not performed within the period of limitation
and if no action is taken by the promise in a law court, the contract is discharged.

(v) Discharge by operation of law:

A contract may be discharged by operation of law. It includes discharge by:
a) Death
b) Merger
c) Insolvency/ Bankruptcy
d) Unauthorized Alteration of the terms of a written agreement, and
e) Rights and liabilities becoming vested in the same person.
f) Judgement of Court

(vi) Discharge by breach of Contract:

Breach of contract means failure to perform the contractual obligation by either of the parties
without any lawful excuse. It is a ground for discharge of the contract. Breach of contract
may be - 1) Actual breach, or 2) Anticipatory breach.
1) Actual breach of contract may occur a) at the time when the performance is due, or b)
during the performance of the contract.
2) Anticipatory breach of contract occurs when a party repudiates his liability or obligation
under the contract before the time for performance arrives.

II. ENGINEERING CONTRACT AND SPECIAL FRAMEWORK

OF LAW OF CONTRACT WITH GOVERNMENT
There are some special formalities that are to be followed in all governmental engineering
contracts. As stated already, the general principle of law of contract deals with the matter
relating to offer acceptance, consideration, lawful object, discharge etc. However, some
special formalities required by the constitution of India, in addition to those laid down by the
law of contract which govern any contract made in India. The constitution of India provides
that the Union and the states as juristic persons, capable of owning and acquiring property,
making contracts, carrying on a trade or businesses and defending legal action, justice
private persons, subject to modification specified in the constitution itself. Thus, the Union or
state governments are competent to carry on any trade or business and make contracts for
that purpose, in exercise of its executive power. The reason for imposing these special
conditions is that contracts by the government creates some problems which do not or
cannot possibly arise in the case of contracts entered into by private persons. Thus there
should be a definite procedure according to which contracts may be made by its agents, in
order to buy the government, otherwise public funds may be depleted by clandestine
contracts made by any and every public servant. Formalities for contracts made in exercise
of the executive power of government, of the union or a state as they have done in Article
299 of the Constitution of India.
Article 299 provides how government contracts form including assurances of property, are to
be made and executed. A contract with the government, Union or state must satisfy three
requirements:
● the contract must be executed by a person authorised by the president or Governor
as the case may be
● the contract must be executed by such person on behalf of the President of governor
as the case may be and
 ● the contract must be expressed to be made by the president or the Governor as the
case may be
The provisions of Article 299 are mandatory and their non-compliance would render a
contract void. It follows that no Suit against the government, Union or state can be brought if
the requirements laid down in this article are not complied with. Equally the contract will not
be enforceable by the governments.

1. Procedural Requirements
The words expressed and executed create doubt whether the government contract, by a
need or by a formal written form, a binding contract by a tender and acceptance also come
into existence if the acceptance is by a person duly authorised in this behalf by the president
or governor of a state. Section 175 (3) of the Government of India Act 1935, which is
identical to the provisions of Article 299 of the constitution, provides that a contract entered
into by the governor of a province must satisfy three conditions:
● it must be expressed to be made by the Governor,
● it must be executed, and
● the execution should be by such persons and in such manner as the Governor must
direct or authorise.
It was observed in MS Karam Chand Thapar case that section 175 (3) did not prescribe any
particular mode in which authority must be conferred on a person to execute a contract.
Normally search conferment will be by notification in the official gadget, but there is nothing
in the section itself to procure authorisation being conferred ad hoc on any person and when
that is established, the requirement of section is satisfied. However, the executive act need
not be closed in the particular form referred to in Article 299 and the transaction does not
become invalid by not being so expressed. Thus, a transaction of mortgage between a state
bank and its constituent do in exercise of the executive power of the state, need not be
expressed to have been made in the name of the Governor. In M Muhammad v Union of
India, the law on the subject of procedural requirements in government contract has been
summarised thus:
● a formal document of contract is not necessary
● a contract can be inferred from correspondence
● A mere tender and acceptance is sufficient to constitute a valid contract
● the contract must be entered into by an authorised person. do a contract entered into
by an unauthorised person may be ratified by the government, particularly, if it was
for the government’s benefit
Article 299(1) does not prescribe any particular mode in which the authority has to be
conferred, normally, it is by a notification in an official gadget but it can also be ad-hoc on
any person and need not be given by rules expressly promulgated for the purpose; and it's
so given a special authority can always be validly given in respect of a particular contract to
another officer rest well.The sanction to the contract can be expressed or implied the given
and for which, actions, apart from the execution of the documents, can be considered.
A contract entered into without complying with the requirements of Article 299(1) is void in
the sense that it cannot be enforced by the parties to the contract, though it is not white for
all purposes and it can be taken into consideration and looked into for collateral purposes
and is not, absolutely void, that is void for all purposes.

2. Determination of Government Liability

In determining the liability of the Union and the states in respect of contracts, regard must be
had to Article 299, one which prescribes the formal requirements for making of contracts by
the Union and the states, for their power to enter into contracts and to carry on trade or
business is expressly are formed by Article 298, which provides that the executive power of
the Union and the states extends to the carrying of any trade or business, acquiring, holding
and disposing of property and the making of contracts. Therefore, the requirements of Article
299 are complied with, there can be no doubt that Article 308 is valid and contract can be
enforced against the Union and the states, since it could have been enforced against the
East India Company. Article 299 raises three questions :
● is it mandatory?
● if so, does failure to comply with it make an agreement void? and
● if so, does Section 70 of the Contract Act apply to it?
Clause 1 of Article 299 of the constitution provides that all contracts made in the exercise of
the executive power of the union of a state shall be expressed to be made by the President,
or by the Governor of the state, as the case may be, and all such contracts and all
assurances of property made in the exercise of the power shall be executed on behalf of the
president or the Governor by such person and in such manner as he made direct or
otherwise. This provision of the Constitution is in pari materia with the provision of Section
173 (3) of the Government of India Act 1935. It was held that a contract entered into by the
Governor of a province, under the Government of India Act 1935 must satisfy three
conditions namely:
● it must be expressed to be made by the Governor
● it must be executed
● the execution should be by such a person and in such manner as the Governor might
direct or authorise.
These three conditions are required to be fulfilled. The Supreme Court reiterated the position
in Seth Bhikhari Jaipuria case and the court held that the three conditions as stated above
must be fulfilled and the state should not be saddled with liability for unauthorised contracts
and hence, it was provided that the contract must show on their faces that these were made
by the governor general and executed on his behalf in the manner prescribed by the person
authorised. It is based on public policy and no question of waiver arises.
In K.P. Choudhury v M.P., the effect of Article 299(1) was again considered that the contract
had not been completed, there was an implied contract which was not hit by Article 299. In
reversing the judgement of the high court and in remanding the case WANCHOO J. referred
to the Supreme Court decisions of Section 175 of Government of India Act, 1935 and held
that those decisions under the shade section 175 applied equally to art 299 (1).
He held that in view of Article 299(1), there can be no implied contract because if implied
contract between the government and another person were allowed, they would, in fact,
make Article 299(1) useless. Secondly, if the contract between Government and another
person was not in full compliance with article 299 (1), it would be no contract at all, and could
not be enforced either by the government or by any person as a contract. As a result, there
was no contract between the appellant and respondent as the alleged agreement did not
comply with the terms of Article 299 (1).

3. Personal Liability in Government Contract

Government contracts are made in the name of the President of India in states in the name
of the Governor. The question is whether they are personally liable? This issue was argued
in the constituent assembly debate; Shree Mahavir Tyagi asked Dr. Ambedkar in the
following terms "are you going to have the liability without defining the nature of the liability?
If it were only a case of your defining that the liability shall always be executed in the name
of the Governor or such other persons I can understand, because he is the head of the state
and all executive action has to be taken in his name. but in clause to you say "neither the
president not the governor of a state not the ruler now shall be personally liable in respect of
any contract of insurance made or executed for the purposes of this constitution. This also I
can understand in the case of the Governor whose name has been used only formally but I
cannot pardon the officers who are the ministers who do wrong things in his name. It is only
a question I have to put to Dr. Ambedkar and I hope he will clarify the position." Dr.
Ambedkar replied to the question of Mr. Tyagi and said it was very difficult to impose the
personal liability of the government contract. Mr. Tyagi could understand the reason of it if he
could signed a contract he further added that “I think much of the objection raised by Mr.
Tyagi would fully disappear if he were made the member of the cabinet I should like him to
answer the question whether any contract that he has made on behalf of the Government of
India should impose a personal liability on him I am sure he knows the ordinary commercial
procedure of principal appoints and agent to do certain things on his behalf unless the agent
has acted outside the scope of the authority conferred upon him by the principal, the agent
has no personal liability in regard to any contract that he has made for the benefit of the
principal it is the same principal here". Similarly the officers who contract on behalf of the
Government and not personally liable since they are acting for the Government and not for
themselves. The same law is in England. In Macbeath v Haldimand, which arose out of
supplies of stores for a fort under the control of the Government of cubic, it was held that
public officers cannot be sued, either personally or in their official capacity for contracts
made by them in their official capacity.
Thus the constitution of India under Article 299 provides a special framework of law of
contract with the government.
 III. DISPUTE RESOLUTION IN ENGINEERING CONTRACT
As stated above, the general principles of law of contract under the Indian Contract Act,
1872 and special formalities for government contracts under Article 299 of the Constitution of
India are essential part of the law of engineering contract in India. After the formation of an
engineering contract a series of techno-legal disputes arise. These disputes generally arise
relating to documents, execution, payment, time or defaults. The disputes relating to
documents arise in connection with tender form and notice inviting tender, forwarding letter
from contractor, letter of intent, drawing or specifications, bill of quantities and
inconsistencies. The disputes relating to execution of contract include satisfaction of
supervisions, changed conditions, variations, alterations, damages of works and suspension.
As far as the disputes relating to payment are concerned, these days courts cover evaluation
of contract works, evaluation land, variation of changes, variation in quantities in different
rates, claims for extra time spent, delay in payment. Disputes relating to time in engineering
contracts may be summarised as regard to suspension of work, delay due to possession of
land, delay in issue of drawings, instructions, delay due to errors in design, delayed due to
issue of materials and orders. The major controversial area in engineering contracts is
defaults, which covers liquidated damages, non payment of incentives, recession of contract
and frustration of contract. The legal system in India provides that disputes are to be settled
in civil courts. Besides the settlement of disputes in civil courts, there are also legally
recognised Alternative Dispute Resolution (ADR) methods prevails in India.

1. Dispute Resolution under Civil Courts

Ordinarily, all disputes arising under a contract including engineering contracts have to be
settled by the civil courts established by the state. The well-known maxim ubi jus ibi
remedium prevails in common law provides that "where there is right there is a remedy" i.e.
rights are capable of being judicially enforced. Thus, Indian Contract Act 1872, as a
substantive law determines the rights and liabilities of parties to the contract, whereas the
Code of Civil Procedure 1908, as a procedural law and an accessory to substantive law,
prescribes procedure and machinery for the enforcement of those rights and liabilities. An
aggrieved person, who feels that his writes under some substance law has been violated will
look out for a remedy. The adversarial methods will tell him that he has now to approach an
adjudicatory forum. Yet one cannot, under the present system, just walk into any Civil Court
and demand redressal. The Code of Civil Procedure provides procedure to be adopted by
civil courts. Some important aspects regarding procedure of trial in civil courts are discussed
below:

(i) pre trial procedure

A person having a grievance of a civil nature has a right to institute a civil suit in a competent
court. Before instituting a suit no one has to determine the jurisdiction of Civil Court whether
the particular court has the power authority to hear and determine a cause, to advocate and
exercise any judicial power in relation to it. Section 9 of the Code of Civil Procedure, 1908
provides that a Civil Court has jurisdiction to try all suits of a civil nature unless they are
barred. Section 17 of the Code provides that where a suit is to obtain a relief respecting, or
damage for Torts, immovable property situated within the jurisdiction of different courts, the
suit can be filed in court within the local limits of Jurisdiction any portion of the property is
situated provided that the suit is within the pecuniary jurisdiction of such court. This provision
is intended for the benefit of suitors and to prevent multiplicity of Suits. According to Section
18, if there is uncertainty of jurisdiction of local limits the suit may after recording the
statement to that effect proceed to entertain and dispose of the suit. According to Section
19, a suit for compensation for wrong to a person may be instituted at the option of the
plaintiff otherwise such wrong is committed or where the defendant resides, carries on
business or personally works for gain. Section 20 provides for all other cases not covered by
any of the foregoing rules. All such suits may be filed at the plaintiffs option in any of the
following courts, namely:
❖ where the cause of action, wholly or partially arises
❖ where the defendant resides or carries on business or personally works for gain
❖ where there are two or more defendants any of them besides are carries on business
or personally works for gain, provided that in such case,
● either the leave of the court is obtained
● the defendants who do not reside to carry on business or personally work for
gain at that place of acquiesce in such institution.
Once the pre-trial preparations are complete, the suit is ready for institution before the
chosen forum. However, section 79 to 82 and Order 27 of the codes lay down procedure
wear suits are brought by or against the Government of public officers. The provisions,
however, prescribed procedure and machinery and do not deal with the rights and liabilities
enforceable by or against the government. After the plaint has been presented by the
plaintiff and the written statement by the defendant in court and the issues have been
framed by the court, a stage is reached when the parties to the suits are in a position to
know what facts and what documents should be proved by them. This stage is called the trial
stage.

(ii) trial procedure

The trial procedure consists of summoning and attendance of witnesses, attendance of
witnesses in prison, summons to produce documents, adjournments, hearing of suit.
Sections 30 to 32 and Orders 16 to 18 of the codes contains necessary provisions relating
trial procedures. Order 16, Rule 11 provides that the parties to the suit have to present in
court a list of witnesses whom they proposed to call either to give evidence or to produce
documents and to obtain summonses for their attendance in court. Such a list must be filed
on or before such date as the court may appoint but not later than 15 days after the issues
are framed. Every summon issued to a witness should contain the following particulars:
● the time and place at which he is required to attend
 ● the purpose of office attendance, whether his attendance is required for the purpose
of giving evidence or to produce a document, or for both the purposes
● the document which he is called upon to produce should be described with
reasonable accuracy.
According to Section 32 of the court the court has power to enforce the tendency of any
person to whom a summons has been issued and for that purpose, may:
● issue a warrant for his arrest
● attach and sell his property
● impose a fine upon him not exceeding 5000 rupees
● order him to furnish security for his appearance and in the fault commit him to the
civil person.
The procedure to issue summon to produce documents is the same as to the issue of
summons to give evidence (Section 31). After the court starts hearing of the suit, it will be
continued till the final disposal of the suit full stop as a general rule, when hearing of
evidences once begin, search hearing shall be continued day to day and the ground should
be granted only for unavoidable reasons full stop an adjournment may be granted by a court
inter-alia on the grounds of sickness of a party, his witness for his advocate, non service of
summons, reasonable time for preparation of case, withdrawal of appearance by a pleader
at the last moment etc. According to Section 153 B of the Code as a general rule, the
evidence of witnesses shall be taken orally in open court in the presence and under the
personal direction and superintendence of the judge. It is well settled that, in general, all
cases brought before the courts, whether civil criminal or others, must be heard in open
court. However, if it occurs where the requirement of the administration of justice itself may
make it necessary for the court to hold the trial in camera. If the primary function of the court
is to do justice in causes before it, then on principle, it is difficult to access to the proposition
that there can be no exception to the rule that all causes must be tried in open court. The
free trial and trial procedure of the civil court as discussed above is applicable to settle
disputes relating to all types of contracts including engineering contracts. However, Section
89 as inserted by the Code of Civil Procedure (Amendment) Act, 1999 provides for
settlement of disputes outside the court. Section 89 provides that where it appears to the
code that there exists elements of settlement which may be accepted to the parties, The
court shall formulate the terms of settlement and give them to the parties for their
observations and after receiving the observations of the parties, the court may formulate the
terms of a possible settlement and refer the same for arbitration, conciliation, judicial
settlement including settlement through Lok Adalat or mediation.

2. Alternative Disputes Resolution

All disputes relating to engineering contracts can be solved in ordinary civil courts, the
existing judicial system prevails in courts and is not able to cope up with the ever increasing
burden of civil litigation. The deficiency lies in the adversarial nature of the judicial process
which is time consuming and more often procedure oriented. The engineering industry
possesses certain special features which require consideration in the context of settlement
of disputes as the traditional legal process is found to be more tardy and expensive for
settlement of disputes in the engineering industry. Some special features of the engineering
industry can be enumerated thus:
❖ The industry itself is a specialised one, with its own patterns and practices
❖ Planning and executing engineering projects involves numerous parties and
organisations must work in Unison, though temporarily. A small deviation affects
numerous parties.
❖ An engineering project is continuous, usually spread over a number of years. A
dispute that operates as an impediment at any single stage may upset the entire time
table, unless speedily resolved. Some of the problems that arise in the workings of
the project are not foreseeable or even if they are foreseeable, their magnitude may
not be foreseeable.
If litigation is resorted to, then such problems may increase rather than resolve the tension
generated by the emergence of the problem in engineering contracts, everyone is expected
to work towards its successful completion. Hence, the number of persons who can benefit
from a prompt and peaceful settlement of disputes is much larger than in the case of a non
engineering contract. Delayed resolution of a dispute substantially hampers performance of
the contract in its other parts. Therefore, alternative dispute resolution bracket ADR appears
to be an appropriate substitute of settlement of dispute in engineering contract. A number of
ADR procedures are hybrids that combine two or more well-established ADR procedures.
ADR procedures can be broadly divided into two categories, namely,
adjudicatory and non-adjudicatory.
The adjudicatory procedures such as arbitration and binding expert determination lead to a
binding ruling that decides the case. The non adjudicated procedures contribute to resolution
of disputes by agreement of the parties without adjudication. Of the several ADR techniques,
mediation seems to be the most widely used one; it is the same dispute resolution process
as consolation, except that in the case of the former the neutral third party places a more
active role in putting forward his own suggestions for the settlement of the dispute.
Sometimes, the terms conciliation and mediation are used interchangeably. Other ADR
techniques can be used with appropriate and what form is appropriate depends upon the
facts and circumstances of each case.

Non binding Procedures

Some ADR procedures, namely negotiation, conciliation, mini trial are non-binding in nature.
Negotiation, a non binding procedure involves direct interaction of the disputing parties
where in a party approaches the other with the offer of a negotiated settlement based on an
objective assessment of each other's position. Mediation or conciliation is also a non-binding
procedure in which a neutral third party assists the disputing parties in mutually reaching and
agreed settlement of the dispute. Mini trial, a non binding procedure involves presenting
parties to the dispute with their respective cases before their senior executives who are
competent to make decisions and who are assisted by a neutral third party. Thus, the
executive has an objective assessment of the dispute and if possible, we can mutually arrive
at an amicable settlement. Some features of mini trial are as follows:
❖ a moderately formal non binding arbitration like case presentation held in an office,
conference room, borrowed courtroom
❖ usually made exclusively by Counsel
❖ wherein the evidence usually comes in as a fitter bit, deposition and documentary
evidence presented by Counsel.
❖ the presentation are generally made to two groups, first, top management type
decision makers from each party and second, one or more neutral third parties
❖ as in non binding arbitration, the neutrals receive the evidence and arguments, then
issue a non-binding opinion.
❖ the parties retire to talk settlement. If they fail to settle the neutral becomes a
mediator and attempts to facilitate discussion and induce a settlement between the
parties.
❖ the mini-trial is benefited by the fact that the top management have:
➢ heard the case through the mouth of the adversary
➢ scene devar on counsel's performance in comparison to that of the adversary
➢ hurt how the case played to the neutral that is received the neutral evaluation
➢ had an opportunity generally to evaluate the resources and effort that will be
required to carry the case through trial

Binding Procedures
Besides the non-binding procedures, it also provides binding procedures. The binding
procedures of ADR can be categorised as medola, fast track arbitration and arbitration.
Medola provides a procedure in which, if the parties fail to reach agreement through
mediation, a neutral person, who may be the original mediator for an arbitrator, will select
between the final negotiated offers of the parties, such selection by being binding on the
parties. Fast Track arbitration is an arbitration in which the arbitration procedure is rendered
in a particularly short time and reduced cost. One of the most important procedures of ADR
is arbitration procedure, a binding procedure where the dispute is submitted for adjudication
by an arbitral tribunal consisting of a sole or an odd number of arbitrators, which gives its
decision in the form of an award that finally settles the dispute and is binding on the parties.
The advantages of arbitration as against litigation have been variously indicated to be:
❖ that arbitration allows the parties to keep private the details of the dispute
❖ the parties can choose their own rules or procedure
❖ there is greater scope for minimising acrimony
❖ the costs can be kept low
❖ the times and places of hearing can be chosen according to convenience
 ❖ there will be saving of time
❖ the ability of the parties to choose their own judge formats and choice of an expert in
the field who is more able to view the dispute in its commercial setting.
Therefore, government contracts generally provide for compulsory arbitration in respect of
disputes arising there under and usually the arbitrator appointed to decide such disputes are
senior government officers.
Some special provisions of law of contract with the government have been incorporated in
the constitution of India. Article 299 of the Constitution of India provides some special
formalities for government contracts. As regards the settlement of engineering disputes,
ordinary courts have jurisdiction to settle the dispute. A detailed scheme of procedure has
been incorporated under the code of civil procedure for settlement of disputes within the
court. However, ADR also provides some procedures, both non binding and binding, for
settlement of disputes outside the court. These procedures are negotiation, conciliation, mini
trial, meloda, first track arbitration and arbitration in dispute settlement relating to
engineering contracts, there is much prosperity in arbitration certainly, for arbitrators and
arbitral institutions but arbitration must also be popular with users. In the past, commercial
man showed arbitration because it seemed a good way of resolving disputes, in the present,
it is selected mainly through habit and only because all other methods seem even worse.
The current preoccupation with alternative dispute resolution is a symptom of this, and
demonstrate a growing sentiment that there is a need, not for an alternative to national
courts, for that does exist--in most places in the shape of arbitration (court structured); but in
need for some alternative to 'judicial arbitration'. In reality, arbitration, conciliation and
mediation are different forms of dispute resolution outside courts. ADR and arbitration are
complementary hence, the preferred use of the words ‘appropriate’ or ‘additional’ in place of
alternative. The complexity of engineering projects, the frequent recurrence of differences
and the intricacies of the differences themselves, all these justify one thing that in case of
engineering disputes arbitration is not an option for a luxury, but almost a necessity.
Therefore, the law of arbitration needs detailed deliberation.