- A.S.Vamsi Krishna (Fourth Year Law Student, Rajiv Gandhi National University of Law)
Introduction
In the past year, the judicial trend established by the Supreme Court has completely turned around the evidentiary requirements with respect to delay claims in construction contracts. Previously, claims of losses due to construction delays were remedied in a straightforward manner through a formulaic method. For example, in the case of JG Engineers Pvt. Limited v. Union of India, 10-15% of the contractual amount was paid for delays without conducting actual cost calculations. However, the SC in Batliboi Environmental Engineers Limited v Hindustan Petroleum Corporation Limited (“Batliboi”) and Unibros v All India Radio (“Unibros”) changed its position, and provided for a higher evidentiary threshold wherein the delay claim must be adduced with complete financial accounts of the cost incurred. While this shift in favour of a comprehensive evidentiary regime has been largely supported owing to greater accuracy, it does place an increased burden placed on contractors, especially smaller firms who already operate with limited margins and resources, which could find themselves at a disadvantage. This article examines the impact of the new evidentiary threshold for delay claims on small-scale contractors and attempts to provide ways to allow for a smoother transition for small firms to this new regime.
Substantiating Claims For Construction Delays
When delay in completion of construction occurs, there are two types of costs associated– site overheads and off-site overheads. The former refers to costs incurred related to maintaining idle-presence on the site of construction (maintaining equipment, utilities and salaries of workers, etc) and the latter concerns administrative costs (salaries of support staff, insurance and bank guarantees, stationery, etc). To successfully claim damages owed due to delay the contractor must adduce evidence to show that each of these costs were incurred. The Society of Construction Law Delay and Disruption Protocol ("SCLDDP") outlines the typical evidence required for delay claims. This includes running account bills, time sheets, progress reports, payroll records, invoices for utilities, minutes of project meetings, and rental expenses. These documents, among others, are essential for substantiating claims related to project delays and disruptions.
Furthermore, in JF Finnegan v. Sheffield City Council, the Court held that delay claims are not limited to damages for actual losses but can also include loss of profits which could have been obtained otherwise i.e., loss of profits. For the claim of lost profits, the claim must be sufficiently adduced with evidence of tender documents, business plans, resource logs, etc. Such an extensive record-keeping is not an inexpensive affair, requiring additional costs of accountants, record keepers and greater legal costs accrued due to the lengthier paperwork process.
The Impact On Small-Scale Construction Firms
In India, over 95% of the total number of construction companies are small-scale enterprises. The cost and complexity of meeting these evidentiary demands would eat into the already limited margins and resources of these small firms. This could discourage them from pursuing legitimate claims, which can lead to greater power disparity within the industry, such that larger companies with greater resources can more easily pursue claims, while smaller firms may be forced to bear the burden of the costs of delays. Furthermore, this rigorous approach can lead to lengthier and complicated dispute resolution processes. This is attributable to the increased time spent in compilation and presentation of detailed evidence by the parties as well as subsequent examination by the relevant adjudicating authority. This complication impacts both the contractors and the project owners since delay in the settlement of claims increases the legal and administrative costs. Moreover, a prolonged litigation process hurts small firms not just financially but it also results in lost opportunities which it could have undertaken instead of engaging in delay proceedings. .
The Micro, Small, and Medium Enterprises (“MSME”) sector in construction generates around 41 million jobs and is a significant contributor to the job market in India. In light of the rampant unemployment crisis plaguing the nation, the adverse effects of the courts' changed approach to handling construction claims can have substantial ramifications on employment and the welfare of a large segment of the population. Ultimately, the damage due to increased complexity in delay claims is not localised to the construction firms alone since any costs incurred by these contractors are passed on to consumers, thereby increasing the overall cost of construction in India.
The Path Forward: Ensuring A Smooth Transition For Small-Scale Contractors
While the shift towards requiring comprehensive evidence in construction delay claims presents an additional burden on construction firms, it does reflect the Indian Court’s commitment to fairness and accuracy in the construction industry. The role of record-keepers, accountants and employees tasked with handling documentation is extremely essential for ensuring successful project management. For contractors, this shift requires additional investments in robust documentation practices and related technology to streamline data collection and storage. However, to ensure that the transition to the new evidence-based regime does not adversely affect the interests of the small-scale construction firms it is crucial to introduce short-term measures to smoothen this intermediary stage. In furtherance, the authors propose that the provision of clear guidelines on the requisite evidentiary standards is important, to allow smaller firms to plan more efficiently. Introduction of standardised evidential formats such as the SCLDDP, which have found usage in English courts would be beneficial since they provide clear instructions on the type and extent of evidence required for the delay cost incurred. Furthermore, introducing financial assistance schemes such as low-interest Litigation Funding Agreements (LFAs) to support small construction firms in pursuing legitimate claims can be beneficial. Economic support may also be provided in the form of subsidised legal and expert fees, offering tax incentives or rebates, and establishing affordable insurance schemes to help manage the financial risks associated with disputes.
Conclusion
While the Supreme Court’s decisions in Batliboi and Unibros have clearly shown that the days of assuming profits in delay claims are long gone, it does present new challenges, particularly for small constructors. It is important to address these concerns since the losses to small constructors can send shockwaves in the Indian economy owing to increased litigation and housing costs. To address the challenges faced by smaller contractors, measures such as introducing clear guidelines which enumerate the requisite evidentiary standard and financial assistance to small-scale constructors are proposed. As the construction industry continues to evolve, stakeholders must balance the need for comprehensive documentation with practical considerations to ensure that the process remains equitable and efficient for all parties involved.
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