Infrastructure Contract Drafting

Module 3: Legalities of Contract Provisions

& Life Cycle of a Contract

07 Sep 2025

Presented by: Contact Info:

Dr. Pradeep Reddy pradeepreddyindia@[Link]
Advocate & Arbitration Professional +91 7702967275
 Disclaimer
 This presentation should NOT be interpreted as legal or technical advice. This
presentation is intended to help a person understand the topic discussed here, merely
as a preliminary educational tool. This presentation does NOT create any professional
or commercial relationship.
 This topic is dynamic and vast. It is difficult, or probably impossible to be up to date
with the Law that applies to every case. Errors and omissions are possible.
 The presenter, the presenter’s firm, or the Institute organizing this event, DOES NOT
accept any responsibility for the content, accuracy or completeness of the information
presented.
 All rights reserved. This presentation shall NOT be used or distributed without the
written authorization of the Presenter.
2
 Notes
 Do not believe anyone. Verify for yourself.
 Traditional beliefs may not be up to date. The law is dynamic.
 Every case is unique.
 Every Rule has an Exception. Every Exception has a Rule.

3
Legalities of Contract Provisions

4
 Legalities of Contract Provisions
 Provides a clear roadmap for project execution and conflict resolution
 Offers effective legal remedies in case of non-performance or breach
 Allocate risks effectively
 Define the rights and obligations of the parties with legal precision

5
 Legalities of Contract Provisions
 Real-world and legal consequences
 Provisions that are valid and enforceable
 Legally robust
 Capable of withstanding disputes
 Minimizes ambiguity and the risk of costly disputes

6
 Choice of Parties vs Prevailing of statutes
 Freedom to Contract is paramount
 Freedom cannot curtail rights such as
 Natural rights
 Constitutional rights
 Fundamental rights
 Freedom is not absolute

7
 Choice of Parties vs Prevailing of Statutes
 To protect the “weak”
 Hierarchy of legal authority
 Any contractual clause that contradicts or "defeats the provisions of" a mandatory law
is invalid
 Mandatory provisions vs Directive provisions

8
 Choice of Parties vs Prevailing of Statutes
Choice of Parties (Freedom of Contract) Prevailing of Statutes (Mandatory Law)

Statutory laws, such as the Indian Contract Act, 1872,

The doctrine of "freedom of contract" allows parties to
establish the essential elements of a valid contract and
define their rights, obligations, and terms based on
declare certain types of agreements void for reasons of
mutual consent
public policy or legality

Allows parties to tailor agreements to their specific Creates non-negotiable rules that must be followed.
needs, such as setting payment terms, defining a scope Any clause that is "forbidden by law" or "defeats the
of work, and selecting a dispute resolution method like provisions of any law" is considered unlawful and
arbitration. unenforceable, regardless of the parties' agreement.

The law acts as a safeguard. If a contract contains terms

The principle is that contracts freely and voluntarily
that are unfair, immoral, or against public policy, the
entered into between competent parties should be held
court may strike them down to protect the weaker party
sacred and enforced by the courts.
or the public interest.
9
 Mandatory Provisions
 Imperative legal requirement that must be strictly and literally followed
 Typically strict, unconditional, and compulsory
 Failure to comply can be a serious legal offense
 Often written by commanding or prohibitory language, such as "shall," "must," or
"shall not". However, the use of a particular word is not always conclusive, and courts
consider the overall context.
 Non-compliance with a mandatory provision renders the resulting act or proceeding
void or invalid
 Can lead to penalties, liability or criminal charges

10
 Mandatory Provisions
Examples
 Statutory deadlines
 Registration of Documents
 Stamp Duty
 Right to judicial intervention

11
 Directive Provisions
 Legal instruction that is advisory or procedural in nature
 Substantial compliance is sufficient, and exact compliance is not essential
 Provisions are discretionary, permissive, and intended for convenience or orderly
procedure
 Often written by permissive language, such as "may" or "should." As with mandatory
provisions, this is a guideline, not a strict rule.
 Non-compliance does not automatically invalidate an act or proceeding, especially if
no prejudice or injustice is caused
 Courts can prevent a miscarriage of justice that might result from overly strict,
technical interpretations
12
 Directive Provisions
Examples
 "may" submit quarterly reports. A delay in submitting a report would not invalidate the
enforcement actions already taken.
 Report to be published within 30 days may be deemed directory if the ultimate
purpose of publishing the report is not defeated by a delay.
 Minor, non-prejudicial lapses in a judicial procedure, like a slight delay in filing, may
be excused if the core purpose of justice is not affected

13
 Mandatory vs Directive Provisions
Mandatory Provision Directive (Directory) Provision
Advisory, procedural, and can be followed
Strict, compulsory, and must be followed exactly
substantially
Uses imperative terms like shall, must, or shall not,
Uses permissive terms like may or should.
though not exclusively

Non-compliance can void the act or proceeding and Non-compliance does not typically void the act,
lead to legal penalties especially if its core purpose is met

Often safeguards substantive rights or protects Generally relates to orderly procedure or

public policy administrative efficiency

Courts interpret and enforce these strictly, based on Courts may be more flexible to prevent injustice
legislative intent resulting from technical non-compliance.
14
Overruling the Choice of Parties: Governing Principles
 Lack of Consent
 Fraud
 Unconscious Provisions (Shocking the consciousness of the Court )
 Against fundamental policy of India
 Against public policy of India
 Unreasonable and unfair

No “specific statute”. Decisions may change with time.

15
Frequent Clauses

16
 Liquidated Damages
 Section 74 of the Indian Contract Act 1872
 Empowers courts to award only "reasonable compensation" regardless of the “pre-
estimate amount” stipulated in the contract
 Ensures fairness by preventing excessive damages
 Courts review the stipulated amount and can reduce it if it acts as a penalty
 Reasonable compensation not exceeding the amount stipulated, even if proving the
exact loss is difficult, as long as some loss is shown
 Courts require some loss to be proven

17
 Penalty Clause
 Section 74 of the Indian Contract Act 1872
 Parties can exercise their choice to include a penalty clause
 But courts ultimately prioritize awarding “reasonable compensation”
 Will not enforce an excessive or punitive penalty
 Important Judgements on Section 74 by Supreme Court:
 Fateh Chand vs Balkishan Das
 Maula Bux vs Union of India
 Oil & Natural Gas Corporation Ltd vs Saw Pipes Limited

18
 Damages
 Section 73 of the Indian Contract Act 1872
 Compensate the injured party and put them back in the position they would have been
in had the contract been performed correctly
 Types of Damages:
 Compensatory damages
 Nominal damages
 Reliance damages
 Restitution damages
 Punitive or exemplary damages

19
 Pay if Paid or Pay When Paid
 Pay if Paid
 Contingent on receiving payment
 Risk on the second Party
 Usually not allowed
 Pay when Paid
 Contingent on receiving the payment
 Ultimately relates to time of payment
 Usually allowed
 For both clauses, payment shall be made by the main Party within a reasonable time

20
 Usually not considered as Force Majeure
 Increased costs or economic hardship  Issues that do not prevent performance
 Change in market price through alternative means

 Unavailability of funds  Breach of contract unrelated to an external

event
 Party's own negligence or fault
 Failure to mitigate losses
 Foreseeable events
 Failure to give notice
 Failures of subcontractors or suppliers
 Self-induced frustration

21
 Change of Scope of Work
 Section 62 of the Indian Contract Act 1872
 Mutual consent and contractual basis
 Unilateral changes may be specifically allowed by a fair clause in the original contract
 Reasonability check
 Reasonable justification
 Unforeseen site conditions
 Design errors or omissions
 Regulatory changes
 Owner-requested enhancements
22
 Change of Time Duration
 Section 62 of the Indian Contract Act 1872
 Justification for delay / acceleration
 Proportionate time extension / reduction
 Written agreement
 Role of “time at large” or “time is of essence”

23
 Change of Cost
 Section 62 of the Indian Contract Act 1872
 Justification of costs and impacts
 Reduced productivity
 Schedule disruption
 Administrative burden
 Contractual terms for price variations
 Written consent is mandatory
 Duration of Project

24
 No Price Escalation during Extension of Time
 Generally allowed
 Allocation of risks
 Contractual freedom / choice of Parties
 Exception: Cannot profit from own mistake

25
 Time is of Essence with Extension of Time clause
 Extension of Time (EOT) clause = Time is NOT of the essence
 Section 55 of the Indian Contract Act 1872
 Contradictory intent

26
 Time is of Essence without Extension of Time clause
 Section 55 of the Indian Contract Act 1872
 Intent based on the contents of the Contract
 The term “Time is of Essence” by itself may not be sufficient
 If held that Time is of Essence, then
 Material breach of Contract
 Allows the non-breaching Party to terminate the contract
 Non-breaching Party can claim damages

27
 Time is of Essence with Force Majeure Clause
 Section 55 and Section 56 of the Indian Contract Act 1872
 Suspends the "time is of the essence" provision for the duration of the force majeure
event, rather than eliminating it entirely
 Force majeure clause provides a legal escape hatch from the strict deadlines imposed
by a "time is of the essence" clause
 Recognises that unforeseen and uncontrollable events may make timely performance
impossible without leading to a contractual breach
 May return back to the “time is of essence" after event or terminate the Contract
without any damages
 What about costs incurred by one of the Parties in case of termination?
28
 Extension of Time without Compensation
 Also known as “no damage for delay”  Exceptions
clause  Bad faith or malicious intent
 Enforceable under the principle of  Uncontemplated delays
freedom of contract  Abandonment of the contract
 Allocates risks  Fundamental breach
 Waiver of the right to compensation  Cannot profit from one’s own mistake
 Reasonable and fair conditions

29
 Warranties / Guarantees / Defects Liability Period
 Express warranties
 Implied warranties
 Defects liability period (DLP)
 Patent defects
 Latent defects

 Above clauses allowed with reasonable time period

 Even without such clauses, “implied promise” and can be enforceable
 Sometimes, statutorily mandatory. Ex. RERA
30
 Indemnification Clause
 Section 124 of the Indian Contract Act 1872
 To protect one of the Parties due to the action by the other Party
 Can provide a financial limit
 Can define the risks included in the Indemnification
 Not for profit but only to cover losses
 Anticipatory protection: Courts have established the principle that an indemnity holder
does not have to wait until they have suffered a loss to compel the indemnifier to meet
the liability

31
 Guarantee Clause
 Sections 126-147 of the Indian Contract Act 1872
 Also known as “hold harmless” clause or “promise of guarantee”
 Interpreted by courts as a "defensive" right that shields the protected party from having
to deal with a claim or lawsuit in the first place
 Cannot be made only between two people. Requires a third party “guarantor”

32
 No Interest for Delayed Payment
 Generally valid
 Freedom of contract
 Waiver by the contractor
 Only during the duration of the Contract
 Certain statutes mandatorily allow interest for delayed payment
 Example: MSMED Act 2006

33
Negative Covenants

34
 Negative Covenants
 Allowed by law
 Section 27 of the Indian Contract Act 1872
 Clause that restricts one party from performing a specific action that would be legal
otherwise
 Examples:
 Non-compete
 Non-solicitation
 Non-disclosure/confidentiality
 Restrictions on assignment
 Restrictions on liens
35
 Negative Covenants
During the contract period
 Generally valid and enforceable
 Necessary tool for parties to manage their relationship
 Protect legitimate business interests
 Remedy: Section 42 of the Specific Relief Act 1963

36
 Negative Covenants
After termination of the contract period
 Generally void and unenforceable
 Protect an individual's right to earn a livelihood
 Prevent "economic terrorism" or situations akin to "bonded labour"
 Exception: Confidential information
 Reasonableness test

37
Exclusionary Clauses

38
 Exclusionary Clauses
 Provisions that seek to completely remove or limit a party's legal liability for certain
breaches, negligence, or specific types of damages
 Generally valid
 Types of exclusionary clauses
 Total exclusion from liability (mostly not allowed)
 Limitation clauses with monetary cap
 Exclusion of specific liabilities
 Time-limited clauses to notify the other party of a breach or file a claim

39
 Exclusionary Clauses
 Not allowed if against public policy
 Not allowed if hit by Section 23 of the Indian Contract Act 1872
 Courts have held that clauses that absolutely bar the right to claim damages under
Sections 55 and 73 of the Indian Contract Act are void
 Clauses that attempt to exclude liability for fraud, gross negligence, or willful
misconduct are typically unenforceable.
 May refuse to enforce if its effect is to deprive the other party of the entire benefit of
the contract.
 Review of fairness and equal bargaining power in determining the validity
 Review of relationship with main object in determining the validity
40
Risk Assessment

41
 Risk Assessment
 Process of identifying, analysing, and allocating potential issues and uncertainties to
ensure a project is delivered on time, within budget, and safely
 Process:
 Risk identification
 Risk analysis
 Risk evaluation
 Risk mitigation and allocation
 Monitoring and review

42
 Risk Assessment
 Risk categories:
 Financial risks
 Design and technical risks
 Legal and contractual risks
 Safety and environmental risks
 Labour risks
 Courts review reasonability based on the case

43
 How much Risk can be allocated to Other Party
 Reasonable and fair allocation
 Exception: Insurance or special contracts
 Court intervention:
 Protection against unconscionable clauses
 Exclusions on gross negligence and fraud
 Strict interpretation of exclusionary clauses

44
Life Cycle of a Contract

45
 Life Cycle of a Contract
Pre-Contract phase Execution phase Post-Completion phase
 Initiation and design  Site mobilization and  Project closure and
work handover
 Procurement and bidding
 Drafting and negotiation  Performance management  Defects liability and
and monitoring warranty
 Approval and signing
 Change management  Financial payments and
adjustments
 Compliance and
communication  Dispute resolution

46
 Conditions Precedent
 Contractual provision that stipulates an event or action that must occur before a party's
obligation to perform arises
 Until the condition is fulfilled, the contract or the specific obligation remains
unenforceable, and the parties are not required to perform.
 Timing: occurring before rights/duties arise
 Purpose: protecting parties from premature obligations
 Legal effect: rendering the obligation unenforceable if not met, without grounds for
damages for non-performance

47
 Conditions Precedent
Examples:
 Contractor claims requiring timely written notice
 Subcontractor payments conditional on the main contractor receiving funds from the
owner
 Site mobilization dependent on the owner providing a clear site and notice to proceed
 Lender loan disbursement conditional on the borrower providing collateral or permits
 Starting work packages conditional on owner-approved designs or specifications

48
 Conditions Subsequent
 Contractual provision that if a specified event occurs after the contract has come into
effect, can terminate or alter the existing obligations of the parties
 Serves as a "trigger" for exiting or modifying a contract that is already in force
 Applies after contractual obligations have commenced
 Can terminate or modify existing rights and duties, releasing a party from their
obligations
 Risk management tool allowing parties to adapt or exit a contract due to changed
circumstances without penalty
 Rights and duties vest upon contract formation, but the condition's occurrence can
later alter these
49
 Conditions Subsequent
Examples:
 Revocation of necessary regulatory approval
 Insolvency or bankruptcy
 Failure to make timely payments or violating terms
 Failing to meet specific quality standards

50
 Performance of a Contract
 Refers to the fulfillment of the mutual obligations by all parties as specified in the
agreement, which leads to its discharge or termination
 Section 37 of the Indian Contract Act 1872
 Types of contract performance
 Actual performance
 Attempted performance (tender of performance but unwilling by other Party)
 Substantial performance
 Partial performance

51
 Performance of a Contract
 Pacta sunt servanda: The fundamental legal principle that "agreements must be kept"
serves as the basis for performance of contract law
 Timeliness of performance: Section 55 of the Indian Contract Act and Contract Terms
 Impossibility and frustration: Section 56 of the Indian Contract Act
 Breach and remedies
 Damages
 Specific performance
 Quantum Meruit

52
 Termination of a Contract
 Termination by agreement: Section 62 of the Indian Contract Act
 Termination for breach
 Material breach
 Anticipatory breach
 Termination by frustration (impossibility): Section 56 of Indian Contract Act
 Termination for convenience
 Termination by notice / expiry

53
 Survival Clauses
 Provision that explicitly states which rights, obligations, or terms remain legally
binding and enforceable even after the contract has been terminated or has expired
 Primary purpose is to ensure critical protections do not end just because the project is
complete or the agreement is terminated

54
 Survival Clauses
Common clauses that survive in construction contracts
 Payment and final accounts
 Confidentiality and intellectual property (IP)
 Warranties and defects liability
 Indemnification
 Dispute resolution
 Limitation of liability
 Governing law and jurisdiction
 Post-termination deliverables
55
 Discharge of Contract
 Termination of the contractual relationship, which releases the parties from their legal
obligations
 Contract ceases to be legally binding and comes to an end
 Types of Discharge:
 Discharge by mutual agreement
 Discharge by impossibility or frustration
 Discharge by operation of law
 Discharge by lapse of time

56
 Difference between Termination & Discharge of Contract
 Termination may have survival clauses.
 Discharge end of all rights and remedies. The END.

57
The more we learn, the less we know!

THANK YOU

Presented by:
Dr. Pradeep Reddy
Advocate & Arbitration Professional
pradeepreddyindia@[Link]
+91 7702967275
58