India: Construction Comparative Guide

1 Legal framework

1.1 Which legislative and regulatory provisions govern construction projects in your jurisdiction?

Construction contracts in India are governed by the Contract Act, 1872. Section 10 of the act lays down the essential elements required for all contracts. Any contract that has an unlawful purpose is invalid. Moreover, claims for liquidated damages in case of breach of contract are rooted in the provisions of the Contract Act itself. Sections 73 and 74 specifically provide for the payment of damages by the defaulting party in the event of a breach of contract.

On the other hand, the Specific Relief Act, 1963 makes provision for a party to enforce performance of a contract. If a party is in breach of its obligations under a contract, Section 10 mandates enforcement of the contract by the courts, subject to the provisions of Section 11(2), Section 14 and Section 16. Section 20 of the act, which was recently added through the Specific Relief (Amendment) Act 2018, provides for an alternative remedy of substituted performance.

The Commercial Courts Act, 2015 was passed by Parliament to enable the creation of commercial divisions in high courts and commercial courts at the district level. Section 2(1)(c) of the act defines ‘commercial disputes' – a definition which includes disputes arising from construction and infrastructure contracts. Furthermore, Section 20B of the Specific Relief (Amendment) Act 2018 provides that designated courts can "try a suit under this Act in respect of contracts relating to infrastructure projects".

1.2 What other legislative and regulatory provisions have relevance for construction projects in your jurisdiction?

Other key laws and regulatory provisions that govern construction projects in India include the following:

• Labour regulations: Employers and contractors must comply with labour laws such as the Industrial Disputes Act, 1947, which defines a ‘workman' and provides for various statutory benefits and fair treatment. Other federal laws – including the Contract Labour (Regulation and Abolition) Act, 1970 and the Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979 – also apply. The Workmen's Compensation Act, 1923 and the Minimum Wages Act, 1948 regulate compensation for labourers.
• Tax: Section 194C of the Income Tax Act provides for tax deductible at source, which is payable when a person pays any sum to a contractor for carrying out work. Since the indirect taxation system in India was overhauled with the introduction of goods and services tax (GST), works contracts are treated as the supply of services and currently fall within the 12% to 18% tax bracket.
• Health and safety: Social security laws – such as the Employees' Compensation Act, 2009, the Employees' State Insurance Act, 1948, the Maternity Benefit Act, 1961, the Payment of Gratuity Act, 1972, and the Employees' Provident Fund Act, 1952 – mandatorily apply to all employers and contractors hiring labourers or workmen in the construction industry.
• Miscellaneous: Various state laws additionally apply to construction projects, such as the Shops and Commercial Establishment Acts enacted by respective state governments and the boiler regulations. The construction industry is also coming under heightened scrutiny due to the deteriorating air quality in major metropolitan cities; environmental regulations such as the Air (Prevention and Control of Pollution) Act, 1981 must thus also be adhered to.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The construction industry is a highly regulated sector; but ironically, it lacks a single regulatory body. Multiple bodies regulate different aspects at both the central and state levels. For example, waste management on a construction site is governed by regulations of:

• the Ministry of Environment, Forests and Climate Change;
• the Central Pollution Control Board and the relevant state pollution control boards; and
• local regulations issued by the relevant municipal bodies.

Similarly, employment matters fall under the remit of both the Ministry of Labour and Employment and the relevant state ministries; while matters relating to the taxation of works contracts are subject to the directives of the GST Council. Moreover, different bodies may intervene depending on the type of project – for example, for a highway construction project, the regulations of the National Highway Authority of India and the Ministry of Road Transport and Highways will be of paramount importance.

1.4 What is the general approach in regulating the construction sector?

As the construction industry is heavily regulated, multiple stakeholders such as contractors and infrastructure companies have voiced concerns over time overruns caused due to delays in seeking clearances and licences from multiple regulatory authorities. The government has acknowledged these concerns and recognises that they present a barrier to the ease of doing business in India. Therefore, the government has been working on single window clearance to establish a one-stop platform for stakeholders to obtain various clearances for their projects. A Ministry of Commerce and Industry press release states that "all the concerned State Governments and Central Ministries are being taken on board for the system". Multiple special economic zones have already adopted single window clearance systems for relevant infrastructure projects, which is a step in right direction. If implemented effectively, a national single window clearance mechanism would reduce the cost and time overruns that are currently rife in the infrastructure sector.

2 Procurement methods

2.1 What procurement methods are most commonly used in your jurisdiction? Do these vary depending on whether international parties are involved?

As a result of the economic liberalisation that began in the 1990s, the state has relaxed its grip on certain sectors of the economy. For the construction industry specifically, this has meant greater reliance on private entities for infrastructure projects through the public-private partnership (PPP) model. Most PPP projects are item rate contracts in which the contractor quotes a unit price for each item of work in the construction, and private players procure goods according to the terms of the contracts that have been negotiated.

The procurement of goods and services by the Indian government is governed by:

• the General Financial Rules 2017;
• the Manual on Policies and Procedures for the Purchase of Goods and Services; and
• the guidelines issued by the Central Vigilance Commission in a general sense.

More specifically, sector-specific laws – such as the Telecom Regulatory Authority Act 1997 and the Electricity Act, 2003 – also include provisions that address the diverse needs and requirements of different industries. Procurement by the government is based on the recommendations of purchase committees or rate contracts concluded with registered suppliers.

Alternatively, it can also be based on bids collected through a tender process. The most common procurement method employed by the government or government companies for large-scale infrastructure projects is an open competitive bidding process. There are various types of bidding processes, and the decision on which to employ for a project will depend on the nature of the procurement and the type of project. In large projects requiring technical expertise and logistical competence, the government employs a two-stage bidding process in which the technical and financial competence of the bidder is evaluated in the first stage, and the entities that qualify from this first stage then submit their price bids in the second stage.

2.2 What are the advantages and disadvantages of these different methods?

Item rate contracts defer the job of procurement to contractors and tend to be more efficient than lengthy bidding procedures. During the tender phase, the client will create a bill of quantities, which sets out the tasks to be completed and requires the contractor to offer a unit price for each item of work. The foundation of this contract is a unit fee for each item of work plus an acceptable variation margin that is acceptable to both parties. This allows both parties to obtain a complete cost analysis. On the other hand, the bidding procedure is extremely transparent and almost always ensures the most competitive price for the employer.

2.3 What other factors may influence the choice of procurement method?

In 2017, the government introduced the Public Procurement (Preference to Make in India) Order with the aim of encouraging localised manufacturing. The order makes it compulsory for the state to employ suppliers that produce or source goods locally from India. It applies only to certain specified goods, services and works, and was amended in 2020 to classify suppliers based on percentage of local content. For a Class-I local supplier certification, at least 50% of all goods, services or works offered for procurement must be local content; while for a Class-II certification, the threshold is 20%. All other suppliers will be labelled ‘non-local' suppliers.

3 Project structures

3.1 How are construction projects typically structured in your jurisdiction? Does this vary depending on whether international parties are involved?

In projects involving a government entity, the regulatory authority will usually award the project through a tender process. The developer will then perform its role in developing the project, which includes the following activities:

• conclusion of land procurement contracts;
• construction; and
• financing and operation of the project for the duration of the grant period.

The most common structure for infrastructure projects in India is the special purpose vehicle (SPV), which is a project corporation incorporated in India to carry out the project development. If a consortium bids on a major project, it is often required to form an SPV, with consortium members owning shareholdings as specified at the time of bidding. SPVs are also the most common corporate vehicle for major globally financed projects.

The most common contractual structures for infrastructure projects involving public-private partnerships (PPPs) are as follows:

• Build-own-operate (BOO): A BOO agreement allows the project developer to finance, construct, own, operate and maintain an infrastructure or development facility; and then collect tolls, fees, rent or other charges from facility users to recoup the total investment, operating and maintenance costs, plus a reasonable return. The developer, which owns the facility, may delegate its management and maintenance to a facility operator under the terms of the project.
• Build-operate-transfer: BOT is a contractual model in which the project developer is responsible for both the construction (including finance) and the operation and maintenance of a particular infrastructure facility. The project developer operates the facility for a set period, during which it is allowed to charge facility users appropriate tolls, fees, rent and charges – which do not exceed those proposed in its bid, or as negotiated and incorporated into the contract – to allow it to recoup its investment, as well as operating and maintenance costs. On the conclusion of a certain period, the project developer hands over the facility to the relevant government agency or local government body. A supply-and-operate scenario is a contractual agreement in which the provider of equipment and machinery for a particular infrastructure project runs the facility if the government's interests so demand.
• Build-own-operate-transfer (BOOT): Under a BOOT agreement, a private organisation is contracted to execute a major project. The private organisation is subsequently given the authority to own, maintain and run the project for a certain period, during which it may charge fees to users. Upon termination of the agreed period, control of the project passes to the public sector partner, either for free or for a charge specified in the original contract. In the case of large infrastructure projects that involve significant construction and operating risk, the timespan is often many decades.
• Build-lease-transfer (BLT): A BLT agreement is a commercial agreement that allows a project developer to finance and build infrastructure or development facilities. Following completion, the developer leases the facility to a government agency or a local government for a certain period, after which ownership of the facility is automatically passed to the government agency or local government.
• Build-transfer-operate (BTO): A BTO agreement is a contract under which the government contracts out the construction of an infrastructure project to a private company, with the contractor taking responsibility for cost overruns, delays and defined performance risks. The title is passed to the implementing agency after the facility has been successfully commissioned. The private company, on the other hand, manages the facility on behalf of the implementing agency.
• Design-build-finance-operate-transfer (DBFOT): In a DBFOT structure, the government body enters into a contract with a private sector partner, assigning all of the project responsibilities – design, construction, financing, operation and maintenance – to that partner. In return for taking on these responsibilities, the private sector participant is eligible to obtain fees from project end users or compensation from the government in the form of availability payments or shadow tolls for a certain period. Operating control is returned to the government body at the conclusion of the term.

3.2 What are the advantages and disadvantages of these different structures?

As the SPV is a separate legal entity, while the sponsor retains ownership of the project company and the corporate assets, the sponsor is independent and segregated from the project risks, except where it has given a corporate or personal guarantee. However, from the employer's perspective, this acts as a disadvantage, since there is limited recourse against the sponsor. In India, complete non-recourse to sponsor-based financing until project completion is achieved is uncommon, and generally the sponsor is required to give a corporate or personal guarantee as part of the lenders' commercial requirements.

For PPP projects, a BOT structure is suitable where there is significant operating content, such as a water or waste management plant. However, these contracts are complex, involve protracted tendering processes and require stringent performance monitoring systems.

The most common PPP contract structure in India is the DBFOT model, which is an upgrade on the BOT structure, as it allocates most of the work and risk to the private sector, and is thus a lucrative option for the government. This project type also allows the government to leverage the powers and expertise of the private sector in areas where the government itself may lack capacity.

3.3 What other factors may influence the choice of project structure?

Each contract structure mentioned in question 3.1 is suited to different kinds of infrastructure projects. The needs and requirements of a highway project will differ from those of a power plant project. It is mainly the type of project that will determine the contract structure. The factors that influence this decision range from natural factors – such as land topography and difficulty of operations – to political factors, such as the desired level of involvement of the private sector and economic interests.

A greater understanding of the interests of the parties that determine the choice of project structure can be gained by looking at the contracts awarded by the National Highways Authority of India (NHAI). In the 2011-2012 financial year, 96% of all project awards followed the BOT route. After 2012, highway development ground to a halt as developers were unwilling to assume the funding and traffic risks that the BOT model posed due to policy paralysis, delays in land acquisition and other contractual issues. The NHAI has since launched almost no new BOT projects, relying instead on the engineering, procurement and construction and hybrid annuity models. However, before the outbreak of the COVID-19 pandemic, the Cabinet Committee of Economic Affairs amended the NHAI's BOT model to make it more attractive to private investors, with the government rekindling its interest in awarding projects through the BOT route in the coming years.

4 Financing

4.1 How are construction projects typically financed in your jurisdiction? Does this vary depending on whether international parties are involved?

The most common mechanism for financing large infrastructure projects is project finance, which is a non-recourse or limited recourse structure in which the project debt and equity used to fund the project are repaid from the cash flow generated by the project. Lenders place greater emphasis on the project's profitability and expected cash flows than on the names and reputations of the promoters/owners.

However, due to their growing struggles with non-performing assets, commercial banks are hesitant to extend large new loans. The following steps have been taken by the Reserve Bank of India (RBI) and the Finance Ministry to address the issue of stressed assets:

• Corporate debt restructuring (CDR): This is a discretionary non-statutory system that allows banks to restructure assets while keeping their standard classification with no additional provisions. It is founded on the principle of authorisations by a majority of 75% (by value) creditors, which binds the remaining 25% (by value) to follow the majority decision. Only multiple financial accounts, syndication/consortium accounts and accounts where all banks and institutions have an unsettled aggregate balance are covered by the CDR process.
• Strategic debt restructuring (SDR): The SDR system was implemented with the goal of reviving stressed enterprises and giving lending institutions a means to force management changes in companies that fail to meet their targets. The consortium of lenders is granted the opportunity to convert a portion of its loan in an ailing firm into equity under this programme, as long as the consortium owns at least 51% of the company. The consortium must sell its equity shares in the firm; and upon doing so, the loan will be upgraded to ‘standard', with no change in the number of provisions retained by the lenders. SDR offers banks additional control over the management of a firm that has defaulted on a loan. The SDR system, on the other hand, requires banks and financial institutions to sell a portion of their stake to a new promoter (which is unconnected to the present promoters) within a certain timeframe.
• Scheme for Sustainable Structuring of Stressed Assets (S4A) Scheme: In June 2016, the RBI unveiled the S4A Scheme. Depending on a company's cash flow, banks can categorise their debt obligations into sustainable and unsustainable components under the S4A Scheme. Banks can continue making loans for the component of the debt that is sustainable, while the amount that is unsustainable can be converted into equity or a convertible security. As a result, the system permits current management to keep their jobs, as long as the default isn't wilful. The S4A Scheme aims to promote the financial restructuring of large-debt projects by allowing lenders (banks) to purchase shares in the distressed project.

Today, foreign direct investment (FDI) has also increased, with the FDI Policy 2020 providing for 100% foreign investment through the automatic route in the construction development industry. Any equity contribution by a foreign investor must be in accordance with the current Foreign Exchange Management Act 1999 and the FDI Policy issued by the Department of Industrial Policy and Promotion (DIPP).

4.2 What are the advantages and disadvantages of these different structures?

Project finance-funded projects provide unique advantages to the promoter, limiting or even eliminating lenders' recourse against it and permitting off-balance sheet treatment of the debt, which allows for more favourable tax treatment. However, this debt is recovered from revenue generated by the project once it is operational; as a result, the promoter's upside is tied up in debt repayment for a long period. RBI directives allow for various options when it comes to debt restructuring, giving lenders a variety of options depending on their interests, such as participation in management or continued involvement in financing the project.

4.3 What other factors may influence the choice of financing structure?

Various factors are considered before deciding on the financing structure for a project. The most important considerations are the commercial interests of the entity; as such, important factors include:

• tax treatment;
• rebates for different financing instruments;
• interest rates; and
• charges.

The entity's own financial strength might also dictate its powers and limitations when it comes to raising debt or equity funds.

4.4 What types of security and other protections are available to lenders to safeguard their position?

The RIB Circular on the Review of the Prudential Guidelines for the Restructuring of Advances by Banks and Financial Institutions (DBOP.BP.BC.No.99/21.04.132/2012-13, 30 May 2013) made it mandatory for promoters to obtain personal guarantees for project finance. Lenders' funding projects also typically involve the following security package:

• a charge on the project developer's movable assets and intangible assets;
• a mortgage on immovable property;
• a charge on all current assets, including book debts, operating cash flow, receivables, commissions and revenues;
• a charge on the project developer's bank accounts (including control over cash flow, providing the agreed waterfall for the cash flow and so on);
• a pledge on the promoter's shareholding in the project developer (51%, 75% or 100%); and
• a charge/assignment by way of security interest over all present and future rights, title, interest, benefit, claims and demand of the project developer on the project documents, insurance contracts and so on.

4.5 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

There is no umbrella legislation governing project finance transactions in India. Different sets of laws will apply, depending on the nature of the transaction.

The following laws primarily govern rupee-denominated project lending by local lenders to borrowers:

• the Banking Regulation Act 1949;
• the Reserve Bank of India Act 1934;
• guidelines, master directions, notifications and circulars issued by the RBI;
• the Foreign Exchange Management Act 1999, for loans obtained from a non-resident lender;
• in the case of project funding by way of equity or quasi-equity instruments by non-residents:
• • the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations 2000 of the RBI; and
  • the FDI Policy issued from time to time by the DIPP; and
• the Companies Act 2013 and the rules provided thereunder if the borrower is a company.

5 Bribery and corruption

5.1 What measures are in place to combat bribery and corruption in your jurisdiction?

The Prevention of Corruption Act, 1988 (PCA) is India's main anti-corruption law. It outlaws the acceptance of any ‘undue advantage' by ‘public servants' and the giving of such undue advantage by others. Any gratification (not only financial) other than the lawful compensation to which a public servant is entitled, either from the state or from any other entity serviced by such public servant, is defined as an ‘undue advantage' under the PCA.

The Central Civil Services (Conduct) Rules 1964 and the All-India Services (Conduct) Rules 1968 require government employees to operate in accordance with the service rules that apply to various types of officials. Government officials are prohibited from accepting gifts, hospitality, transportation or any other monetary benefit from individuals other than close relatives or personal friends without the permission of the government.

The Foreign Contribution Regulation Act of 2010 (FCRA) prohibits legislators, judges, political parties or their office bearers, government servants and employees of bodies owned or controlled by the government from accepting hospitality or contributions from ‘foreign sources', unless the central government grants permission. Any foreign person, business, organisation, multinational corporation, trust or foundation is considered a ‘foreign source' under the FCRA.

The Central Vigilance Commission (CVC) was established by the central government under the Central Vigilance Commission Act of 2003. The CVC is the official agency charged with investigating crimes committed under the PCA. It is also in charge of advising, planning, implementing, evaluating and reforming the supervisory activities of federal agencies. The CVC is supposed to act impartially and independently of the executive branch, and has the authority to recommend inquiries to the RBI.

The Lokpal and Lokayuktas Act, 2013 established new anti-corruption ombudsmen, which are outside the executive branch of government. These organisations have the authority to examine accusations of corruption against public officials, including PCA violations.

The Comptroller and Auditor General (CAG) is an office established under the Constitution that is responsible for auditing all revenue and spending of the federal and state governments, as well as all government agencies and enterprises. The CAG's observations, inconsistencies and anomalies have triggered numerous alleged cases of corruption; and the CAG acts as a watchdog against corruption despite having no investigative or prosecution authority.

The Companies Act, 2013 is India's primary corporate law, with a heavy focus on corporate management and the prevention of corporate fraud. Under the act, auditors and cost accountants are obliged to disclose any suspicious fraud (beyond a certain level) to the central government. Certain kinds of businesses must also establish a vigilance system for reporting problems. The word ‘fraud' is defined extensively under the Companies Act and may include acts of private or commercial bribery. Fraud is a criminal offence under the Companies Act that carries a sentence of six months to 10 years in jail and/or a fine.

6 Standard form contracts

6.1 Which standard form contracts are typically used for construction projects in your jurisdiction? Does this vary depending on whether international parties are involved?

The Indian construction sector does not adhere to any standard form of construction contract. However, the standard form contracts issued by the International Federation of Consulting Engineers (FIDIC), the Institution of Civil Engineers and the AUTM Model Inter-institutional Agreement are some of the most frequently used. The FIDIC Conditions of Contract for Plant and Design/Build, which are widely used in India, are mainly influenced by design-only contracts (the FIDIC Yellow Book). The Plant and Design/Build Contract is a typical FIDIC form that is widely used in the Indian construction sector.

Many governmental construction agencies use their own standard form contracts to meet specific departmental needs, especially for public-private partnerships. They include the following:

• the National Highways Authority of India;
• the Central Public Works Department;
• the Delhi Metro Rail Corporation;
• the Indian Oil Corporation; and
• the National Building Construction Corporation.

With the aim of reviving the construction sector, the National Institution for Transforming India previously issued a Model Engineering, Procurement and Construction Contract for construction works. However, with renewed exemptions and measures to make build-operate-transfer (BOT) contracts more lucrative, it is now shifting its focus towards awarding projects through the BOT route.

Internationally funded projects where World Bank or other multilateral financial agency funding is involved follow the guidelines and policies of such agencies. Otherwise, international construction projects mostly use FIDIC contracts.

6.2 What are the advantages and disadvantages of using the different standard forms?

The use of a standard form contract has a host of benefits. It reduces the cost of contracting by eliminating the need for customised contracts for individual tenders. There is also a substantial cost reduction in the case of New Engineering Contracts, in which standardised clauses are combined to create suitable contracts for different employers.

It also eliminates the scope for negotiation and thus speeds up the bidding process. The same terms are used every time a contract is formed, allowing people to become familiar with the terms of the standard contracts in their industry. As time passes, confidence in those terms also increases.

Consistency in contracts means that there is less room for deviation from the terms set out in the contract. It prevents employers from making any changes to the contract without informing their clients. Over time, the use of standard form contracts leads to the establishment of a body of case law that can be referred to by parties in the event of disagreement over any issues. This benefits the whole industry.

The most obvious downside of using standard form contracts is that due to their general nature, they cannot foresee complex situations that parties might find themselves in due to the nature of project, leaving large gaps and the potential for misunderstandings between parties. Hence, it is always recommended that even when the agreement is based on a standard form contract, it be edited to tailor it to the specific needs of the project and the parties involved.

6.3 What other factors may influence the decision to use standard form contracts and the choice of standard form?

One key characteristic that influences the choice of contract is the client's level of experience in implementing construction projects. The decisions that must be made in relation to contract selection are somewhat complex. They also involve several competing project goals and drivers. These decisions are influenced by the perceived level of difficulty of the environment in which the construction project is being delivered.

There is very little guidance for construction managers and clients on how to make these contract decisions. In most instances, the contract forms are selected in line with the corporation's policy. For example, large client organisations which have executed projects before or which implement projects frequently can use past experience or may even employ in-house advisers with construction expertise.

6.4 Where standard form contracts are used, do parties typically modify their provisions?

While the provisions of standard form contracts are not themselves modified, there is often a special conditions contract which is drafted by the contracting parties to fill any gaps in the standard form contracts for that specific project.

7 Contractual issues

7.1 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application?

A choice of foreign jurisdiction is valid when it comes to the seat of arbitration. In GMR Energy Limited v Doosan Power System India Ltd, the Supreme Court held that two (or more) Indian parties can choose a foreign seat. Where there is a foreign element to the contract – as was in the case in Sasan Power Limited v North American Coal Corporation – the Supreme Court has held that two Indian parties may consent to be controlled by the laws of another nation.

It has also been specified that a choice of foreign law will govern only disputes arising from the contract. For issues that lie outside the contract – such as labour law or taxation issues – the prevailing law of the relevant jurisdiction will apply.

7.2 What formal, substantive and procedural requirements typically apply to construction contracts in your jurisdiction? Are there any mandatory terms? What terms are typically included? Are any terms prohibited?

There are no specific requirements for the formation of construction contracts in India. As per the Contract Act 1872, any agreement that is enforceable by law is a contract. The Contract Act lays out the limits and parameters within which the parties are free to contract. The key principles of construction contracts are similar to those of any other contracts under Indian law – that is:

• there should be an offer and unconditional acceptance on the part of the employer and contractor respectively;
• the parties should be competent to contract;
• there should be valid consideration; and
• the object or subject matter of the contract should be lawful.

As disputes frequently arise in relation to the interpretation of construction contracts due to their complexity, almost all construction contracts today include a multi-tier dispute resolution clause. In addition, clauses are commonly included that provide for:

• variations;
• cost and time overruns;
• price variations;
• retention; and
• liquidated damages.

Chapter 2 of the Contract Act sets out a list of void agreements which are unenforceable in India, including:

• agreements in restraint of trade;
• legal proceedings; and
• agreements void for uncertainty.

As per the doctrine of severability, any agreements that include such provisions will not be enforceable to the extent of those provisions only. In addition, penal clauses in a construction contract are invalid. The courts have also taken a position against enforcing one-sided clauses where the parties have unequal bargaining power.

7.3 How is risk typically allocated between the parties? What steps can the parties take to mitigate these risks?

Various factors determine how the parties chose to allocate risks between them. The most important is the degree of control that a party has over the project and who is in the best position to manage the risk in the most efficient manner possible. Mostly, contractors undertake the risks relating to construction, delay and costs overrun.

However, parties seldom take absolute risks and agreements often provide for certain situations in which the contractor will be absolved from liability – for example, where a delay is caused due to reasons beyond its control or where a cost overrun arises due to a change in law.

Such clauses ensure that an unfair burden is not placed on any party and protects the parties from liability in case of any unforeseen occurrence. In situations of force majeure, the contract goes into abeyance, leaving each party to its own risks and costs for its interest. On the other hand, in most construction contracts, the risk posed by any change in law is assumed by the employer.

Employers often mitigate their risks by providing for liquidated damages related to delay and performance. Often, construction contracts mandate the provision of bank guarantees and performance security by both parties, to ensure the smooth performance of and payment for the contract. Most construction contracts also specify a warranty period during which the contractor remains liable to remedy any defects found in the project.

7.4 How can liability be excluded or restricted in your jurisdiction? Are parties able to cap their liability?

Exclusionary clauses are deemed valid under Indian law, provided that they are not in violation of any relevant legislation. However, the parties must be careful in situations where they have unequal bargaining power, as the courts have often shown their willingness to hold one-sided clauses void where they suspect one party has exploited its dominant position.

In 1986, in Central Inland Water Transport Corporation v BrojoNathGanguly, the Supreme Court held that tribunals might not always find an unreasonable element in a contract between parties which do not have equal bargaining power. Such clauses are unenforceable because they are contrary to public policy. This implies that in cases where a stronger party abuses the interests of the weaker party by fully excluding itself from any responsibility in the case of any violation of the agreement, the courts may not enforce such an exclusionary clause. Furthermore, no contractual clause can exclude criminal liability.

Clauses which cap the liability of the parties are also valid under Indian law. Most construction contracts in India have a liquidated damages clause in the event of a breach. However, the judicial interpretation of such a clause is different in India than in most other common law jurisdictions: the amount specified in the contract is a ceiling or limit on the amount that may be paid, not the amount that will be awarded automatically. Therefore, liquidated damages clauses are perceived as a cap on liability.

7.5 In the event of delay to the project, what consequences will this typically have for the parties?

How the parties cope with various types of delays will depend on the contractual negotiations between them. Most contracts allow the contractor to seek extra time if the owner causes a delay. However, the contractor's entitlement to reimbursement for such delays is restricted. Usually, such situations will result in a claim for added compensation where the contractor argues that the owner's delay caused it financial loss due to a rise in prices.

If the delay is caused by the contractor, the owner is usually entitled to liquidated damages and the contractor is not allowed to any additional time. As no two cases of delay are the same, the consequences of delay will primarily depend on the party to which the delay is attributable and the conduct of the parties leading up to the delay. The Society of Construction Law's Protocols and industry practice are often taken into consideration in adjudicating a dispute pertaining to delay.

Contracts seldom address the issue of concurrent delay events and/or pacing delays when it comes to other types of delays. Some contract phrasing, such as "time is of the essence", might be understood to mean that the contractor is obliged to complete the task as quickly as possible and minimise losses.

7.6 Is the concept of force majeure recognised in your jurisdiction? If so, what are the typical implications for the parties?

The concept of force majeure is well recognised in the Indian legal system. The doctrine of frustration of contract is enshrined in Section 56 of the Contract Act, 1872. In accordance with this provision, a contract stands frustrated if the performance of an agreed set of obligations becomes impossible or unlawful, either before or after the conclusion of a contract. Section 56 thus recognises force majeure (or act of God) events as grounds for frustration of contracts.

A number of cases have been brought before the courts in which the argument of force majeure has been invoked. While this defence has been recognised in certain cases, it has been dismissed in others. In general, judges tend to enforce force majeure provisions where the occurrence was beyond the control of the party and completely unforeseen. On the other hand, force majeure is not triggered by simple suffering, discomfort or material loss. Where the court decides that the whole purpose or foundation of the contract was frustrated by the occurrence of an unforeseen change of circumstances that was not envisaged by the parties at the time of entering into the contract, it will normally grant relief. The event should be so important that it affects the contract's core.

7.7 What scope do the parties typically have to make material variations to the works?

An employer or an engineer hired to conduct works may make changes to the works to be undertaken under a construction contract by a contractor. If such modifications are introduced, the contractor is permitted to claim extra compensation where the employer or engineer has approved them. However, variations:

• must not be of such a kind that significantly affects the nature of the contract in issue; and
• must be within the contractor's competence to perform.

In some cases, it is the site that demands variation once the work commences, forcing the parties to make amendments to the negotiated structure. Most construction contracts also provide for variations in quantities in item rate contracts – for example, a provision that exceeding the expected quantity of an equipment used by 50% will result in different prices.

7.8 Are there any particular requirements for completion or taking-over in your jurisdiction?

Construction contracts generally contain provisions governing the terms of takeover and completion of works. Most contracts contain a section on tests for completion, which are used to determine whether the work is deemed to be complete. Most require the contractor to perform all works (including minor issues, referred to as ‘punch points') even if the employer takes possession. Even otherwise, merely taking beneficial possession of the work will not amount to deemed acceptance on the part of the employer or deemed completion by contractor.

The employer will have to pay for the value of the works taken over. However, it can still sue for unfinished work and the resultant damages suffered (including seeking costs incurred by executing the remaining work through a third party).

In any event, the employer may justify the early possession on account of its legal duty to mitigate other losses that it could have suffered and separately seek performance of the balance of the work or damages in lieu of the incomplete work.

The parties are free to negotiate the takeover procedure during the contract negotiations. Most construction contracts specify a defect liability period which allows sufficient time for the employer to determine that the construction is not defective and accords with what was promised.

7.9 What requirements and restrictions typically apply to the termination of the construction contract in your jurisdiction?

The right to terminate a contract may be exercised either pursuant to the termination provisions in the contract or under the Contract Act, 1872. The parties may stipulate certain circumstances that allow either party to terminate the contract, including, for example:

• delay in completion of the works beyond a certain time limit;
• abandonment of the works;
• force majeure; and
• liquidation or bankruptcy.

In addition to the circumstances listed in the contract, a party is entitled to terminate a contract under the Contract Act as follows:

• Section 19 stipulates that if the consent of either party has been vitiated by use of coercion, fraud or misrepresentation, the contract is voidable and the innocent party has the option to rescind the contract.
• Section 39 provides that if one of the parties refuses to perform its promise in its entirety, the other may put an end to the contract.
• Section 53 stipulates that where the contract contains reciprocal promises and one party to the contract prevents the other from performing its part of the contract, the contract becomes voidable at the option of the party so prevented.
• Section 55 provides that where "time is of the essence" and the party fails to perform the obligations under the contract within the stipulated time, the contract becomes voidable at the option of the innocent party.
• Section 56 stipulates that if the subject matter of the contract becomes impossible to perform by some unenforceable event, the contract becomes void.

7.10 How are delay or liquidated provisions dealt with in your jurisdictions?

According to Section 73 of the Contract Act, the main approach for determining damages is compensatory, which means that the innocent party should be restored to the situation it would have been in had the contract been completed, to the extent that money can compensate for this. However, liquidated damages provisions are valid under Indian law. Section 74 of the Contract Act states that if a sum is defined in the agreement as the amount payable in the event of a breach of contract, the party alleging the breach is entitled to claim that value "whether or not actual loss is proven to have been caused". While the text of this section is in sync with the understanding of liquidated damages around the world, its judicial interpretation in India differs from that elsewhere. The following concepts have been established as a result of the judicial interpretation of Section 74:

• Only appropriate recompense may be granted as liquidated damages.
• Regardless of whether there is a liquidated damages provision, the factum of the harm or loss must be shown (the claimant has the burden of proof).
• The court must determine that the liquidated losses are a true assessment of the damages.
• The phrase "whether or not loss is proved" in Section 74 has been understood to suggest that if real damage or loss can be shown, such evidence is necessary. However, if it is difficult or impossible to prove the actual damage or loss, the contract's liquidated damages sum may be granted if it is determined to be a legitimate pre-estimate of the damage or loss.
• The court does not look for arithmetical precision when determining whether there has been a loss or harm.
• The amount specified in a contract is a ceiling or limit on the amount that may be given, not the amount that will be awarded mechanically.
• The parties are assumed to have waived their right to seek an undetermined quantity of money as damages if they agree to a true pre-estimated sum of money as liquidated damages.

8 Subcontractors and suppliers

8.1 Are there any particular issues which arise when dealing with subcontracts and/or subcontractors which are different from the issues discussed elsewhere?

There are no different issues that arise specifically when subcontracting the work. The contract with the subcontractor will be governed by specific clauses of the main contract between the employer and contractor.

8.2 Are there nominated subcontractors in your jurisdiction?

Yes, the parties are free to decide on nominated subcontractors during the contractual negotiations. Otherwise, a clause in the main contract which says that subcontractors must be approved by the employer is commonly included in construction contracts in India.

9 Payment

9.1 Are there any statutory or other requirements which govern how parties are paid?

The parties are free to decide on a payment structure as per their requirements and interests, provided that the terms are not in violation of any laws.

9.2 Are ‘pay when paid' clauses valid? In what circumstances?

Payment for construction contracts can be tendered, promised or part paid and part promised. Therefore, conditional payment provisions, such as pay-when-paid, are not illegal per se . Conditional payment clauses are generally found or contained in ‘back-to-back' arrangements. In such contracts, a party (contractor) must make payment to another party (subcontractor) after receiving payment from a third party (employer). Usually, this chain of payment is initiated once the customer is satisfied after running the tests for completion.

9.3 How are retentions typically dealt with?

Retention clauses are generally found in every construction contract/agreement. The owner will retain a percentage of the payment due to the contractor from each bill until the performance parameters have been met and final handover of the facility has occurred.

10 Health and safety

10.1 What key health and safety requirements apply to construction projects in your jurisdiction?

The health and safety laws applicable to projects in India include the following:

• The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Central Rules 1998 (BOCWA) govern the employment and working circumstances of building and other construction employees, as well as their safety, health and welfare, and other related issues. BOCWA establishes welfare boards and funds to assist workers after injuries and with pensions (after age 60), education, medical bills and maternity benefits, among other things.
• The Factories Act, 1948 includes specific chapters governing health and safety arrangements. Chapter III of the act sets out the minimum standards required from a health perspective, including cleanliness, waste disposal, overcrowding, lighting, drinking water and washrooms. Chapter IV deals with safety standards required at a site, including fencing, safety gear for certain equipment and maintenance provisions. Section 40B of the act provides for a safety officer where 1,000 or more workers are employed.
• The Maternity Benefit Act governs women's employment in specific institutions for specified periods before and after delivery, as well as providing for maternity benefits and other benefits.
• The Petroleum and Natural Gas (Safety in Offshore Operations) Rules were promulgated in 2008. They require operators to conduct petroleum operations in a safe manner. Employers must also obtain a permit and a fire safety certificate from the chief fire officer/relevant state government fire department for the plans at the layout design stage before beginning the project.
• Social security laws – such as the Employee's Compensation Act, 2009, the Employees' State Insurance Act, 1948, the Maternity Benefit Act, 1961, the Payment of Gratuity Act, 1972 and the Employees' Provident Fund Act, 1952 – mandatorily apply to all employers and contractors that hire labourers or workmen in the construction industry.
• Other laws of relevance include:
• • the Dock Workers (Safety, Health & Welfare) Act, 1986 and the Dock Workers (Safety, Health & Welfare) Regulations, 1990;
  • the Mines Act, 1952 and other laws pertaining to mines;
  • the Dangerous Machines (Regulation) Act, 1983;
  • the Motor Transport Workers Act, 1961 (amended 1986); and
  • the Explosives Act, 1884 (amended 1983).

10.2 What reporting requirements apply with regard to construction site accidents in your jurisdiction?

Section 10 of the Occupational Safety, Health and Working Conditions Code, 2020 obliges the employer or the manager of the establishment to send notice to the relevant authorities prescribed by the government where "an accident occurs which causes death, or which causes any bodily injury by reason of which the person injured is prevented from working for a period of forty-eight hours or more". Sections 11 and 12 impose similar notice obligations in case of dangerous occurrences and the spread of diseases on site.

10.3 What are the potential consequences of breach of these requirements – both for the contractor itself and for directors, managers and employees?

The Code on Occupation Safety, Health and Working Conditions 2020, which is part of the recently introduced Labour Codes, sets out the penal provisions applicable where there is a breach of obligations. If an offence has been committed by a company, anyone who, at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of its business, as well as the company, will be deemed guilty of the offence and will be liable to be proceeded against and punished accordingly. Chapter XII of the code sets out the penalties for offences.

If the offence was committed with the consent or connivance of, or is attributable to any neglect by, a director, manager, secretary or other officer of the company, that person is also guilty of the offence and liable to prosecution.

10.4 What best practices in relation to health and safety should construction contractors consider adopting in your jurisdiction?

In Part IV of the Indian Constitution, which sets out the Directive Principles of State Policy, Article 42 provides that the state must make provision to ensure just and humane conditions of work and for maternity relief.

Many labour law provisions trace their origins back to the time of the British Raj. However, over the decades, many of them either became ineffective or lost contemporary relevance. In furtherance of the objective laid out in Article 42 of the Constitution, the present government has repealed the non-useful labour laws. Some 29 labour laws have been codified into four Labour Codes which set out the standards that every work site must adhere to. One such code is the Occupational, Safety, Health and Working Conditions Code, 2020, which comprehensively states the standards, practices and compliances required in this regard.

10.5 Which bodies are responsible for enforcement of health and safety obligations?

Labour welfare is included in the Concurrent List in the Seventh Schedule, allowing both the central and state governments to legislate on and regulate this subject. Thus, the Ministry of Labour and Employment and the relevant state ministries are the key regulatory authorities responsible for health and safety obligations in the construction industry.

10.6 What is the general approach in regulating the construction sector from a health and safety perspective?

Unfortunately, the construction industry accounts for 24.2% of all occupational fatalities annually – the highest in the country. According to a study conducted by the British Safety Council in 2017, nearly 80% of construction workers work in an unsafe environment. While legislation such as the Minimum Wages Act, the Workmen's Compensation Act, 1923 (modified in 1962) and the recently introduced Labour Codes mandate strict standards for the safety of workers, the statistics indicate that there is a dire need for strict implementation of these provisions.

The government has created a robust framework providing the standards required of worksites with respect to health and safety. Provision is also made for the imposition of sizeable fines and even criminal liability in the event of a breach. However, enforcement of this framework is inadequate to ensure a meaningful improvement in working conditions.

Despite this legislative framework and measures introduced by companies themselves, the rate of accidents remains alarmingly high. In developing countries such as India, awareness of safety measures can effectively reduce the cause of accidents and ultimately reduce the project cost. The Indian government has placed labour reforms high on its agenda and the enactment of the Labour Codes is testimony to this.

11 Environmental and sustainable development issues

11.1 What environmental authorisations are required for construction projects in your jurisdiction? Do these vary depending on the type of project or the location of the site?

All infrastructure projects in India must take into account a number of environmental concerns. India has rigorous environmental, forest and biodiversity conservation regulations.

Environmental clearance and forest clearance are required from the Ministry of Environment, Forests and Climate Change (MoEFCC) under the Environment Protection Act, 1986. Furthermore, approvals from relevant state pollution control boards (SPCBs) are also necessary under the Air (Prevention & Control of Pollution) Act 1981 and the Water (Prevention & Control of Pollution) Act 1974. Projects which are spread across forests area or wildlife sanctuaries also need permission under the Forest (Conservation) Act 1980 and the Wildlife (Protection) Act.

Furthermore, any culpability deriving from environmental harm may result in both civil and criminal liability. At different phases of a project, multiple approvals and permissions must be secured and maintained.

11.2 What is the process for obtaining environmental authorisations?

New ventures that fall within one of 38 categories require permissions directly from the MoEFCC before the commencement of the project. These categories include:

• textile processing;
• sugar production and refining;
• tanneries;
• ship-breaking operations;
• e-waste recycling;
• paint varnish and pigments;
• pesticides;
• cement;
• fertilisers;
• oil and gas extraction;
• coal preparation plants; and
• nuclear plants.

Once a site has been selected for a project that falls within one of the scheduled categories, the project proponent must conduct an environmental impact assessment (EIA) to identify the possible environmental consequences of the planned project or development, taking into consideration interconnected socioeconomic, cultural and human health implications, both positive and negative.

Following the EIA, the project proponent must approach the relevant SPCB, which will issues a notice of compliance (NOC) after evaluating:

• the quantity and quality of effluents projected to be produced by the proposed unit; and
• the effectiveness of the investor's planned control measures in meeting the stipulated requirements.

Prior to issue of the NOC by the SPCB, a public hearing is required as part of the environmental clearance procedure for some development projects, affording a legal forum for inhabitants of the region to communicate their concerns directly to the project proponent and the government.

All relevant documents, including the EIA and NOC, are then submitted to the MoEFCC or the relevant state ministry, depending on the nature of project. They are then subject to review by an environmental appraisal committee, which will accept or reject the project.

11.3 What environmental requirements must the contractor observe while the site is operational?

The Central Pollution Control Board (CPCB) comes up with guidelines and best practices with respect to waste management from time to time. Under Rule 3(c) of the Construction and Demolition (C&D) Waste Management Rules, 2016 (GSR 317(E), 2 March, 2016) issued by the MoEFCC, ‘construction and demolition waste' is waste comprised of building materials, debris and rubble resulting from the construction, remodelling, repair or demolition of any civil structure. Rule 4(4) of the C&D Waste Management Rules states that there should be no littering or deposition of construction and demolition waste in order to prevent obstructions to traffic or the public, or to drains.

The rules apply to all waste resulting from the construction, remodelling, repair or demolition of civil structures by the individual, organisation or authority that generates the waste. They include comprehensive provisions on environmental and waste management compliance. A special focus is also placed on noise waste management and dust management, which are increasingly important concerns of the general public. These guidelines and policies must be referred to before commencing an infrastructure project to ensure compliance in advance.

11.4 What are the potential consequences of breach of these requirements – both for the contractor and for directors, managers and employees?

Breach of the environmental obligations set out in laws such as the Water Act, the Air Act and the Environment Protection Act may incur both civil penalties in the form of fines and criminal liability in some cases. However, the fines provided for in these laws range somewhere between INR 1,000 and 10,000, and are thus minuscule in contrast to the scale and cost of infrastructure projects, rendering them an ineffective deterrent. However, the National Green Tribunal (NGT), established under the NGT Act 2010, has been proactive in imposing significant fines and penalties on infrastructure projects that are in breach of their obligations, under the ‘polluter pays' principle. For instance, in 2018, the NGT imposed a fine of INR 1.95 billion on a Pune-based real estate firm for causing environmental damage at the sites of its Ganga Bhagyodaya, Amrut Ganga and Ganga Towers projects. The NGT is expected to play an even more proactive role in future, due to growing concerns over pollution in India and a recent Supreme Court judgment holding that the NGT has suo moto powers.

Failure to obtain the required consent order can also incur criminal liability. For instance, under the Water (Prevention & Control of Pollution) Act 1974, anyone that breaches the consent application process may be punished with imprisonment for at least 18 months, which can be extended to six years, and a fine. Any company operating without consent to establish or operate will immediately receive a closure notice from the relevant SPCB.

The Water Act, the Air Act and Environment Protection Act all contain specific provisions on offences committed by companies. Under these acts, all people who are in charge when an offence is committed, and who are responsible to the company for the conduct of its business, are guilty of the offence and liable to be prosecuted and punished accordingly. However, a person is not liable if he or she can prove that the offence was committed without his or her knowledge, or that he or she exercised all due diligence to prevent the offence.

Further, if the offence was committed with the consent or connivance of, or is attributable to the neglect of, a director, manager, secretary or other officer of the company, that person is also guilty of the offence and liable to be prosecuted.

11.5 What environmental requirements apply to new buildings?

The EIA Notification, issued under Sections 3(1) and (2)(v) of the Environment Protection Act and Rule 5, Sub-rule 3 of the Environmental Protection Rules, requires that prior environmental clearance be obtained for:

• new construction projects or activities (more specifically defined in Item 8 of the schedule to the EIA Notification);
• the expansion or modernisation of existing projects; and
• activities listed in the schedule to the EIA Notification.

Projects and activities are divided into two categories – Category A and Category B (further categorised into Category B1 and B2) – based on the extent of the potential impact on human health and natural and man-made resources. The MoEFCC has proposed a draft EIA Notification, 2020 to replace the previous notification, in order to promote greater transparency and streamline the process of procuring environmental clearances.

A number of states in India have also introduced requirements in their building codes to improve energy efficiency, water conservation and the use of renewable energy, among other things.

11.6 Which bodies are responsible for enforcement of environmental obligations?

The primary institutions responsible for the formulation and enforcement of environmental acts and rules include:

• the MoEFCC;
• the CPCB;
• state Departments of Environment;
• the SPCBs; and
• the respective municipal corporations.

Furthermore, the Supreme Court in Municipal Corporation of Greater Mumbai v Ankita Sinha held that the NGT has the power to take suo motu cognisance of environmental issues, giving it wide powers to enforce environmental regulations.

11.7 What is the regulators' general approach in regulating the construction sector from an environmental perspective?

Regulatory enforcement has increased in recent years, due to various factors. For instance, several states now insist on the installation of continuous online emissions/effluent monitoring systems, which gives the SPCBs the necessary and objective information to monitor compliance in their jurisdiction. Moreover, the state high courts, the Central Supreme Court and the various local benches of the NGT closely monitor the implementation and enforcement of environmental laws. The Supreme Court and the state high courts can and do impose exemplary damages for damage to the environment.

Given the heightened focus on issues such as climate change and air quality, the regulations are expected to be strictly enforced. The construction industry is considered to be a major contributor to air pollution, due to high dust emissions from sites. The National Capital Region is susceptible to high air pollution and poor air quality index ratings in the months of November and December. Therefore, since 2016, the knee-jerk reaction to increasing pollution levels in winter has been to impose a temporary ban on construction.

11.8 What is the impact of Net Zero in your jurisdiction?

Given the growing concerns about global warming, the Paris Agreement – a legally binding international treaty on climate change – was adopted by 196 parties, including India, at COP 21 in 2015. The goal is to limit global warming to well below 2° C, and preferably to 1.5 ° C, compared to pre-industrial levels.

In order to achieve this ambitious goal, countries are aiming to achieve net-zero status by 2050. While there are no laws requiring infrastructure projects to comply with a net-zero obligation, voluntary corporate action in this area is gaining momentum in different economic sectors, including construction. ACC became the first Indian construction company to sign the Net-Zero Pledge; and companies such as Godrej are focusing on net-zero energy buildings. However, all action in this sphere is voluntary.

12 Insurance

12.1 What types of insurance arrangements - whether compulsory or optional - are typically put in place for construction projects in your jurisdiction?

The Employees' State Insurance Act of 1948 (‘ESI Act') requires that every firm that hires more than 10 employees be registered. Every employer is required by the ESI Act to offer insurance for its employees. The act applies to employees who are engaged directly by an employer as well as those who are hired via a contractor. Under the ESI Act, an employer/contractor must obtain insurance to cover situations such as maternity leave, illness, temporary or permanent physical disablement or death resulting from workplace dangers that might result in a loss of earnings and earning ability for an employee.

The contractor's all risk (CAR) policy is the most common form of insurance policy adopted by employers, contractors and subcontractors, individually or collectively. All major construction contracts require the implementation of a CAR policy throughout the construction phase. CAR insurance covers sudden and unforeseen physical damage to civil projects under construction by any cause or peril not specifically excluded under the policy.

12.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?

Indian insurance companies can reinsure their risks with Indian and foreign reinsurance companies, subject to the terms and conditions set out by the Insurance Regulatory and Development Authority of India (IRDAI). Certain additional conditions must be satisfied where an Indian insurance company proposes to reinsure its risk with a foreign reinsurance company (eg, the foreign reinsurance company must have a certain minimum credit rating from a recognised credit rating agency). Reinsurance arrangements need not be pre-approved by the IRDAI, but they must be documented and filed with the IRDAI within the stipulated timeframe.

12.3 Is it possible to obtain insurance for fitness for purpose design obligations?

While India recognises the use of implied terms in a construction contract, such as fitness for purpose design obligations, it is not possible to obtain insurance for the same.

12.4 What other forms of insurance feature in construction projects in your jurisdiction?

While this is not mandatory, all construction contracts usually require that broadly the following types of insurances be maintained by the contractor:

• insurance covering loss or damage to the contractor's equipment and materials, including any loss or damage, while in transit until their arrival at the site or damage to property by any cause (damage to work);
• insurance of the works during construction, testing and commissioning, and during the defect liability period; and design defect cover (damage during work);
• insurance of plant and equipment for cargo and transportation of the plant and equipment to the project site (damage during transit);
• insurance covering bodily injury, sickness, disease or death suffered by the contractor's personnel or any third party arising from execution of the works; and
• insurance covering all personal accident claims.

13 Employment

13.1 What legislation must employers and contractors be aware of when hiring labour?

Please see question 10.4 in relation to the Labour Codes. In addition to the Labour Codes, the most important laws that govern the employment conditions of labourers and/or contractors include the following:

• The Industrial Disputes Act, 1947 regulates the resolution of industrial disputes, as well as the legality or illegality of strikes, lay-off terms and worker retrenchment. It applies only where the employee is a worker – that is, someone who does manual, supervisory, technical or clerical labour, and does not primarily have management or supervisory duties.
• State governments have enacted Shops and Commercial Establishments Acts which apply to all shops and business enterprises in certain states. These laws govern, among other things, working hours, salary payments, holidays, annual and sick leave entitlements, probation, termination and dismissal (certain states exclude the applicability of these act to employees who are engaged in a managerial capacity).
• The Minimum Wages Act, 1948 regulates the minimum wage rate that an employer must pay.
• The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979 was enacted to regulate the employment and conditions of migrant workers from other states. This law governs the working conditions of interstate workers.
• The Building and Other Construction Workers (Employment and Conditions of Service) Act, 1996 regulates the employment and conditions of construction workers. It applies to any business that employs, or has employed, 10 or more construction employees for any building or other construction activity on any day in the previous 12 months; and simplifies the registration procedure.
• The Contract Labour (Regulation and Abolition) Act, 1970 was enacted to regulate and abolish contract labour. A major employer/contractor that hires 20 or more contractual labourers falls under this category. The act regulates contract labour employment.
• The Factories Act, 1948 prevents anyone under the age of 14 from working in a factory; and provides that anybody between the ages of 15 and 18 cannot work in a factory unless a certificate of fitness has been issued under Section 69. It also mandates the hiring of safety inspectors in factories with more than 1,000 employees.

14 Tax

14.1 What issues must be considered from a taxation perspective in relation to construction projects in your jurisdiction?

Under Section 194C of the Income Tax Act, a person that is obliged to pay any money to a contractor for the performance of any job (including the supply of labour for the performance of any work) must deduct taxes at the time of payment. Contracts for labour, work or services are subject to the Works Contract Tax. Prior to 1 July 2017, service tax and value added tax were charged on works contracts by the national and state governments, respectively. However, with the implementation of the goods and services tax (GST), works contracts (relating to immovable property) have been classified as the provision of services, with the current tax brackets ranging from 12% to 18%.

The Building and Other Construction Workers Welfare Cess Act, 1996 was adopted to promote the welfare of construction employees, including by regulating their safety, health and other service conditions. It applies to 10 or more building workers or workers engaged in other construction activity. A cess of 1% of the cost of construction will be collected from the employer.

14.2 Are any exemptions or incentives available to encourage construction in your jurisdiction?

Enterprises engaged in the following activities are eligible for a tax exemption of 100% of their profits for any 10 consecutive years falling within the first 15 years of operation (the first 20 years in the case of infrastructure projects, except for ports, airports, inland waterways, water supply projects, and navigational channels to the sea):

• power generation, transmission or distribution;
• the development, operation or maintenance of a notified infrastructure facility, industrial park or special economic zone (SEZ), if the SEZ was commissioned before March 2020;
• the substantial renovation and modernisation of the existing network of transmission or distribution lines (in specified periods); or
• the construction and operation of a cross-country natural gas distribution network.

14.3 What strategies might parties consider to mitigate their tax liabilities in the construction context?

Companies whose activities involve infrastructure facilities – such as roads, water supply, ports, telecommunications, industrial parks or SEZs, the electricity sector or natural gas distribution – can claim a tax reduction for all profits earned from such activities under Section 80-IA of the Income Tax Act 1961. A deduction of 30% to 100% of the profits is available for a period of 10 years for such businesses.

15 Technology

15.1 How is Building Information Management (BIM) dealt with in your jurisdiction? Does the government mandate any particular BIM standards or other requirements?

There are no established BIM standards or rules that are mandated by the government; and although awareness of BIM has increased, its full potential has not yet been explored.

15.2 Are smart contracts used in your jurisdiction? Are there any special restrictions or regulations?

Any agreement can become enforceable by law as a contract if it consists of an offer, acceptance and consideration. It would seem, by definition, that smart contracts are allowed under the Contract Act, 1872. However, a smart contract consists of offer, acceptance and consideration in the form of cryptocurrency, which raises the issue of whether cryptocurrency is acceptable as consideration under Indian law.

Sections 5 and 10 of the Information Technology Act, 2000 legally accept digital signatures and provide that a contract concluded by electronic means is legitimate and enforceable. Furthermore, Section 65B of the Evidence Act, 1872 states that contracts which are digitally signed are admissible in the courts.

Therefore, although the legislation has progressed in this regard and awareness of smart contracts has increased in India, the law is still operating in a grey area – mainly because of a lack of clarity about cryptocurrency and its validity. As of the time of writing, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 is scheduled for discussion in the upcoming winter session of Parliament, which could provide answers to some of these questions.

15.3 What developments in digital technology do you see having a major impact on the construction industry?

To meet a project's time and cost requirements, technology-driven construction techniques and digital practices in engineering, planning, procurement, monitoring and information sharing are becoming increasingly common. All project participants are integrated through the sharing of digital data between the project proponents, the authorities, consultants, suppliers and contractors at all phases of the project execution process.

Although the adoption of digital solutions has accelerated in recent years – with document management solutions, procurement and bid process management tools, BIM 3D and unmanned aerial vehicle (UAV) based solutions among the most popular – satisfaction with their ability to meet business objectives remains mixed.

A survey conducted by PwC in 2020 revealed that:

• around 25% of respondents were using UAVs and drones for project monitoring and high-definition surveying;
• over 22% had implemented e-document management systems;
• around 20% had implemented BIM 3D modelling solutions in large residential, commercial and industrial projects;
• 19% had implemented cost estimation and bill of quantity development software tools; and
• 18% had established enterprise resource planning systems for cost management.

16 Disputes

16.1 In which forums are construction disputes typically heard in your jurisdiction?

In most construction contracts, a multi-tier dispute resolution clause is included in case the parties should differ in their interpretation of the contract, giving them the right to approach the civil courts for interim relief. If the contracting parties are Indian and the project is based in India, ad hoc arbitration under the Arbitration and Conciliation Act, 1996 is often chosen. If the contractor is a foreign entity, it will usually prefer institutional arbitration.

The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 aims to expedite the resolution of high-value commercial disputes (over INR 10 million) by instituting commercial courts at the district level, as well as commercial divisions and commercial appellate divisions in the high courts. Subsequent amendments have reduced this threshold to INR 300,000.

Disputes arising from construction contracts are currently heard by a bench created by this act. Section 2(1)(c) includes construction and infrastructure contracts within the definition of ‘commercial disputes' covered under the ambit of this act.

16.2 What issues do such disputes typically involve?

Construction contracts tend to be long and complicated. The complex provisions of construction contracts frequently lead to misunderstandings between the parties, thus giving rise to disputes. Most such disputes generally relate to one of the following issues:

• contract errors or omissions;
• divergent site conditions;
• delay at the employer's end in making the site available;
• delay at the contractor's end in completion of the works;
• variations and scope of the works; or
• defects in construction.

16.3 How are disputes typically resolved?

In India, a variety of methods for settling conflicts are recognised. Litigation, arbitration, mediation, conciliation, dispute resolution boards and judicial settlement are all available options. Arbitration is the most popular method of resolving contract disputes in the construction industry. However, most procedures are cumbersome, time consuming and expensive.

16.4 Is the use of alternative dispute resolution common and/or encouraged by legislation or the courts?

In India, generally, the most common alternative dispute resolution (ADR) methods are arbitration, conciliation, mediation and negotiation. The Arbitration and Conciliation Act, 1996 recognises the settlement of disputes through arbitration, conciliation and mediation.

As a matter of policy, the Indian courts encourage parties to settle disputes using ADR mechanisms before initiating a court action.

16.5 Is the use of dispute boards common in your jurisdiction?

Several prominent Indian corporations have adopted a different approach. Where the standard contracts stipulate that a dispute board will resolve any issues that arise as an alternative to arbitration, the members of the dispute board will be nominated by the parties and the dispute board's judgment will be final and binding. Although the parties may still opt for such provisions, arbitration remains the preferred form of dispute settlement.

16.6 Have there been any recent cases of note?

Most of the disputes arising from construction contracts involve claims for liquidated damages. As discussed in question 7.10, the judicial understanding of liquidated damages is different in India from that in other common law jurisdictions. In the 2015 case of ONGC v SAW Pipes, the Supreme Court set out the guidelines for courts/arbitrators to award liquidated damages in different scenarios; the decision is frequently referenced in subsequent claims for liquidated damages.

In another recent decision, in Telecommunication Consultants India Ltd v MBL Infrastructure Ltd, the Delhi High Court – deviating from the norm of not going into the merits of the award when it comes to a Section 34 application to enforce an arbitral award – examined the merits of the tribunal's award and ruled that as the tribunal found that no losses had been incurred, it could not then go on to order compensation. This is an interesting judgment, as it widens the scope of Section 34 of the Arbitration and Conciliation Act and gives the courts greater power to examine the merits and adjudicate on the reasoning of the tribunal.

17 Trends and predictions

17.1 What has been the impact of the COVID-19 pandemic on construction in your jurisdiction?

The construction sector was one of the sectors that was hardest hit by the COVID-19 pandemic. Many projects remained unfinished because of a lack of funds; and many of those that were finished remained unsold, due to changing buyer preferences.

17.2 How would you describe the current construction landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The Indian government recognises the importance of infrastructure development to the country's overall growth, as is evidenced by the scale of funds allocated for this purpose and the wide range of initiatives announced by the government in its Union Budget speech for the 2021–2022 financial year. Furthermore, the government is keen to improve India's standing in the Ease of Doing Business Index, and relaxing regulations for infrastructure projects features prominently in its approach.

18 Tips and traps

18.1 What are your top tips for smooth completion of construction projects in your jurisdiction and what potential sticking points would you highlight?

Parties should pay attention to their rights and obligations under the contract. All claims should be grounded in the contractual provisions itself and should not go beyond the written word of the contract, as such claims tend to be difficult to defend in the court. To minimise the risk of disputes, parties should maintain proper documentation when it comes to extensions of time or variations, so that there are no misunderstandings between the parties on their position under the contract. The parties should also draft fair and balanced contractual provisions, and not exploit their dominance to strong-arm the other party into a one-side contract, as such contracts are contrary to public policy and are not enforceable in India.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.