Construction Disputes Without an Arbitration Clause: Unpaid Bills, Delays, Escalation and Retention Money

Start here: is there really no arbitration clause?

Most big construction contracts do have an arbitration clause. If yours does, the dispute generally goes to arbitration rather than a civil suit, and the court work around it (petitions under Sections 9, 11 and 34 of the Arbitration and Conciliation Act, 1996) is covered on arbitrationlawyer.in. This page deals with the many contracts that don't have one. Think of work orders from private owners, subcontracts, developer and contractor agreements on smaller jobs, and letters of award that were never turned into a full contract.

Look properly before you decide. Often the clause isn't in the work order at all. It sits in the general conditions of contract, in the tender document, or in a standard form the work order says is "incorporated". It can turn up in an exchange of letters too. And a clause that only says the engineer in charge will decide disputes, with no mention of arbitration, usually isn't an arbitration agreement.

Suppose there is a clause and you sue anyway. The other side can ask the court under Section 8 to send the matter to arbitration, as long as it applies no later than its first statement on the substance of the dispute. If the defendant files a full written statement and never raises the clause, the suit generally carries on. We wouldn't bet on that. Pick the forum at the start.

The law a court applies to construction claims

Running bills, the final bill, and why they get stuck

Most payment fights on a construction job come down to measurement and certification. You submit an RA bill based on measurements. The owner's engineer or architect checks and certifies it, and payment falls due within whatever period the contract gives. Trouble starts when measurements are cut, when items are struck off as outside the scope, or when certification just sits on someone's desk for months. We see that last one constantly.

If your bill has been certified, you're in good shape. A certified figure is a liquidated sum, and where there's a written contract, a suit on it may qualify as a summary suit under Order XXXVII. Uncertified bills are harder. You'll have to prove the work and what it's worth with measurement books, joint measurement records, drawings and photographs. Where the owner's engineer refused to certify without good reason, the court can fix the amount itself.

The final bill is where it all piles up. Last measurements, extra items, deductions for defects and whatever liquidated damages the owner wants to hold back all land on it together. Some owners keep the final bill hostage until you sign a "no claim" certificate. Don't let it lie unpaid for years while letters go back and forth. Limitation keeps running.

Delay, extensions of time and liquidated damages

Every delay dispute is really about cause. The owner deducts liquidated damages because the building was finished late. The contractor says the delay came from the owner's side: late handover of the site, late drawings, design changes, stop work notices, bills paid late, or approvals the owner was meant to get and didn't. Under Section 67 of the Contract Act, the contractor isn't liable for delay the owner's own failure caused.

If the site kept a hindrance register, that's often the document that decides it. Close behind come the letters asking for drawings, the dates the drawings actually arrived, and the owner's own minutes of site meetings. A contractor who didn't record hindrances at the time will struggle to prove them years later. Owners have a trap of their own. Grant extensions of time without reserving the right to liquidated damages, and the third paragraph of Section 55 may have taken that right away.

Liquidated damages aren't automatic. The court awards reasonable compensation up to the figure in the contract, and where a public interest project or an obvious loss is involved, it may treat the agreed figure itself as a fair estimate. If the contract made time of the essence but the owner kept granting extensions, courts often hold that time stopped being of the essence. Both sides should draw up a plain delay chart. Planned date, actual date, cause, and the document that proves the cause. When Advocate B.K. Singh goes through a delay claim, that chart usually shows the delay was shared. Then the real fight is over days. How many were yours, and how many were theirs?

Escalation, price variation and extra work

With a price variation clause and a formula, the claim is just arithmetic. Apply the formula to the indices for the right period. Without such a clause, the contractor generally carries the risk of prices rising during the original contract period. That changes once the project runs past that period because of the owner's breach. The extra cost of labour and materials in the extended period can then be claimed as damages under Section 73. You'll have to show the delay was the owner's, though, and prove what the increase actually was.

Extra items and deviations are a separate head. If the owner or its engineer ordered work outside the drawings and the bill of quantities, it's paid at the contract rate where one applies, and at a reasonable rate where none does. Plenty of contracts insist on written variation orders while the real instructions get given at site meetings or over the phone. Section 70 may still get you fair value for work the owner accepted and is using.

Owners and developers, watch the other side too. Contractors do sometimes dress up ordinary scope work as extra items, or claim escalation for delays they caused themselves. The original bill of quantities and the tender drawings usually answer those claims. So does the contractor's own programme. They rarely expect you to produce it.

Retention money, security deposit and bank guarantees

Retention money is a percentage cut from every bill, normally released after completion or once the defect liability period is over. Security deposit works much the same way. The dispute comes when the owner sits on both long after that period ends, usually pointing to unrelated defects or its own counter-claims. Once the period has expired and no defects were notified under the contract, the retention becomes a debt due. You can sue for it, with interest.

Performance bank guarantees are a different animal. An unconditional guarantee is the bank's own independent promise. Courts will stop it being invoked only in narrow cases: an egregious fraud the bank knows about, or encashment that would cause irretrievable injustice of an exceptional kind. An argument over whether you actually defaulted usually isn't enough. Move fast anyway. Once the money's gone, your challenge to a wrongful invocation is a claim for money, not an order stopping it.

Owners need care here as well. Invoke a guarantee for a purpose the contract doesn't allow, or after it has expired, and you're inviting a claim for wrongful invocation. Read the guarantee's own wording. Not just the contract.

No claim certificates and full and final settlements

Owners, and public bodies more than most, often won't release the final bill or the retention until the contractor signs a no claim or no dues certificate. Contractors sign. They need the money. Later they claim the balance, and the owner says the claim was given up.

The court looks at how the certificate came to be signed. A real settlement, where the contractor took a lower figure to close the dispute, binds the contractor. A certificate signed under economic pressure, as a condition for releasing dues the owner had already admitted, can be challenged. You'll have to prove the pressure, though. The best proof is a protest letter sent soon after signing. A protest that first shows up two years later, when the suit is filed, doesn't count for much.

Have to sign one to get paid? Then write to the owner straight away, the same week if you can, saying you signed under protest and listing the claims you're keeping alive. That single letter can decide whether the rest of your claim survives.

Who usually claims what

• Contractor against owner or developer. Running and final bills that haven't been paid, extra items, escalation, idle labour and machinery, retention and security deposit, a refund of liquidated damages wrongly cut, and wrongful termination.
• Owner or developer against contractor. Liquidated damages for delay, what it cost to get another agency to finish, the cost of putting defects right, mobilisation advances never adjusted, and owner-supplied steel or cement the contractor can't account for.
• Subcontractor against main contractor. Unpaid bills, and nearly always a "pay when paid" clause thrown back at you that ties your payment to the client's. What such a clause does depends on its exact words. One that only fixes timing doesn't usually let the main contractor off paying forever.
• Material suppliers. The price of cement, steel, ready mix concrete or fittings delivered to site. These often look more like a sale of goods claim than a construction one.
• Architects and consultants. Fees for design and supervision stages already finished when the project was stopped or someone else was brought in.

How a construction claim moves through the court

Construction suits carry far more paper than most commercial cases. The preparation takes longer. Plan for that.

1. Settle the forum first

   Go through the work order, general conditions, tender document and letters of award looking for an arbitration clause. Check whether the other side is a Government body that needs a Section 80 notice. And if you're registered as a micro or small enterprise, see whether the MSME Facilitation Council is open to you.

2. Build the claim from the records

   Make a bill-wise statement showing what was billed, certified and paid, and the balance. Then put retention, security deposit, extra items, escalation and delay as separate heads. Every figure should point to a page in the measurement book, a certificate or a letter. No round numbers.

3. Send the notice

   The notice sets out each head and its amount, with interest. Owners who plan to bring in another agency to finish should give the written notice of at least 30 days that Section 20 of the Specific Relief Act requires for substituted performance.

4. Section 12A mediation

   Unless you need urgent interim relief, apply for pre-institution mediation through the Legal Services Authority. It works best when both sides accept some money is due and they're really arguing about how much.

5. File the suit

   File a commercial suit with a statement of truth and every document you rely on. Certified bills may support a summary suit. A mix of bills, damages and escalation goes as a regular money recovery suit with the damages claim joined to it.

6. Interim protection and evidence from the site

   Ask for orders only where you actually need them. That could be attachment before judgment if the owner is getting rid of assets, an injunction on a bank guarantee in a rare case, or a local commissioner under Order XXVI Rule 9 to record the state of the site before anyone changes it.

7. Pleadings, disclosure and case management

   From service, the defendant has 120 days at the most to file its written statement and any counter-claim. Then comes the case management hearing. Issues are framed and a timetable for evidence is fixed.

8. Evidence, judgment and execution

   Witnesses are usually the site engineers, the quantity surveyor and someone from accounts. After judgment, an appeal lies within 60 days under Section 13. The decree is enforced through execution under Order XXI.

The Specific Relief Act, as amended in 2018, also provides for designated special courts to hear suits about infrastructure project contracts. It directs that suits under that Act be decided within twelve months of service of summons, extendable by six months. Check whether your project is in the Schedule, and which court has been designated.

Time and costs at each stage (a rough guide)

Which court will hear it

The Commercial Court takes the case when the specified value is Rs 3 lakh or more. For a money claim, Section 12 of the Commercial Courts Act counts what you claim plus interest up to the filing date. If the suit also asks for a declaration or an injunction, the value of that relief, and of any property involved, goes into the sum.

In Delhi, suits up to Rs 2 crore go to the District Judge (Commercial Court) in the district court complex for the area, which means Saket, Patiala House, Tis Hazari, Karkardooma, Rohini or Dwarka. Anything bigger goes to the Commercial Division of the Delhi High Court. A change to the district court limit has been under consideration, so check the current figure. In Ghaziabad and Gautam Buddh Nagar, the suit goes to the court designated as the district's Commercial Court, with appeals to the Allahabad High Court. Gurugram and Faridabad work the same way, with appeals to the Punjab and Haryana High Court. There's more on our page about which commercial court will hear your case.

On territory, a money claim can be filed where the defendant carries on business, or where any part of the cause of action arose. That covers where the contract was signed, where the site is, or where payment was due. Usually it's the site. A suit about rights in the land itself has to go where the land is.

Papers to pull together

How long you have to sue

Most construction money claims have to be filed within three years under the Limitation Act, 1963. Working out when those three years started is the hard part. For the price of work done at the defendant's request, with no time fixed for payment, Article 18 runs from when the work was done. If the contract fixes when the final bill is payable, time generally runs from that date. Damages for breach run from the breach, under Article 55.

Running bills are a trap. Each unpaid RA bill may give its own cause of action. A contractor who waits for the final bill before suing on the early ones can find some of them time-barred, unless the contract treats them as interim payments to be adjusted in the final bill. A written acknowledgment of the balance by the owner (Section 18), or a part payment recorded in writing (Section 19), starts the period afresh. Only if it comes before the period runs out, though.

Retention normally falls due when the defect liability period ends. So its clock starts later than the bills. Time spent in Section 12A mediation is left out of the count. Our guide on the time limit to recover dues walks through calculations like these.

Small contractors, developers, Government work and the NCR courts

If you're a small or mid-sized contractor registered as a micro or small enterprise, look at the MSMED Act, 2006. It covers services as well as goods. The owner has to pay within the agreed period, which can't be more than 45 days from acceptance of the work, and late payment attracts compound interest at three times the RBI bank rate. The Facilitation Council route under Section 18 is open even when the contract has no arbitration clause, because the council conciliates first and then arbitrates itself. For a plain bill claim, it's often quicker and cheaper than a suit.

Developers and private owners are usually defending on bills and claiming on delay and defects. Keep your own records of site handover, drawing issue and payments. Contractors build their case from exactly those documents. Where homebuyers are hurt too, their claims go to other forums. The developer and contractor dispute stays commercial.

Government and PSU work brings the Section 80 notice, slow internal approvals, and standard conditions that very often contain an arbitration clause. Across NCR, Delhi projects go to the Delhi courts. Projects with the Noida or Greater Noida authorities go to the Gautam Buddh Nagar court at Surajpur, Ghaziabad projects to the Ghaziabad court, and Gurugram and Faridabad projects to their own district courts. Each has its own court fee schedule and its own habits on listing. The time a commercial suit takes changes from one court to the next.

Where construction claims usually go wrong

Contractors mostly lose money because the records aren't there. Measurements agreed by word of mouth. Hindrances nobody wrote down. Extra work done on a phone call, and protest letters never sent. When Advocate B.K. Singh drafts a construction plaint, most of the time goes into rebuilding the paper trail from site engineers' diaries and old emails, because the court won't accept a round figure for idle labour or escalation without it.

Owners lose money by mixing up remedies. They terminate without the notice the contract asks for. They deduct liquidated damages and also claim the full cost of completion, or invoke the bank guarantee for something it doesn't cover. What makes an owner's claim hold up is a clean termination, a 30-day notice before a substitute agency comes in, and a proper record of what completion cost.

Both sides expect too much from interim relief. Courts are slow to stop a bank guarantee and slow to restrain work on infrastructure projects, and they won't order a contractor back to site. Frankly, plan for a money claim. Use interim orders only where the facts really back them.

What to do this week

Find the full contract set, including any general conditions brought in by reference, and read it. Is there an arbitration clause or not? Then prepare a bill-wise statement of what's been billed, certified, paid and left outstanding, and a separate list of retention, security deposit and claims for delay or extra work. Check the dates. When each bill fell due, when the defect liability period ended, and when the owner last acknowledged the balance in writing.

Signed a no claim certificate under pressure? Send the protest letter now. If you're an owner bringing in another contractor, give the 30-day notice first. And if you're a defendant who's been served with summons, the 120-day outer limit for your written statement is already running. Our page on defending a commercial suit explains what to do.

If you'd like your contract, bills and site records looked at before you choose between mediation and a suit, send them to Advocate B.K. Singh's team through the contact page. We'll tell you plainly what we see in them.