Contactor's claim for damages for prolongation of work: Period of limitation applicable

Introduction

Often an employer entrusts to a contractor certain works to be carried out under a contract, in a time bound manner by deploying resources like staff, labour, machinery etc.  In such cases the employer typically assumes reciprocal obligations like delivering to the contractor site, drawings and other approvals etc. within specified timelines. If employer commits breach in performing these reciprocal obligations by delivering site etc. in time, the period of execution of works may get prolonged. As a consequence of prolongation of period of execution, the contractor may suffer losses on account of:

i) Idling of resources deployed;

ii) Overheads during extended period; and

iii) Escalation of cost of transportation, material, labour and machinery etc. applicable to the prolonged period.

The contractor can institute a suit to recover losses under above heads.

Section 3 of the Limitation Act 1963 however provides that every suit instituted after the prescribed period shall be dismissed. Therefore the contractor should institute the suit within period of limitation.

This write-up examines the period of limitation available to a contractor for instituting claim for losses of the nature mentioned above.

Statutory provisions

The right of a party suffering losses as a result breach of contract to receive compensation from the party in breach is generally traceable to section 73 of the Indian Contract Act 1872.

Article 55 of the schedule to Limitation Act 1963 prescribes period of limitation for instituting a suit for compensation for the breach of any contract as under:

As per section 22 of Limitation Act 1963, in the case of a continuing breach of contract, a fresh period of limitation begins to run at every moment of the time during which the breach, continues.

Above section 22 read with article 55, makes a clear distinction between cases of breach of contract:

i) Where there is a breach or there are successive breaches (when breach is complete); and

ii) Whether the breach is continuing.

In the former case the period of limitation commences on occurrence of breach. In the latter case the limitation starts running when breach ceases.

Completed breach v/s continuing breach

In order to ascertain the starting point for limitation for breach of contract resulting in claim for compensation, it needs to be understood whether the breach in question can be treated a completed one or a continuing one. 

The Supreme Court[1] considering what would constitute continuing cause of action within section 23 of the old Limitation Act 1908 (corresponding to section 22 of Limitation Act 1963) pointed out that the provision refers not to a continuing “right” but to a continuing “wrong”. The essence of a continuing wrong is that it is an act which creates a continuing source of injury and renders the doer of the act responsible and liable for the continuance of the said injury. If the wrongful act causes an injury which is complete, there is no continuing wrong even if the damage resulting from the act may continue. If, however, a wrongful act is of such a character that the injury caused by it itself continues, then the act constitutes a continuing wrong. The court drew a distinction between the injury caused by the wrongful act and what may be described as the effect of the said injury. It held that only in regard to acts which could be characterised as continuing wrongs (and not their effect) that section 23 could be invoked.

Claim for compensation for breach whether based on completed or continuous breach?

In a case[2] the Supreme Court considered applicability of law of limitation to claims arising from a contract for providing lining to canal line, where on account of repeated and consecutive delays in handing over the site by the employer, the contractor could not complete the work within the stipulated time. At the contractor’s request, the contract period was extended though while granting extensions the employer specifically stated that no compensation would be payable for the extension. The Supreme Court held the suit filed by the contractor beyond 3 years from occurrence of each breach, seeking damages under thirteen different heads, including price escalation in labour due to the prolongation of the work, price escalation in fuel lubricants etc., overstay of capital and machinery, and overheads such as staff, kitchen, office etc., as barred by limitation.

The court held that it was a case of successive or multiple breaches, rather than of a continuous breach, as each delay in handing over the canal/site by the employer constituted a breach that was distinct and complete in itself and gave rise to a separate cause of action for which the contractor could claim compensation due to prolongation of time and resultant escalation of costs. Article 55 specifically states that in respect of successive breaches, the period begins to run when the breach in respect of which the suit is instituted, occurs. Therefore, suit was required to be filed within three years of the occurrence of each breach, which constituted a distinct cause of action[3].

In another case[4], where employer delayed supply the drawings and specifications which involved work of a complicated nature not included in the original contract and the time for completion of the work was on that account extended, the contractor made a claim for payment at an enhanced rate over the basic rates stipulated under the contract on inter alia the following grounds:

i) There was a "substantial deviation" in the nature of work of which the detailed work drawings were supplied after the date of the contract. The work involved was of a complex nature requiring highly skilled labour, and that additional labour and materials not covered by the contract rates were required;

ii) There was increase in the price of materials and labour on account of undue prolongation of the period of work; and

iii) There was increase in the cost of transportation on account of rise in the price of petrol and increase in railway freight.

Supreme Court held that the suit filed by the contractor was not a suit for compensation for breach of contract express or implied: it was a suit for enhanced rate because of change of circumstances, and in respect of work not covered by the contract. The court held that the additional work directed by the employer when carried out may be deemed to be done under the terms of the contract: but the claim for enhanced rates did not arise out of the contract: it was not a claim for compensation for breach of contract under Article 115 of Limitation Act 1908 (corresponding to Article 55 of 1963 Act. It was held that the claim was covered under Article 120 of Limitation Act 1908 (corresponding to Article 113 of 1963 Act).  The court did not accept the employer’s plea that even then the claim was barred as the contractor had made a claim for work done more than six years before the institution of the suit and the period of limitation commenced to run from the date on which the employer obtained the benefit of the work done by the Contractor. Court held that under Article 120 of the Limitation Act 1908, the period of three years for suits for which no period of limitation is provided elsewhere in the Schedule commences to run when the right to sue accrues and there was no right to sue until there was an accrual of the right asserted in the suit, and its infringement, or at least a clear and unequivocal threat to infringe that right by the employer against whom the suit is instituted.[5] This case is distinguishable in that it was held to involve a claim outside the contract to which the period of limitation prescribed under article 55 is not applicable.

Inference

In the light of the discussion as aforesaid, a contractor intending to sue employer for compensation for losses resulting from employer’s breaches that caused delay in execution and completion of work, should institute the litigation within three years of occurrence of each breach and not merely wait for the work to be completed or the final settlement to be made.

[1] BalkrishnaSavalram Pujari and Ors. vs. Shree DnyaneshwarMaharajSansthan and Ors. MANU/SC/0174/1959
[2] State of Gujarat vs. Kothari and Associates  (2016)14SCC761
[3] Ibid
[4] Gannon Dunkerley and Co., Ltd. vs. Union of India (UOI) MANU/SC/0475/1969
[5] ibid