Analysis of "Tender at Risk and Cost" Clauses in Indian Contract Law

An Analysis of "Tender at Risk and Cost" Clauses in Indian Contract Law

Introduction

In the realm of contract law, particularly concerning works contracts and procurement, the "tender at risk and cost" clause (often referred to as a "risk purchase" clause) serves as a significant remedy for an employer or principal in the event of a contractor's default. This clause typically empowers the employer to terminate the original contract, engage another agency to complete the unfinished work, and recover any additional expenditure incurred from the defaulting contractor. The Indian judiciary has extensively interpreted the contours of this contractual provision, balancing the employer's right to ensure project completion and recover losses against the contractor's liability, ensuring fairness and adherence to contractual principles. This article undertakes a comprehensive analysis of "tender at risk and cost" clauses under Indian law, drawing upon statutory provisions and key judicial pronouncements, including those provided as reference materials.

The Concept of "Tender at Risk and Cost" in Indian Contract Law

A "tender at risk and cost" clause is a contractual stipulation that comes into play when a contractor fails to perform their obligations, leading to the termination of the contract. The fundamental legal basis for such clauses and the ensuing recovery of damages lies in the Indian Contract Act, 1872. Section 73 of the Act provides for compensation for loss or damage caused by a breach of contract, stating that the party who suffers from such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

The clause essentially operationalizes Section 73 by pre-defining a mechanism for quantifying damages arising from the contractor's failure to complete the work. The "risk" element refers to the uncertainties and potential liabilities associated with finding an alternative contractor and completing the work, while the "cost" element pertains to the additional financial burden, if any, borne by the employer. As noted in M/S. INTEROCEAN SHIPPING (INDIA) PVT LTD. v. OIL AND NATURAL GAS CORPORATION LTD (Bombay High Court, 2022), the phrase "at its cost, expense and risk" in a contract clearly delineates the allocation of financial and operational burdens.

Such clauses are common in government contracts and large infrastructure projects to safeguard public interest and ensure timely completion of works. For instance, in Union Of India And Others v. Tantia Construction Private Limited (Supreme Court Of India, 2011), the East Central Railways invited a "Risk and Cost Tender" for construction work, indicating the prevalence of this mechanism. Similarly, the case of Odisha Forest Development Corporation Ltd. (S) v. Anupam Traders And Another (S) (Supreme Court Of India, 2019) illustrates the cancellation of an agreement and re-tender at the 'cost and risk' of the defaulting party.

Essential Pre-requisites for Valid Invocation of Risk and Cost Clause

The invocation of a risk and cost clause is not absolute and is subject to several conditions and legal principles. The employer must meticulously follow the contractual procedure and act in a fair and reasonable manner.

Valid Termination of the Original Contract

The foremost requirement is that the termination of the original contract must be valid and in accordance with the terms of the agreement and the principles of natural justice. If the termination itself is wrongful or illegal, the subsequent risk purchase action will be vitiated. The grounds for termination, notice periods, and cure periods, if any, stipulated in the contract must be strictly adhered to. The employer must demonstrate that the contractor was indeed in default and that such default warranted termination.

Duty to Mitigate Loss

The employer, while exercising the right to complete the work at the risk and cost of the defaulting contractor, is under a legal obligation to mitigate the losses. This principle is enshrined in the Explanation to Section 73 of the Indian Contract Act, 1872, which states: "In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account." This means the employer must act reasonably and prudently in engaging a new contractor and must not incur extravagant or unnecessary expenses. The new tender process should aim to secure the most reasonable terms available under the circumstances. The Supreme Court in Karsandas H. Thacker v. The Saran Engineering Co. Ltd. (1965 AIR SCC 1981, Supreme Court Of India, 1965) emphasized that compensation is limited to losses that naturally arise or were foreseeable, implying a duty on the aggrieved party not to aggravate the loss.

Reasonableness and Bona Fides in Re-Tendering

The process of re-tendering must be conducted fairly, transparently, and in good faith. The terms and conditions of the new tender should, as far as practicable, be similar to the original contract to ensure a like-for-like comparison of costs. Any significant deviation in the scope of work, specifications, or conditions in the risk purchase tender can undermine its validity as a measure of the loss attributable to the original contractor's default. The decision-making process of the employer in awarding the new contract can be subject to judicial review on grounds of irrationality or mala fides, as highlighted in general tender jurisprudence (SRI K B KUMAR v. STATE OF KARNATAKA, Karnataka High Court, 2025; M/S. Chirag Enterprises v. State Of Rajasthan And Another, Rajasthan High Court, 1981). While an employer may have the power to relax tender conditions (Master Marine Services (P) Ltd. v. Metcalfe & Hodgkinson (P) Ltd. And Another, Supreme Court Of India, 2005; Upendra Jena v. State Of Odisha And Others Opp. Parties., Orissa High Court, 2019), such relaxation in a risk purchase tender must not unduly burden the defaulting contractor or alter the fundamental nature of the work.

Judicial Scrutiny of Risk and Cost Tenders: Analysis of Key Precedents

Indian courts have laid down several important principles governing the operation and enforcement of risk and cost clauses.

Scope and Nature of Work in Re-Tender

A critical aspect is whether the work executed through the risk purchase tender is the same as, or substantially similar to, the work under the original contract. If the employer alters the scope of work significantly, it may not be permissible to recover the entire additional cost from the defaulting contractor. In Union Of India And Others v. Tantia Construction Private Limited (Supreme Court Of India, 2011), one of the issues identified was whether the nature of work in a risk and cost tender could be altered and whether such action would violate constitutional principles or contractual clauses. The Madras High Court in K. Dhanasekar Engineering Contractor v. The Union of India (2020 MLJ 1 169, Madras High Court, 2019) held that if specifications are unilaterally relaxed in the risk and cost tender (e.g., impact value of ballast changed from 20% to 25%), the tender loses its character as a risk and cost tender and becomes a completely fresh tender, disentitling the employer from recovering the differential cost. This is because the cost difference would not accurately reflect the loss caused by the original contractor's breach concerning the original specifications.

Calculation and Crystallization of Recoverable Amount

The amount recoverable is typically the difference between the cost incurred in completing the work through the new agency and the price that would have been payable to the original contractor for the same work. This amount must be proven as actual loss. The Supreme Court in State Of Karnataka v. Shree Rameshwara Rice Mills, Thirthahalli (1987 SCC 2 160, Supreme Court Of India, 1987) held that a party to a contract (the State in this case) cannot be an arbiter in its own cause to determine the quantum of damages if the breach or the amount is disputed; such determination requires independent adjudication. While this case dealt with recovery as arrears of land revenue, the principle of independent adjudication of disputed damages is pertinent.

The claim for the extra cost is generally considered to crystallize once the risk purchase contract is awarded and the additional expenditure is ascertained. The Supreme Court in Indian Oil Corporation Limited v. Sps Engineering Limited (2011 SCC 3 507, Supreme Court Of India, 2011) and the Delhi High Court in STEEL AUTHORITY OF INDIA LIMITED v. BEIJING SINO STEEL INDUSTRY AND TRADE GROUP CORPORATION , CHINA & ORS. (Delhi High Court, 2023) observed that the amount to be claimed from the person guilty of breach of contract becomes crystallized when the risk purchase tender at a higher cost is awarded. The employer must provide clear evidence of the costs incurred.

In Union Of India v. Steel Stock Holders Syndicate, Poona (1976 SCC 3 108, Supreme Court Of India, 1976), while dealing with damages for delayed delivery by railways, the court allowed interest as a measure to calculate damages, which can be an analogous principle in determining consequential losses in risk purchase scenarios if appropriately pleaded and proven.

Procedural Fairness and Natural Justice

The employer must follow principles of natural justice. This includes giving proper notice to the defaulting contractor about the intention to terminate and carry out the work at their risk and cost. The contractor should ideally be informed of the outcome of the risk purchase tender and the amount being claimed. As per Abdus Salam Choudhury v. The State Of Assam & Others (Gauhati High Court, 1989), a tenderer agreed to be liable for deficiency if the tender was withdrawn and the work re-tendered, implying an understanding of such risk.

Role of Estoppel and Waiver

A contractor's conduct can sometimes lead to estoppel or waiver of their right to challenge a risk purchase action. In M/S Oriental Agencies Thro' It'S Proprietor Petitioner(S) v. The Divisional Railway Manager & 1 (S) (2009 SCC ONLINE GUJ 5692, Gujarat High Court, 2009), it was held that if the petitioner accepted the rescission of the contract and the decision to invite fresh tenders at their risk and cost (by not objecting or even participating in the new tender), they could not later raise a dispute regarding the earlier contract. Conversely, an employer's actions might also be construed as waiver. However, mere acceptance of a final bill "under protest" by a contractor does not necessarily estop them from raising further claims, as held in R.L Kalathia And Company v. State Of Gujarat (2011 SCC 2 400, Supreme Court Of India, 2011), though this case was not directly on risk purchase, the principle of non-estoppel for protested acceptance is relevant. If there is an "accord and satisfaction" where the contractor acknowledges full and final settlement, it may bar subsequent claims related to the contract, as seen in M/S P.K Ramaiah And Company v. Chairman & Managing Director, National Thermal Power Corpn. (1995 SCC CRI 1 215, Supreme Court Of India, 1993).

Arbitrability of Disputes

Disputes arising from the invocation of risk and cost clauses, including the validity of termination, the reasonableness of the new tender, and the quantum of damages, are generally arbitrable if the original contract contains an arbitration agreement. The Supreme Court in Asian Techs Limited v. Union Of India And Others (2009 SCC 10 354, Supreme Court Of India, 2009) affirmed the broad authority of arbitration clauses. The Calcutta High Court in HARJI ENGINEERING WORKS PVT LTD v. UNION OF INDIA AND ORS. (Calcutta High Court, 2023) explicitly stated that the arbitration clause in the original tender document would apply to a challenge against a fresh tender floated at the risk and cost of the appellant. The arbitrators, however, must act within the confines of the contract and cannot disregard its express terms (Rashtriya Chemicals And Fertilizers Limited v. Chowgule Brothers And Others, 2010 SCC 8 563, Supreme Court Of India, 2010). The survivability of arbitration agreements despite administrative changes or contract termination is also a well-settled principle (Union Of India v. D.N Revri And Co. And Others, 1976 SCC 4 147, Supreme Court Of India, 1976).

The case of Union of India v. Saravana Construction Private Limited (Kerala High Court, 2015) also dealt with the justification of cancellation and fresh tender at risk and cost, and the scope of arbitral review in such matters.

Defences Available to the Defaulting Contractor

A contractor facing a claim under a risk and cost clause may have several defences, including but not limited to:

  • Wrongful Termination: If the original contract was terminated illegally or without proper grounds.
  • Failure to Mitigate: If the employer did not take reasonable steps to minimize the additional costs. This includes not awarding the risk purchase contract at an inflated price or to an unqualified bidder.
  • Substantial Alteration in Scope: If the work awarded under the risk purchase tender is materially different from the original scope, making the comparison of costs inequitable (K. Dhanasekar Engineering Contractor v. The Union of India, 2019).
  • Lack of Proper Notice: Failure by the employer to issue necessary notices as per the contract or principles of natural justice.
  • Unreasonableness or Mala Fides: If the risk purchase tender process was unfair, not transparent, or conducted in bad faith.
  • Novation of Contract: If the terms of the risk purchase are so different that it amounts to a completely new contract rather than a continuation of the original work.
  • Impossibility of Performance: If the original contract became impossible to perform due to reasons not attributable to the contractor, though this is a high threshold to meet.
  • No Actual Loss: If the employer managed to get the work completed at a cost equal to or less than the original contract price.

The contractor in M/S J. Sons Company Limited v. The Union Of India (Patna High Court, 2011) faced a re-tender at its risk and cost due to persistent failures to fulfil contractual terms despite extensions, illustrating a scenario where defences might be limited.

Conclusion

The "tender at risk and cost" clause is a potent tool for employers to ensure project completion and recover losses stemming from a contractor's default. However, its exercise is circumscribed by fundamental principles of contract law, including the necessity of valid termination, the duty to mitigate, reasonableness, and adherence to procedural fairness. The Indian judiciary has consistently emphasized that this right cannot be exercised arbitrarily or oppressively. The employer must demonstrate that the additional costs claimed were genuinely incurred, were a direct consequence of the original contractor's breach, and that reasonable steps were taken to minimize such costs.

While the clause provides a mechanism for recovery, disputes regarding its invocation and the quantum of damages are common, often leading to arbitration or litigation. The extensive case law, including the precedents discussed, provides a robust framework for adjudicating such disputes, ensuring a balance between the employer's legitimate interest in project execution and the contractor's right to be protected from unreasonable or punitive claims. Ultimately, the efficacy of a risk and cost clause depends on its careful drafting within the contract and its judicious implementation by the employer, always subject to the overarching principles of fairness and equity enshrined in Indian contract law.