One of the recurrent issues in construction and service contracts is the interpretation of clauses that deal with escalation of costs, particularly statutory increases in the minimum wages payable to workmen. Disputes often arise where the contract stipulates that the employer or owner is not liable to bear any part of such increases. The critical question becomes: does this exclusion apply only to the original contract…

One of the recurrent issues in construction and service contracts is the interpretation of clauses that deal with escalation of costs, particularly statutory increases in the minimum wages payable to workmen. Disputes often arise where the contract stipulates that the employer or owner is not liable to bear any part of such increases. The critical question becomes: does this exclusion apply only to the original contract period, or does it extend to the extended period of the contract, especially when the extension is attributable to the employer?

The Clause in Dispute

In an (arbitration) dispute, arising out of an engineering contract, the clause in the Contract (GCC) read as follows:

“The Contractor shall ensure that wages are paid by himself or by his sub-contractors to their workmen directly without the intervention of any Jamadars or Thekedars and that no amount by way of commission or otherwise is deducted or recovered by the Jamadars from the wages of the workmen. It is agreed and understood that the wages paid or payable by the Contractor or his sub-contractor is not below the minimum wages as applicable from time to time and the Owner shall not be liable to bear any part of the increase, if any, in the minimum wages during the term of the contract.”

The interpretative controversy focused on the expression “during the term of the contract.”

Ambiguity in Drafting and the Contra Proferentem Rule

Neither the GCC nor the SCC defined what constituted the “term of the contract.” This ambiguity is significant because the contract was drafted by the employer. Established legal principles dictate that any ambiguity in contractual language must be construed against the party that drafted the clause (the contra proferentem rule). Accordingly, “term of the contract” should be restricted to the original contractual period, not the extended term.

Exemption clauses, such as the present one excluding liability for increased minimum wages, have traditionally been construed narrowly by courts. As the House of Lords observed in Gilbert-Ash (Northern) Ltd. v. Modern Engineering (Bristol) Ltd.[1974] A.C. 689, exclusion clauses must be clear and categorical, particularly when they limit rights that would otherwise accrue by implication.

Presumptions in Law

Two important presumptions in contract law are relevant here:

1. Responsibility for Delay: The party responsible for delay bears its consequences, including additional costs arising during the extended period.
2. Waiver of Rights: A party cannot be held to have waived a right unless it is clear and informed. Thus, unless the contractor expressly and unambiguously waived entitlement to increased minimum wages during extended periods, no such waiver can be inferred.

Judicial Precedents

The law recognizes that escalation is a normal incident of contracts in an inflationary economy. The absence of an express escalation clause does not automatically disentitle the contractor. In P.M. Paul v. Union of India (1989 Supp (1) SCC 368), the Supreme Court observed that escalation is an inevitable occurrence and a legitimate head of claim.

Similarly, in Tarapore & Co. v. State of M.P.(1994) 3 SCC 521, the Court held that when a contractor is obliged to pay minimum or fair wages as revised from time to time, there is an implied understanding that the employer would reimburse such increases. The Court reasoned that the contractor cannot be expected to absorb such increases at the cost of profit, particularly where compliance with statutory wage obligations is mandated under the contract. This principle was reaffirmed in Union of India v. Saraswat Trading Agency(2009) 16 SCC 504.

The Supreme Court in NTPC Ltd. v. Deconar Services (P) Ltd.(2021) 19 SCC 694 emphasized that the construction of terms like “period of execution” falls within the arbitrator’s domain. A stipulation of firmness in price “during execution” may reasonably be read to cover only the original stipulated period and not extensions, unless explicitly extended.

Similarly, in Assam SEB v. Buildworth (P) Ltd. (2017) 8 SCC 146, the Court upheld an arbitrator’s finding that escalation clauses tied to a fixed contractual period cannot be extended automatically to cover periods beyond formal extensions, unless the contract so provides. Where work continues with the employer’s consent beyond the scheduled completion date, escalation claims remain valid.

Authorities Supporting Exclusion Clauses

On the other hand, where contracts have expressly excluded liability for escalation even during extensions, courts have upheld such provisions. Examples include:

• Union of India v. Chandalavada Gopalakrishna Murthy (2010) 14 SCC 633
• ONGC v. Wig Brothers(2010) 13 SCC 377
• New India Civil Erectors (P) Ltd. v. ONGC(1997) 11 SCC 75
• Union of India v. Varindra Constructions(2018) 7 SCC 794

These cases underscore that if the parties have categorically excluded escalation liability, courts will respect such bargain—even if the extension results from the employer’s breach.

Conclusion

The phrase “during the term of the contract” cannot automatically be extended to cover the extended period of the contract, particularly when the delay is attributable to the employer. Absent an unambiguous exclusion clause, the contractor is entitled to claim reimbursement for statutory increases in minimum wages. Courts and tribunals are likely to apply principles of strict interpretation of exclusion clauses, the contra proferentem rule, and the broader fairness doctrine to protect the contractor’s statutory obligations.

In effect, unless the contract explicitly provides that escalation liability is excluded even during extensions, the law presumes that the employer remains responsible for such increases when the extension is not the contractor’s fault.