CONTRACTS

INTRODUCTION - THE STATUTORY FRAMEWORK India has a codified contract law, which is principally dealt with in the Indian Contract Act, 1872.(ICA) ICA deals with the general principles of contracting. It is not the entire law relating to contracts. - If the ICA has a provision pertaining to an issue it has to be followed. ICA is exhaustive to that extent. - If ICA is silent on a particular issue, Common Law principles can be used. - Common Law cannot be used to enlarge or limit the ICA provisions, unless a provision cannot be understood without the aid of Common law. ICA also deals with certain special contracts such as guarantee, indemnity, bailment, pledge and agency. Other separate enactments are those relating to: - Sale of Goods Act; - Partnerships Act; - Negotiable Instruments Act; and The basic principles of the ICA are applicable to all such contracts under these and other statutes. Freedom to Contract The Act recognises the freedom to contract. Such freedom is not absolute in the sense that the contracts should be consistent with the provisions of ICA and other laws. If a stipulation is mandatory it has to be followed. However directory stipulation, including those stated to be applicable in the absence of a contract to the contrary, can be overridden by the parties through agreement. Contract should emanate from free will and the parties should be consensus ad idem or there should be a meeting of the minds, i.e. the parties should agree upon the same thing in the same sense.

Who can contract? All legal entities; Individual who has attained majority in age, i.e. aged 18 years; Individual who is of sound mind; and Individual or entities, who/which are not disqualified from contracting by any law.

As per Section 10 of ICA all agreements are contracts if they are made: With the free consent of the parties; Parties are competent to contract, (age of majority and soundness of mind); There is a lawful consideration and lawful object; and Consideration and object are not expressly declared by the ICA to be void or voidable.

GOVERNMENT CONTRACTS AND SOVEREIGN IMMUNITY There is no separate law applicable to Government contracts. The Government of India (GOI) and State Governments can carry on any trade or business, acquire, hold and dispose off property and enter into contracts (Articles 298 and 299 of the Constitution of India). In the realm of contracting, no sovereign immunity is available to the GOI or State Governments, public bodies and public sector undertakings. Any dispute arising in a contract with GOI or State Governments has to be resolved in accordance with the general law. All contracts made in the exercise of the executive power of the GOI or of a State shall be expressed to be made by the President, or by the Governor of the State, as the case may be. The period of limitation for filing suits by the Government is thirty years, as against three years for others. Neither the President nor the Governor nor any person executing or making any such contract or assurance on behalf of any of them shall be personally liable in respect of any contract or assurance made or executed.

Contractor selection by Government, Public bodies and Public sector In selecting a contractor, the Government has to follow competitive bidding; should act impartially, without favouritism and should not act arbitrarily. The Government must abide by the conditions laid down in the tender notice and cannot act arbitrarily and capriciously or show favouritism.

CHOICE OF LAW In international contracts, parties are free to expressly choose the: - Substantive law applicable to contract. - Substantive law applicable to arbitration (validity, effect and interpretation of the arbitration agreement) - Procedural law applicable to arbitration. A limitation on this rule is that the choice must be bona fide and it should not be opposed to public policy. In the absence of express choice, the contract is governed by the system of law with which the transaction has its closest and most real connection. If there is no express choice of law for arbitration, proper law of arbitration agreement is normally the same as the proper law of the contract.

VOID AGREEMENT Void agreement is an agreement not legally binding Void ab inito or from inception. There are many situations under which an agreement may be treated as void.

VOIDABLE AGREEMENT Voidable agreement is an agreement binding on the parties unless it is avoided at the instance of one of the parties who is entitled to do so under the provisions of law. Broadly, when consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, the agreement is voidable at the option of the party whose consent was so caused.

RESCISSION When a person rescinds a voidable contract the other party need not perform any promise contained within the contract in which he is the promisor. The party rescinding a voidable contract shall, if he has received any benefit there under from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received. A person who rightfully rescinds a contract is entitled to consideration for any damage, which he has sustained through the non-fulfilment of the contract.

NOVATION If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

TIME ESSENCE FOR PERFORMANCE Merely by stating in the agreement that time shall be of essence, may not be material to decide the intention of the parties. If the contract contains clauses for extension of time and liquidated damages etc. i.e. stipulating for the consequences if the contract is not performed within the stipulated time, they will be indicative that time was not intended to be of essence of the contract. The contract has to be read as a whole to ascertain the intention.

IMPOSSIBILITY TO PERFORM OR FRUSTRATION OF CONTRACT An agreement to do an act impossible in itself is void. A contract to do an act, which, after the contract is made, becomes impossible or unlawful, by reason of some event, which the promisor could not prevent, becomes void when the act becomes impossible or unlawful. Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must compensate the promisee for any loss which such promisee sustains through the non-performance of the promise. The events of Force Majeure also come under the purview of Frustration of Contracts. However, Force Majeure being a contractual term, its implication will depend on the agreement between the parties.

CONSEQUENCES OF NON-PERFORMANCE /BREACH In case of a breach of a contract, the non-defaulting party who suffers by such breach is entitled to receive, from the defaulting party, compensation for any loss or damage caused to him 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. No compensation for remote and indirect loss of damage sustained by reason of the breach.

The compensation has to be at par with the financial injuries suffered by the non defaulting party due to the breach, so as to place the non defaulting party at the same position had there been no breach. The non defaulting party has obligation to mitigate the losses.

MITIGATION In estimating the loss or damage arising from a breach of contract, the means which existed for remedying the consequences caused by non-performance of the contract must be taken into account.

LIQUIDATED DAMAGES/PENALTY If a sum is stated in the contract as Liquidated Damages or penalty, the defaulting party will be liable to pay to the non-defaulting party reasonable compensation not exceeding the amount so stated, whether or not actual damage or loss is proved.

CONCLUSION Even though Law of Contracts in India is Common Law based, a substantial part of it is codified. There are also various associated legislations such as Sale of Goods, Guarantee and Agency etc. which need to be taken into consideration while formulating contracts. Areas like taxation, restrictive clauses, applicable law, jurisdiction etc. need special attention to avoid problems. ---------------------OO---------------------