India has a codified contract law, which is principally dealt with in the Indian Contract Act, 1872.(ICA). ICA majorly 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.ICA also deals with certain special contracts such as guarantee, indemnity, bailment, pledge and agency. There are separate enactments relating to:
- Sale of Goods Act
- Partnerships Act
- Negotiable Instruments Act
The basic principles of the ICA are applicable to all such contracts under these and other statutes, unless modified specifically by the relevent statute.
Common Law
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. If ICA is silent on a particular issue, Common Law principles can be used. However, Common Law cannot be used to enlarge or limit the ICA provisions, unless a provision cannot be understood without the aid of Common law.
Freedom to Contract
The ICA 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.
A Contract should emanate from ‘free will’ and the parties should be “consensus ad idem” or there should be 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.
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 enactment 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 favoritism.
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, for which the following aspects will be considered:
- The place where the contract was made;
- The form and object of the contract;
- The place of performance;
- The place of residence or business of the parties;
- Reference to the Courts having jurisdiction;
- Such other links are examined by the Courts to determine the system of law;
- The law governing arbitration proceedings; and
- The law of the country in which the arbitration is held.
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 from inception. Broadly, and subject to certain exceptions, an agreement is void:
- Where both parties are under a mistake as to matter of fact.
- An agreement without consideration is void. Mere inadequacy of the consideration will not make an agreement void if free consent was given.
- An agreement in restraint of lawful trade, business, profession etc.
An agreement by way of wager. - An agreement, which restricts a party absolutely from enforcing its rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals.
- An agreement, which limits the time, prescribed by law for enforcement of a cause of action.
- Agreement is uncertain and ambiguous.
- Agreement is forbidden by law or if permitted would defeat the provisions of any law.
- An agreement which is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.
- When consideration or objects of an agreement are unlawful in part.
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 thereunder 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. If time was not of essence of the contract at the time of executing it, a party may, through a notice, make time to be of essence by giving the other party reasonable time to perform. If the intention of the parties was, that time should be of essence of the contract then failure to perform at or before a specified time, the contract or so much of it as has not been performed, becomes voidable at the option of the promisee.
If, in case of a contract voidable on account of the promisor's failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of acceptance, he gives notice to the promisor of his intention to do so.
If it was not the intention of the parties that time should be of essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure.
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. 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.
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
While entering into contracts in India or to which Indian law is applicable, especially contracts relating to activities to be carried out in India, areas like taxation, restrictive clauses, applicable law, jurisdiction etc. need special attention to avoid any subsequent problems and unforseen liabilities.
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