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Contract formation

Good faith in negotiating

Is there an obligation to use good faith when negotiating a contract?

There is no statutory obligation under Indian laws to use good faith while negotiating a contract. As is the case under common law, Indian laws also do not impose a general obligation to use good faith when negotiating a contract.

‘Battle of the forms’ disputes

How are ‘battle of the forms’ disputes resolved in your jurisdiction?

The courts in India generally follow a variation of the common law based ‘mirror rule’ in resolving disputes relating to ‘battle of forms’ whereby the contract form that constitutes a complete and concluded contract prevails. While the key ingredients of a concluded contract are offer and acceptance of such offer, the principle of ‘mirror rule’ that requires an absolute and unqualified acceptance is not strictly applied by Indian courts. Contracts have been held to be enforceable and binding on the parties where the acceptance is qualified with minor or immaterial variance and where the offer is not materially affected.

Language requirements

Is there a legal requirement to draft the contract in the local language?

No. In India, contracts are generally drafted in English for practical convenience of the parties.

Online contracts

Is it possible to agree a B2B contract online?

Indian contract law does not specify a particular form of contract (except for contracts relating to immovable property, which have to be compulsorily recorded in writing and executed in a certain manner). The parties to the contract are free to decide on any form they deem fit. It is possible to agree to and execute a B2B contract online through a click-to-accept process or through other electronic means. However, all such online contracts have to meet the essentials of a valid contract set out under Indian contract law. This means that a B2B contract executed online will be valid and enforceable in a court of law so long as it is a lawful agreement between two or more parties who are competent to contract with a valid offer and an acceptance of such offer communicated electronically between such parties.

A practical challenge regarding the enforceability of online contracts is with respect to their stamping. In India, stamp duty is required to be paid on all agreements irrespective of the form of execution to make them admissible in evidence before Indian courts. If an online agreement is not stamped at the time of its execution, it is technically possible to complete the stamping formalities at a later date on payment of a statutory penalty on top of the applicable stamp duty.

 

Statutory controls and implied terms

Controls on freedom to agree terms

Are there any statutory or other controls on parties’ freedom to agree terms in contracts between commercial parties in your jurisdiction?

Yes, Indian contract law lays down specific criteria to be satisfied for a contract to be legally binding and enforceable in India. Subject to fulfilment of these criteria, parties have complete freedom to agree to such terms as they deem fit in their contracts. The essential elements of a valid contract are as follows:

  • Competent parties: Parties to the contract have to be competent, (ie, they should have attained the age of 18 years, should be of sound mind, and not be disqualified from contracting by applicable law).
  • Offer and acceptance: An offer must be made to create a legal contractual relationship and it signifies one’s willingness to do or to abstain from doing something. When the offer is unequivocally accepted by the other party, this acceptance creates a contract. Further, the intention of the parties must be to create a legally binding relationship.
  • Lawful object and consideration: The consideration and object of a contract must be lawful. For example, parties cannot contractually agree to do something that is forbidden by law or is intended to defeat the provisions of any law or is opposed to the public policy of India.
  • Free consent: Parties to the contract must have willingly executed the contract and the consent of either party should not be out of coercion, undue influence, fraud or misrepresentation.

Indian contract law also identifies the circumstances under which an agreement will be treated as a ‘void agreement’. A void agreement includes an agreement that restrains the parties to the agreement from initiating legal proceedings against each other or restricts either party from pursuing a lawful profession, business or trade.

Standard form contracts

Are standard form contracts treated differently?

There is no specific legislation regulating standard form contracts in India as they are also governed by the principles of Indian contract law.

The general view taken by the Indian courts is that standard form contracts cannot be avoided, unless the aggrieved party can establish that the contract vitiates the essential ingredients of a valid contract. In some cases, Indian courts have refused to enforce standard form contracts on the ground that such contracts are ‘unfair’ and ‘unreasonable’. This assumes significance in cases where the bargaining power of the contracting parties is not at the same level or if such a contract was found to be of unconscionable nature.

Implied terms

What terms are implied by law into the contract? Is it possible to exclude these in a commercial relationship?

Indian contract law does not explicitly specify the terms that would be implied in contracts. However, there are some implied terms that generally apply in all contracts, such as the duty not to prevent performance, the duty to co-operate, the duty to achieve specific results and the duty to put in best efforts. As regards supply of services, the service provider has an implied warranty to perform the services in a workmanlike manner and to exercise reasonable skill.

Some sector-specific laws governing transactions of a certain nature or relating to certain subject matter such as insurance, sale of goods, etc set out terms that are statutorily implied in a contract. For instance, the law governing sale of goods in India implies the following warranties in a contract of sale with regard to the quality of goods supplied under such contract:

  • where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required, a condition that the goods shall be reasonably fit for such purpose is implied in the contract;
  • where goods with a specific description are bought from a seller dealing in such goods (whether such seller is the manufacturer, producer or not), there is an implied condition that the goods shall be of merchantable quality. However, if the buyer has examined the goods prior to purchase, there shall be no implied condition as regards defects which such examination ought to have revealed; and
  • an implied warranty or condition as to quality or fitness for a particular purpose may be annexed as part of commercially accepted trade practice.

These warranties provided under statute cannot be contractually circumvented by parties in India. Indian courts generally follow the principle of ‘business efficacy’ before implying a general term into a contract, that too under exceptional circumstances where the contract will not be capable of performance without such an implied term.

Vienna Convention

Is your jurisdiction a signatory to the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention)?

No.

Good faith in entering and peforming

Is there an obligation to use good faith when entering and performing a contract?

In line with the common law practice, Indian laws do not impose an obligation on the parties to enter and perform a contract in good faith. The only exception to this principle is the case of an insurance contract that has been held to be a contract of utmost good faith and binds the parties to the contract to disclose all material information at the time of entering into such contract. In the event of either party to the contract failing to comply with the same, the contract of insurance can even be terminated.

Limiting liability

Prohibition on exclusions and limitations

What liabilities cannot be excluded or limited by a supplier in a contract?

A supplier in a contract cannot limit its liability towards defaults in the goods delivered where the buyer has already paid consideration towards delivery of such goods. Further, courts in India have struck down contractual exclusion and limitation of liability for death or personal injury resulting from a party’s negligence in specific instances depending on the facts of the case.

Financial caps

Are there any statutory controls on using financial caps to limit liability for breach of contract?

No. However, as mentioned in our response to question 10, financial caps to limit liability for death or personal injury resulting from a party’s negligence will not be permitted in specific instances.

Indemnities

Are there any statutory controls on indemnities used to cover liability risks in contracts?

The extent of liability under an indemnity clause depends on the nature and terms of the contract. While there are statutory protections and limitations present in the claim for unliquidated and liquidated damages, there is no such restriction on the quantum of loss that can be claimed under indemnity. Additionally, a party entitled to indemnity under a contract can claim the same from the indemnifying party even before the occurrence of actual damage or loss.

In the absence of statutory controls on indemnities, indemnity clauses in commercial contracts are extensively negotiated in India. While the indemnifying party tries to limit the scope to the maximum possible extent, the other party looks at broadening the scope for indemnity. Indemnity clauses may be drafted in such a manner to cover for liability for past as well as for future transactions by containing expressions such as ‘shall at all times indemnify and keep harmless from all and every loss and injury which has been incurred or shall or may at any time or times hereafter be incurred’.

Liquidated damages

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

Yes, liquidated damages clauses are commonly used and enforceable in India. Liquidated damages are recognised by Indian contract law and refer to a genuine pre-estimate of the loss or damage likely to be suffered on breach of contract by a party to the contract. Indian contract law, however, stipulates that in case of liquidated damages for claims of breach, the affected party is entitled to receive only reasonable compensation for its loss, which cannot be more than the amount so fixed in the contract.

Courts in India have often emphasised that liquidated damages in a contract should be a fair and bona fide estimate of the damages arising from the breach, and not a mere penalty for breach. In some cases, the actual liquidated damages awarded by the court may be less than the fixed amount agreed by the parties under the contract. Also, leading evidence for proving damages is not always required in such claims except where the courts conclude that no loss is likely to occur because of such breach or the happening of such an event.

Liquidated damages are generally set out in commercial contracts in India by way of a specific amount or mentioning the amount to be calculated based on a fixed rate or a specific method of calculation as may be mutually agreed between the parties to the contract. It may also be a lump-sum amount or an amount fixed with reference to a time period or different amounts for breach of different terms of a contract.

Payment terms

Statutory time limits on payments

Are there statutory time limits for paying invoices? Is it possible to agree a different payment period?

No, there is no statutory time limit for payment of invoices or the manner of payment and the same is as mutually agreed by the parties and set out in the contract.

Late payment interest

Is statutory interest charged on late payments? Is it possible to agree a different rate of interest?

Parties to a contract have the discretion to decide on the interest rate as there is no statutory interest rate specified under Indian contract law. However, there is a statutory limitation on the rate of interest payable in a civil litigation for non-payment of dues relating to commercial transactions. This is capped at the rate of interest agreed in a contract, and in the absence of the same the rate at which moneys are lent or advanced by scheduled commercial banks in India for commercial transactions. Further, the courts are also statutorily empowered to relieve a party to a contract from paying exorbitant interest where the courts are of the view that the rate of interest is excessive or the transaction is proven to be substantially unfair.

Civil penalties

What are the civil penalties for failing to comply with statutory interest rate or late payment of invoices?

As mentioned in our response to question 15, there is no statutory rate of interest for late payment of invoices under Indian contract law and therefore no civil penalties ensue.

Termination

Implied terms

Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?

Indian law regulating the sale of moveable property in India would be applicable to supply contracts. This law specifies that the breach of a condition fundamental to the object of the contract will entitle the aggrieved party to invalidate the contract. If a breach of warranty is considered to be collateral to the main purpose of the contract, such breach will only give rise to a claim for damages and not entitle the aggrieved party to terminate the contract on such grounds. This depends on the facts of each case.

There are no other special rules applicable to termination of a supply contract. The statutory rules of termination applicable to all contracts will also apply to supply contracts and these rules cannot be excluded or limited by the parties to the contract.

Notice period

If a contract does not include a notice period to terminate a contract, how is it calculated?

Indian contract law does not provide a mandatory notice period except in the case of agency or tenancy contracts. These contracts have to include a reasonable notice period to be served on the concerned party prior to termination of such contracts. Failure to serve such a reasonable notice period will entitle the aggrieved party to claim compensation.

There is no method of calculation of notice period stipulated under contract law in India for any contract. In such an event, either party will not be obligated to serve any notice period prior to terminating a contract.

Automatic termination on insolvency

Will a commercial contract terminate automatically on insolvency of the other party?

No, insolvency of the other party will not terminate a commercial contract automatically. While Indian contract law is silent on this aspect, the insolvency legislation prohibits termination of a contract during the pendency of insolvency proceedings in case of a corporate entity. Thereafter, upon final adjudication of a debtor as an insolvent, an insolvency official takes over the assets of the insolvent debtor, including all contracts entered into by it, and has the discretion to either terminate or continue the contract subject to the value of the assets of the insolvent debtor and the liquidation process.

Termination for financial distress

Are there restrictions on terminating a contract if the other party is in financial distress?

No, there is no restriction on terminating a contract if the other party is in financial distress, if such ground of termination has been expressly set out in the contract. Typically, commercial contracts in India provide for termination of contract not just for liquidation, but also potential liquidation or analogous arrangements which are invariably linked to financial distress.

Force majeure

Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?

Yes, a force majeure event is recognised in India. A force majeure event may result in:

  • suspension of obligations;
  • discharge of obligations;
  • extension of term; and
  • termination on extended force majeure.

In order to enforce a force majeure clause, the party who claims discharge under such clause must show that such circumstances have arisen that make it impossible for such party to perform the contract.

Subcontracting, assignment and third-party rights

Subcontracting without consent

May a supplier subcontract its obligations under the contract without seeking consent from the other party?

A supplier can subcontract its obligations under the contract without seeking consent from the other party only if such subcontracting is expressly permitted under the contract.

In cases where the contract is silent on the subcontracting aspect, intention of the parties as regards assignment of obligations must be ascertained by analysing the nature of the contract and the facts and circumstances surrounding the same. If the contract is personal in nature (ie, where a party has agreed to contract with another party based on its personal credentials such as brand name, reputation, qualification, skill, experience and so on) there can be no intention to permit subcontracting of obligations.

 

Statutory rules

Are there any statutory rules that apply to subcontracting in your jurisdiction?

No.

Assignment of rights and obligations

May a party assign its rights and obligations under the contract without seeking the other party’s consent?

A party may assign its rights and obligations under the contract without seeking the other party’s consent if such assignment is expressly permitted under the contract. If a contract is silent about assignment of rights and obligations, then the intention of the parties will be considered in respect of contracts that are of a non-personal nature.

What statutory controls apply to the assignment of rights or obligations under a supply contract?

If assignment of rights under a supply contract relates to rights over unsecured debts such as receivables of the supplier not secured by any collateral, such assignment is statutorily required to be made through a written instrument executed by the assignee.

Enforcement by third party

How may a third party enforce a term of the contract?

In general the ‘doctrine of privity’ is followed in India and only parties to the contract have the right to enforce a term of the contract. The only exception to the ‘doctrine of privity’ is a third party for whose benefit a contract has been executed such as beneficiary of a trust, family arrangements and marriage settlements, torts, collateral contracts, etc. While the term ‘beneficiary’ is not explicitly defined under the relevant statute, Indian courts have held that any person drawing a benefit out of the contract or who is affected by a breach by any party to the contract or for whose benefit the parties have entered into such a contract may be considered to be a ‘beneficiary’. Such permitted third party can enforce a term of the contract by instituting a suit for enforcement either in the name of the contracting party through whom the third party derives its benefit under the contract or where such contracting party refuses to partake in the proceeding, by joining such party to the suit as a co-defendant.

Disputes

Limitation periods

What are the limitation periods for breach of contract claims? Is it possible to agree a shorter limitation period?

The limitation period for breach of contract claims in India is three years. The commencement of such limitation period depends on the nature of the contract, number of the breaches and so on. Accordingly, the limitation period for breach of contract will start from the time of occurrence of a single breach. In case of successive breaches, the limitation period will start from the time of occurrence of the relevant breach and where the breach is continuing, the limitation period will start from the time of cessation of such breach.

Given this statutory period of limitation, a shorter limitation period mutually agreed by the parties to a contract will not be enforceable.

Choice-of-law clauses

Do your courts recognise and respect choice-of-law clauses stipulating a foreign law?

Yes, courts in India recognise and respect international commercial contracts governed by foreign law, subject to such choice of law meeting the following criteria identified by Indian courts:

  • the choice of foreign law must be bona fide and legal;
  • the law chosen must have some connection with the transaction, other than the mere fact that it is selected as the governing law; and
  • the law chosen must not be offensive to the public policy of India or the jurisdiction where it is sought to be enforced.

There is lack of clarity on whether Indian parties in a domestic contract can opt for foreign governing law, with different courts in the country taking differing views based on the facts and circumstances of the matter. However, the Delhi High Court confirmed in a judgment last year that two Indian parties can choose a foreign seat (and thereby a foreign governing law) for arbitration. Given the conflicting judicial precedents on this issue, one hopes that the Supreme Court of India will have the opportunity to rule on this issue in the near future.

Do your courts recognise and respect choice-of-jurisdiction clauses stipulating a foreign jurisdiction?

Yes, Indian courts recognise and respect international contracts stipulating a foreign jurisdiction. Courts in India also recognise ‘splitting of the contract’ where the parties to a contract choose to apply law of a particular jurisdiction as the governing law for the transaction and a different governing law and jurisdiction for dispute resolution. However, in case of domestic contracts involving only Indian parties, there is ambiguity on validity of choice-of-jurisdiction clauses stipulating a foreign jurisdiction, as judicial trends so far are not conclusive and in some cases even contradictory.

It is pertinent to note that while Indian courts recognise and respect foreign jurisdiction in an international contract, recognition and enforcement of judgments passed by superior courts of ‘reciprocating territories’ of India is only permitted under Indian laws. Thus, a judgment pronounced by a court in any jurisdiction that is not a reciprocating territory will not be recognised and enforced by the Indian courts.

The concept of ‘reciprocating territories’ is not applicable to international arbitration. As India is a signatory to the New York Convention, arbitral awards of most jurisdictions are therefore enforceable in India, as if they were passed by an Indian court. This is subject to the foreign award meeting the guidelines set out by the law governing arbitration in India, such as the foreign award not offending the public policy of India or suffering from jurisdictional defects.

Efficiency of local legal system

How efficient and cost-effective is the local legal system in dealing with commercial disputes?

The Indian judicial system struggles with corruption issues, a huge backlog of pending cases, improper infrastructure and an inadequate number of judges. Therefore, resolving commercial disputes through the local legal system is not only time consuming, but also an expensive affair.

New York Convention

Is your jurisdiction a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Which arbitration rules are commonly used in your jurisdiction?

Yes, India is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

In case of domestic contracts, resolution of any dispute between parties is generally sought to be achieved through ad hoc arbitration conducted in accordance with the provisions of the Indian arbitration law. However, in case of international commercial transactions, parties generally prefer institutional arbitration under the rules formed by internationally recognised fora such as the ICC, LCIA and SIAC.

Remedies

Available remedies

What remedies may a court or other adjudicator grant? Are punitive damages awarded for a breach of contract claim in your jurisdiction?

Some of the common remedies that may be granted by a court or an adjudicator in India are:

  • specific reliefs for enforcing individual civil rights or for recovery of immovable or movable property;
  • specific performance at the discretion of the courts in cases where there is no standard for ascertaining the actual damage caused by non-performance of the contract or when monetary compensation would not be an adequate relief for non-performance;
  • award of damages for any loss or damage that arises in the usual course of things. Where the contract specifies the amount of liquidated damages, such amount will be deemed to be the damages payable in case of a breach of contract, unless it is proved otherwise. It is important to note that no damages are awarded for any remote or indirect loss;
  • grant of injunction (temporary or permanent); and
  • cancellation, rescission or rectification of contract.

Award of punitive damages for a breach of contract claim is not very common in India. The general rule followed in India for grant of damages is that it is primarily meant to be compensatory and not retributive. The function of damages for breach of contract under Indian contract law is to put the party whose right has been violated in the same position as such party would have been in if such right had not been breached. However, there has been a gradual shift in recent years by Indian courts to award punitive damages, especially in intellectual property matters.

Update and trends

Update and trends

Are there any other current developments or emerging trends that should be noted?

In March 2018, the lower house of the Indian parliament (Lok Sabha) passed the Specific Relief (Amendment) Bill 2017 (the Bill) to amend the Specific Relief Act 1963. The Bill seeks to make specific performance available as a general rule, and also introduces the concept of substituted performance where the party suffering a breach is entitled to get the contract performed by a third party and recover the expenses, including compensation from the breaching party. The Bill also proposes measures to prevent unnecessary delays in disputes involving infrastructure projects. The Bill awaits the approval of the upper house of parliament (Rajya Sabha) following which it will require the President’s assent.