Naresh Kumar*, FCS, Advocate Business Laws, New Delhi.

e-mail :
nareshadvocate08@yahoo.com

The law of contract is the basic business law, which governs trade and commerce all
over the world. The law provides parties freedom to contract, but this freedom has
to be exercised within the legal and regulatory framework of the subject matter of
contract and other applicable laws. In this context, this article discusses the important
legal aspects of contract management.

INTRODUCTION
Modern society rests on the foundation of right to property
and freedom to contract. The right to property and freedom
of contract are the fundamental of modern society. The
market economy functions with efficient functioning of
contractual relations by relative assessment of rights and duties
arising out of contract. In fact, law of contract is the basic
business law, which governs trade and commerce all over
the world. The law provides parties freedom to contract as
well as the restraints within which this freedom has to be
exercised within the legal and regulatory framework of the
subject matter of contract. In this context, an attempt is made
to discuss the legal and regulatory aspects of contract
management.

LEGAL AND REGULATORY FRAMEWORK

Indian Contract Act
The Indian Contract Act, 1872, (Act) defines and consolidates
the law relating to contracts. The Act contains X chapters and
238 sections. Sections 1 and 2 deal with short title, extent,
commencement, saving and interpretation of contract. Sections
3 to 9 deal with communication, acceptance and revocation of
proposals. Sections 10 to 30 deal with voidable contracts and
void agreements. Sections 31 to 36 deal with contingent
contracts. Sections 37 to 67 deal with performance of contracts.
Sections 68 to 75 deal with certain relations resembling those
*Visiting Professor, IIFT, New Delhi.

created by contract. Sections 73 to 75 deal with the

consequences of breach of contract. Sections 124 to 147 deal
with indemnity and guarantee. Sections 148 to 181 deal with
bailment. Sections 182 to 238 deal with appointment and
authority of agent. Sections 76 to 123 were repealed on
enactment of the Sale of Goods Act, 1930, and, sections 239
to 266 were repealed on enactment of the Partnership Act,
1932.

Agreement and contract

In an agreement there must be at least two parties. One who
makes a proposal is called promisor, whereas who accepts
the proposal is called promisee. A proposal is to do or
abstain from doing any things, with a view to obtain the asset
of the other to such act. When at the desire of the promisor,
the promisee or any other person does or abstain from doing,
such an act or abstinence or promise is called a consideration
for the promise. In other words, when the person to whom the
proposal is made signifies his assent thereto, the proposal is
accepted. Section 2(e) defines an agreement as every
promise and every set of promises forming consideration for
each other.
According to section 2(j) contract is an agreement,
enforceable by law. Simply stated, a contract is an agreement,
enforceable by law, made between at least two parties by which
rights are acquired by one and obligations are created on the
part of another. An agreement is essentially a contract, though
all agreements are not contract. As such, parties entering into

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an agreement must ensure that it is enforceable by law to

become a contract.

Lawful objects and consideration

Sections 23 to 30 of the Act state what consideration and objects
are lawful and what not. The consideration or object of an
agreement is lawful, unless it is forbidden by law; or its nature
defeats the provisions of any law; or is fraudulent; or involves
or implies injury to the person or property of another; or is
regarded as immoral, or opposed to public policy by the Court.
Simply stated, every agreement of which the object or
consideration is unlawful or conflicts with morals of the time
and contravenes any established interest of society is void as
being against public policy.
The expressions public policy and opposed to public policy
are not defined in the Act. The Supreme Court of India in
ONGC Ltd. v. Saw Pipes Limited [2003(5) SCC 705] held,
inter-alia, that the doctrine of public policy has to be
construed according to the norms of the private international
law. The concept of what is for the public good or in public
interest or what would be injurious or harmful to the public
good or the public interest, however, varies from country to
country and from time to time. As such, in a wider perspective
public policy under the Act concerns the public good or
public interest in India where the foreign award or decree
would be enforced and not the country where the award was
rendered. Enforcement of a foreign award or decree would,
therefore, be contrary to public policy in India, if it is
contrary to fundamental policy of the Indian law or the
interests of India.
For example, the main objects of the Competition Act, 2002,
are to prevent practices having adverse effect on competition
and to promote and sustain competition in the markets, to
protect the interests of consumers and to ensure freedom of
trade carried on by other participants in markets in India. It
is, therefore, very important to ensure that clauses avoid anticompetitive, restrictive and monopolistic trade practices
relating to (i) price fixation; (ii) limits or controls in
production, supply, markets, technical development,
investment or provision of services; and (iii) sharing the
markets or sources of production or provision of services.
Such clauses include tie-in, exclusive sale/territorial sale,
exclusive distribution, refusal to deal, resale price
maintenance.

Effect of failure to perform when time is of essence

There is a tendency to include time is of essence clause in
procurement and construction agreements. The clause cannot

be interpreted mechanically without ascertaining the intention

of the parties entering into the contract. It is a question of fact
in each case whether time was the essence of the contract. The
burden of proof is on the party, who alleges that time is of
essence, to show the terms of the contract, the nature of the
obligation and other circumstances to establish the allegations.
For example, such a clause becomes inoperative when the delay
is attributable on the part of the claimant himself.
Section 55 of the Act gives to the promisee an option to avoid
the contract where the promisor fails to perform the contract
at the time fixed in the contract. However, 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.
It is also open to the promisee not to exercise the option or to
exercise the option at any time after the fixed date. The
promisee may, by not exercising the option, change or alter
the date of performance, fixed under the contract itself. The
promisee may impose certain concessions upon the promisor.
For example, if a contractor seeks extension of time for
completion of works contract, it is the right of employer to
grant extension subject to early completing some other awarded
work. Extension of time for completion of the contract is
subject to mutual agreement and cannot be unilateral. The
effect of extension of time is to substitute the original time
schedule, by new time schedule as stipulated under the
provisions of section 62 of the Contract Act.
Following principles emerge from the above discussion:
(i) failure to perform by the promisor at the fixed time
(when time is of essence) renders the delayed part of
contract voidable at the option of the promisee;
(ii) failure to perform by the promisor (when time is not
essence) does not render the contract voidable, but entitles
the promisee to compensation for any loss caused due to
such failure; and
(iii) failure to perform by the promisor (when time is not
essence) does not entitle the promisee to compensation,
if the promissee accepts the delayed performance, without
giving notice to the promisor of his intention to claim
compensation.
The Supreme Court in Pillai v. Palaniswami Nadar (AIR 1967
SC 863) ruled that only inclusion of the phrase time is of
essence does not attract section 55. Other conditions such as
provision for extension of time dilute the applicability of this
section. Therefore, in no way the contract could have become

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voidable due to delay in performance, entitling the Respondent

to terminate it and then not pay for part of the work already
executed. Further, in a contract for sale of land or immovable
property, it would normally be presumed that time was not
the essence of the contract.

will not, in the absence of the clearest possible language,

deprive the contractor of his right to claim damages for the
breach.

Award of damage

The Supreme Court in Hind Construction Contractors v. The

State of Maharashtra (1979 AIR 720) ruled that in considering
the question whether time is the essence of the contract the
term would have to be read along with other provisions of the
contract and such other provisions may, on a construction of
the contract, exclude the claim that time was of the essence of
the contract. The Apex Court added that a clause providing
for extension of time in certain contingencies or for payment
of fine or penalty for work remaining unfinished on the expiry
of the time provided for completion of the work would be
construed as rendering ineffective the express provision relating
to the time being of the essence of contract. The contract
contained clauses provided for compensation for delayed work
and also for extension of time. On this ground, the Supreme
Court ruled that it was not the intention of the parties that
time was of the essence of the contract.

Damage means any loss or injury resulting from an unlawful

fact, injury or negligence to a person or his property due to
breach of contract. Sections 73 to 75 of the Contract Act
provide legal remedy for the injured and loss suffered due to
non-performance of the contract.

The Supreme Court in Arosan Enterprises Ltd. v. Union of

India (1999 SCC 449; AIR 1999 SC 3804) ruled that extension
of time has to be granted in clear terms. A promise could not
take the plea that extension of time in explicit terms could not
be granted when the work was allowed to continue and the
running bills were paid from time to time.

Section 73 also provides for compensation for failure to

discharge obligation resembling those created by contract.

The Rajasthan High Court [1999 (3) RAJ 297] ruled that where
time was of the essence, there would be no presumption of
extension of time or presumed extension of a renewed date.
Any extension of time, if any, has to be in clear and categorical
terms.
Delhi High Court in Metro Electric Co. v. Delhi Development
Authority [AIR 1980 Del 266 (DB)] ruled that where the
employer caused breach of contract; he had the power to extend
the time; in exercise of his power he would not deprive the
contractor his right to damages for the breach.
Delhi High Court in N.D.R Israni v. DDA [1989(2) Arb LR
349 Delhi] held that there can be no substance in the argument
that the act of granting extension of time eliminates any right
claim of damages due to prolongation of work, as the
organization granting extension cannot be a judge of its own
cause.
Karnataka High Court in State of Karnatka v. R. N. Shetty &
Co. [AIR 1991(1) DB] ruled that where the cause of delay is
due to breach of contract by the employer, and there is also an
applicable power to extend the time, the exercise of that power

Un-liquidated Damages
Section 73 deals with the compensation for loss or damage
caused by breach of contract. The section provides that in
case of breach of contract, the aggrieved party is entitled to
receive from the defaulter, compensation for any loss or
damage caused to it, which arose in the usual course of things
from such breach, or known to the parties to likely result
from such breach, when contract was made. However, such
compensation is not given for any remote and indirect loss or
damage sustained by reason of the breach.

The explanation to section 73 provides that in estimating the

loss or damage arising from a breach of contract, the means
which existed of remedying the inconvenience caused by nonperformance of the contract must be taken into account. Simply
stated, a party who relies on a breach of contract must take
such measures as are reasonable in the circumstances to mitigate
the loss, including loss of profit, resulting from the breach. If
he fails to take such measures, the party in breach may claim
a reduction in the damages in the amount by which the loss
should have been mitigated.

Liquidated damages
Liquidated damages are the agreed quantum or method of
calculation of damages in the event of breach of contract by
any party. Section 74 deals with compensation for breach of
contract where penalty stipulated for it provides for liquidated
damages - when a contract has been broken, if a sum is named
in the contract as the amount to be paid in case of such breach,
the party complaining of breach is entitled, whether or not the
actual loss is proved, to receive from the party who has broken
the contract a reasonable compensation not exceeding the
amount so named.
The words whether or not actual damage/loss is proved to
have been caused thereby are interpreted in the light of facts

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and circumstances of a case. Further, such damages cannot

exceed the loss which the party in breach foresaw or ought to
have foreseen at the time of conclusion of contract.

Party rightfully rescinding contract is entitled to

damages
Section 75 provides that a party, who rightfully rescinds a
contract, is entitled to compensation for any damage sustained
by it through the non-fulfillment of the contract. It is, however,
the duty of the aggrieved party to take reasonable steps to
minimize his losses.
The following judicial interpretations have laid down the
principles governing award of damages:
(i) The jurisdiction of the Court to award compensation
under section 73 in case of breach of contract is
unqualified except as to the maximum stipulated.
Section73 is to be read with section 74. Section 74
emphasizes that in case of breach of contract, the party
complaining of the breach is entitled to receive
reasonable compensation whether or not the actual loss
is proved. Therefore, the emphasis is on reasonable
compensation. If the compensation specified in the
contract is by way of penalty, consideration would be
different and the party is entitled only to a reasonable
compensation for the loss suffered. However, if the
compensation specified in the contract for such breach
is genuine pre-estimate of loss which the parties knew
when they made the contract to be likely to result from
the breach of it, there is no question of proving such
losses suffered by him. The burden is on the other party
to lead evidence for proving that no loss is likely to
occur by such breach - Fateh Chand v. Balkishan Das
(AIR 1963 SC 1405).
(ii) It is the duty of the aggrieved party to take reasonable
steps to minimize his losses. The aggrieved party cannot
be compensated by the party in default for losses, which
are not really due to the breach of contract, but due to
his own negligence [British Westinghouse & C. v.
Underground Electric Co. (1915 AC 673)].
(iii) Damages are to be awarded as compensation for
any loss or damage arising naturally in the usual
course of things from the breach of contract Karsandas H. Thacker v. Saran Engg. Co. Ltd. (AIR
1965 SC 1981).
(iv) If no loss is proved, both sections 73 and 74 are not
attracted. The words whether or not actual damage/
loss is proved to have been caused thereby used in

section 74 of the Contract Act, are confined to cases in

which it is not possible to prove the monetary value of
the loss and therefore reasonable compensation even as
fixed by the parties may be allowed. Where the loss in
money can be determined, it must be proved - Maula
Bux v. Union of India [1971 (1) SCR 928].
(v) The Supreme Court in Para 69 of ONGC v. SAW Pipes
Limited (AIR 2003 SC 2629), after considering the
judgment of Maula Bux (1970) and Fateh Chand v.
Balkishan Das 1964 (1) SCR 515 laid down the
following propositions of law with regard to liquidated
damages:
Terms of contract are required to be taken into
consideration before arriving at the conclusion
whether the party claiming damages is entitled to
the same;
If the terms are clear and unambiguous stipulating
liquidated damages in case of the breach of the
contract unless it is held that such estimate of
damages/compensation is unreasonable or by way
of penalty, the party who has committed the breach
is required to pay such compensation under section
73 of the Indian Contract Act;
Section 74 is to be read along with 73 and, therefore,
in every case of breach of contract, the person
aggrieved by the breach is not required to prove
actual loss or damage suffered by him before he
can claim a decree. The court is competent to award
reasonable compensation in case of breach even if
no actual damage is proved to have been suffered
in consequences of the breach of a contract.
In some contracts, if would be impossible for the
Court to assess the compensation arising from
breach and if the liquidated damages or
compensation contemplated is not by way of penalty
or unreasonable, the court can award the same if it
is a genuine pre-estimate by the parties as the
measure of reasonable compensation.

Contract of Guarantee
As per section 126 of the Contract Act, a contract of guarantee
is a contract to perform the promise, or discharge the liability,
of a third person in case of his default. The person who gives
the guarantee is called the surety, the person in respect of
whose default the guarantee is given is called the principal
debtor and the person to whom the guarantee is given called
the creditor. The important rider under section 133 of the

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Contract Act, which states that any variance made without

the suretys consent, in the terms of the contract between the
principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance. Further, as per section
134 of the Contract Act, surety is discharged by any contract
between the creditor and the principal debtor, by which the
principal debtor is released, or by any act or omission of the
creditor, the legal consequence of which is the discharge of
the principal debtor. However, section 135 of the Contract
Act provides that the surety is discharged when the creditor
compounds with, gives time to, or agrees not to sue the
principal debtor.
A creditor is entitled to demand payment from the surety as
soon as the principal debtor refuses to pay or makes default in
payment. The liability of the surety cannot be postponed till
all other remedies against the principal debtor have been
exhausted. In other words, the creditor cannot be asked to
exhaust all other remedies against principal debtor before
proceeding against surety. The creditor can file suit against
the surety without suing the principal debtor.
The Supreme Court in Syndicate Bank v. Vijay Kumar (AIR
1992 SC 1066) ruled that bank guarantee is an autonomous
contract. It is in common parlance that the issuance of guarantee
is what a guarantor creates to discharge liability when the
principal debtor fails in his duty and guarantee is in the nature
of collateral agreement to answer for the debt.
Government agencies as beneficiaries of bank guarantees often
exploit the position. Courts generally refuse to grant an
injunction restraining a bank from paying under the guarantee
in cases of dispute between the parties about performance of
contract. The reason is that the courts need not interfere in the
normal course of trade and commerce. The only exceptions
are where the beneficiary of the bank guarantee obtained it
from the bank through fraud and the bank had notice of the
fraud or that some special equities require that payment under
the bank guarantee is restrained.
Bank Guarantee Clause is a potential area of disputes. It is
advisable that contractor should carefully scrutinize the clause
and format of the bank guarantee before signing the contract
and giving bank guarantee. He should ensure that the terms of
the Bank Guarantee are reasonable, proportionate to the amount
involved and his interests are protected. The format of bank
guarantee should not confer discretionary powers to the
employer to encase the bank guarantee.

Resolution of commercial disputes by arbitration

Section 28 of the Act provides that an agreement in restraint

of legal proceedings to enforce legal rights of any party under

a contract is void to that extent. The only exception to section
28 is the saving of contracts by referring to arbitration
disputes which may arise or have already arisen between the
parties.
In India, the Arbitration and Conciliation Act, 1996, governs
the law and procedure for adjudicating commercial disputes.
Arbitration is economical, efficient, speedy and flexible
method of adjudicating disputes on merit. In fact, arbitration
is the creation of business community itself. The basic
principles of arbitration are almost universally acceptable for
the simple reason that the world over practice of business is
much the same.
In recent times, arbitration has emerged as the most preferred
mode of dispute resolution in trade, commerce and business.
The obvious advantages of arbitration are party autonomy,
procedural flexibility, speed, economy, simplicity,
confidentiality, neutrality and impartiality of empire. All
national and international disputes, which are of civil nature,
can be referred to arbitration. The parties have freedom to
choose the arbitral tribunal, governing law and procedure.
The arbitrator is like a judge who allows parties to present
their case and decides their rights and liabilities.
It is advisable that the parties should specifically provide in
the arbitration clause the name of institutional arbitrator,
language of communication, applicable law, and venue and
time schedule for final award. A schedule should set out the
time frame for filing documents, examination of witnesses, if
required, arguments and other activities as agreed upon between
the parties.

FORCE MAJEURE
A force majeure clause is of critical importance in contracts to
protect the parties against breach of contract due to reasons
beyond their control.
Force majeure means acts of God like earthquake, flood,
tsunami etc., which are beyond the reasonable control of
human beings. These unforeseen events of superior force render
performance of contracts by parties impossible. For example,
the recent events in Japan, including tsunami and nuclear leaks,
reinforces that force majeure could cover multiple events as
one event may lead to another related events. As such the
Japanese manufacturers have declared force majeure in order
to postpone deliveries and performance of contracts.
Experience proves that the force majeure clause in a contract
should be drafted comprehensively to cover multiple events,
time and place. The clause should be tightened to absolve

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parties from performance of their contractual obligations

after a definite period of time, if the force majeure event
continues at the place of manufacture or delivery. This allows
the customer as well as supplier to exit the contract and have
the option to search for alternative suppliers from other
locations.
The enforcement of a force majeure clause is determined by
the precise drafting of the contract as several common themes
run through a majority of clauses (a) force majeure event,
(b) nexus with force majeure; (c) cause and effect; and (d)
notice period.
There is a difference between force majeure and fortuitous
event. The former is the act of God while the latter connotes
happening by chance like riot and fire. A force majeure clause
is viewed as fair because it covers not only an act of God
but also which could not be contemplated by the contracting
parties.
On the other hand, commercial impossibility or more difficulty
in performance of a contract does not discharge the contract.
For example, events like strike in the factory, breakdown of
machinery, payment of higher price for raw material or
incurring loss due to fluctuations during the normal course of
business or civil disturbances cannot be covered under force
majeure because these are part of business risks.

CONSTITUTION OF INDIA
In addition to the Contract Act, Article 299 of the
Constitution of India also deals with contracts to be entered
by the Union or the State. Article 299 provides that all
contracts to be made in exercise of the executive power of
the Union or a state shall be executed by the President, or by
the Governor of the state, as the case may be, or on their
behalf in the prescribed manner. However, the President,
Governor or the authorized person shall not be personally
liable in respect of the contract made and executed by him.
The rationale behind Article 299 is to ensure that a prescribed
procedure must be followed for executing contract by the
agents of the Union and State, in order to bind the Union
and the State. A contract made in contravention of Article
299 is absolutely void [State of W.B. v. B.K. Mondal 1963
SC 779; New Marine Coal Co. v. Union of India 1964 SC
152; State of UP v. Murari (1971) 2 SCC 449; Chaturbhuj
v. Moreswar (1954) SCR 817 (835)] and cannot be ratified
by the Government [Bihar Co-op Soc. v. Sipahi 1977 SC
2149; Mulamchand v. State of MP 1968 SC 1218; State of
MPO v. Ratnlal 1956 SC; Hansraj v. Union of India 1974
SC 2724; State of Punjab v. Om Prakash 1988 SC 2149].
Subject to these provisions, other provisions of the law of

contract are applicable to Government contracts - [Union of

India v. Syndicate (1976) SC 879].
A contract can be by tender and its acceptance may be valid,
if accepted by a duly authorized person on behalf of the Present
[Union of India v. Raillia Ram A (1963 SC 1685) and State
of Rajasthan v. Bootamal (1989 SC 1811)].
Without compliance of the requirements of Article 299, the
contract is not binding on or enforceable by or against the
Government [Bhikraj v. Union of India (1962) SC 113; K.P.
Chowdhury v. State of MP 1967 SC 203] though a suit may
lie against the officer who made the contract in his person
capacity (if contract is otherwise valid) Timber Kashmir v.
Conservator 1977 SC 151.

PROPER LAW OF CONTRACT

Proper law of the contract means the legal system which
will govern the contract or a particular aspect of it. In this
context, the important question for consideration is - what
law will govern the rights and obligations under the parties Indian law, English law or any other law?
The most important aspect of contract management is to choose
the governing law. It is the choice of governing law, which
will provide the basic framework for all business transactions,
validity of contract, applicability of the law, resolution of
disputes and jurisdiction of court for settlement of disputes
and enforcement of decree.
According to Dicey and Morris (10th Ed. P.747): The proper
law of contract means the system of law by which the parties
intended the contract to be governed, or, where their intention
is neither expressed nor to be inferred from the circumstances,
the system of law with which the transaction has its closest
and most real connection. Lord Denning, however, expressed
the opinion that the proper law of the contract depends not
so much on the place where it is made, nor even on the
intention of the parties or on the place where it is to be
performed, but the place with which it has the most substantial
connection [Boissevain v. Weil (1949) All ER 146]. Obviously,
`proper law of contract is the law or relevant legal rules
governing the substantive subjects in a contract. The expression
refers to the legal system by which the parties intended their
contract to be governed.
In a joint venture infrastructural contract, a single law cannot
govern the entire contract. For example, in case of a
comprehensive Design, Engineering, Procurement, Erection
and Commissioning Contract (DEPEC), a consortium of
business entities from different countries enter into subcontracts for the different segments of DEPEC. Here a single

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law cannot govern the entire contract. Moreover, the same

law cannot apply at all stages of DEPEC. Further, the applicable
laws may change with the nature and stage of business
transactions and stages of execution and implementation of
contract. In such a situation, contracting parties have to comply
with a variety of laws, regulations and rules.
In a DEPEC, practical difficulties also arise since the parties
have a freedom to choose the substantive law governing the
contract, but not the procedural law, which is inevitably Lax
Fori. Lax Fori is the law of the forum where the case is to be
decided. However, in case of a DEPEC, which is to be executed
in a third country by parties of different nationalities with
different legal systems, more than one set of laws may also
apply to the contract.
In determination of relevant applicable law, what matters is
the intention of the parties. If their intention is expressly stated
in the contract, such intention determines the proper law of
the contract. In the absence of an express statement about the
governing law, inferred intention of the parties determines
that law. The intention is imputed by applying the objective
test to determine what the parties would have in mind as just
and reasonable persons intended as regards applicable law,
had they applied their minds to the question. The intention of
the parties is determined by asking how a just and reasonable
person would have regarded the problem. The proper law is
determined in such circumstances by putting itself in place of a
reasonable man. The relevant factors for this purpose are
residence of the parties, place where the contract was made;
object of the contract; form of contract, the place of
performance of contract and legal system with which the
transaction has its closest and most real nexus.
The United Nations Commission on International Trade Law
(UNCITRAL) Rules for International Commercial Arbitration
provide for the determination of contract in accordance with:
The law chosen by the parties (the substantive law of
the country and not the rules of private international
law);
In case the parties fail to make a choice of law, the
applicable law shall be the one determined by the rules
of private international law, which the tribunal thinks
appropriate.
The Supreme Court of India in Infoware v. Equinox Corp
(2009 2 Raj.) 617 (SC) clarified the concept of Lex Fori.
Infoware, an Indian company, was carrying on business in
USA as well as in India through its subsidiary. Equinox, an
American company, was carrying on outsourcing business in
India through its subsidiary Equinox Global Service Ltd.

Infoware and Equinox entered into the Outsourcing

Agreement in Kolkata.
The arbitration clause in the Outsourcing Agreement stated
that this agreement shall be governed by and interpreted in
accordance with, the law of California USA, and matters of
dispute, if any relating to the agreement or its subject matter
shall be referred to arbitration by a mutually agreed arbitrator.
Dispute arose between the parties. Infoware invoked the
aforesaid arbitration clause by serving two notices to informing
Equinox, proposing name of an arbitrator and requested
Equinox to agree to the appointment. Equinox did not reply
within the 30 days period as stipulated in Section 11(5) of Act
the Indian Arbitration and Conciliation Act, 1996.
Consequently, Infoware made an application to the Chief
Justice of the Supreme Court for appointment of Arbitrator in
accordance of Section 11(5). Equinox disputed the jurisdiction
of Supreme Court on the ground that the agreement was
governed by the laws of California, USA, and not by the Indian
Law.
The issue for consideration was whether the arbitration clause
would apply also to the procedure of appointment of an
arbitrator in case of the failure of parties to mutually agree on
a person to act as Arbitrator.
The Apex Court ruled that if this provision were applied
then the reference to Californian law could apply only to the
substantive, as different from the procedural law; and the
application of the Indian law to the procedure of appointment
of an Arbitrator in case of failure of parties to agree on any
person to act as Arbitrator would be absolutely within law as
laid down in sub-clause of Clause ii (b) of Section 28(1) of
the Act, which is similar to Article 28 (1) of the UNCITRAL
Model Law of Arbitration.
In the present case the application of Indian law is justified on
the ground that India had the maximum connection with the
dispute. For example, the applicant was an Indian company,
the establishment set up by the respondent was also an Indian
company, the agreement was executed in India and the services
were also being rendered and performed in India. Hence the
law of the place of arbitration (Lex Fori) would be applicable
in spite of the specific mention of the law of California USA,
being applicable law in the agreement.
In case of Saudi Arabia v. Arabian Oil Co. (27ILR 168 (1963),
it was held by an International Arbitration Tribunal that laws
of Saudi Arabia had to be supplemented or construed by the
general principles of law, practice and customs and usage in
the oil business in Saudi Arabia.
The Supreme Court in Hindustan Zinc Ltd. v. Friends Coal

Contract Management Legal and Regulatory Framework

Carbonization 2007(1) SCALE reiterated that the Courts in

India would have jurisdiction under section 34 of the Act to
set aside an award passed by the arbitral tribunal which is
patently illegal or in contravention of the provisions of the
Act or any other substantive law governing the parties or is
against the terms of the contract.
The Apex Court in ONGC Ltd. v. Saw Pipes Limited [(2003(5)
SCC 705)] decided that there is a mandate to the tribunal to
decide the dispute in accordance with substantive law for the
time being in force in India. It was held that the substantive
laws would include the Contract Act, the Transfer of Property
Act and other such laws in force. If the award is passed in
violation of the provisions of the Transfer of Property Act or
the Contract Act, the question would be whether such award
could be set aside. Similarly under sub-section (3) of section
34 the tribunal is directed to decide the dispute in accordance
with the terms of the contract and also after taking into account
the usage applicable to the transaction. Similarly, if the award
is a non-speaking one and is in violation of sub-section (3) of
section 31 such an award is set aside. The award could be so
set aside if it is contrary to (a) the fundamental policy of
India, or (b) the interest of India, or (c) justice or morality, or
(d) in addition, if it is patently illegal. Illegality must go to
the root of the award. It is of a trivial nature; it cannot be held
that the Act is against the public policy. If an award is so
unfair and unreasonable that it shocks the conscience of the
court; such an award is opposed to the public policy and is
required to be adjudged void.

RULES OF CONTRACT MANAGEMENT

The golden rules of contract management include:
(1) Comply with the legal and regulatory framework so that
the contract stands the scrutiny of the law for easy
enforcement.
(2) Ensure that the terms of contract are fair to all the parties
and a party taking undue advantage of its smart
negotiating skill may render the contract unconscientious.
(3) Ensure that the objects and intentions of the contracting
parties are crystal clear in the contract.
(4) Clearly set out the mutual rights duties and
responsibilities of the parties.
(5) The agreement should contain averments, representations,
warrants, and assurances made by the respective parties.
It should also include clauses relating to protection of
trade related intellectual property rights, confidentiality,
non-assignment, service of notice, amendment and

obligation of the parties on termination of the contract,

etc.
(6) Keep the language of contract direct, simple and clear.
Cleverly worded clauses not disclosing facts fully and
clearly may render the contract bad in law. For example,
stipulating a shorter period of limitation than that
prescribed under the Limitation Act would result in the
extinguishment of the right itself and thereby be avoided
under Section 23 of the Contract Act.
(7) Mention the method of dispute resolution and jurisdiction
of court. In case of arbitration, clearly mention the
composition of arbitral tribunal, applicable law, venue
of arbitration and language to be used.
(8) Check that the kind of disputes referred to arbitral
tribunal must be capable of being settled by arbitration.
For example, oppression and management comes under
the Companies Act whereas insolvency comes under the
jurisdiction of civil court.
(9) The force-majeure clause should cover force majeure
event, nexus with force majeure and its effect and notice
period.
(10) The Indian parties in international commercial contracts
should stipulate that only the Indian law shall be the
applicable law to meet the requirement of the Reserve
Bank of India (RBI) and other statutory authorities.

CONCLUSION
The foundation stones of modern civilization and market
economy are the right to property and freedom to contract.
The law of contract provides to parties freedom to contract,
but this freedom must be exercised within the legal and
regulatory framework.
In case of breach of contract, the legal remedy for the injured
party is damages for the loss suffered due to breach of contract.
It is, therefore, advisable to avoid disputes on quantum of
damages by fixing a realistic amount of liquidated damages
payable in case of breach of contract.
The proper law governing commercial contract is of decisive
importance in interpretation of international commercial contract
and resolution of disputes. Where the parties expressly mention
proper law of the contract, such law must govern the interpretation
and resolution of disputes and jurisdiction of court for enforcement
of decree and awards. In the absence of an express choice of the
law governing the contract, efforts are made to determine the
proper law with which the contract has the closest nexus. However,
despite the governing laws being the Indian laws, for arbitration,
the procedure would be that of the venue or country where
arbitration proceedings are held.