Contracts, negotiation and enforcement in India: overview

A Q&A guide to general contracts and their negotiation and enforcement in India.

The Q&A gives a high level overview of the key legal concepts, including contract formation with general discussions as to authority, formal legal requirements, formalities for execution, the requirements for deeds and notarisation, and powers of attorney. It also considers the status of contractual terms, variation and assignment of contracts, and enforcement of the contract. The enforcement section covers remedies and liability, exclusion of liability, and cross-border/jurisdictional matters.

The Q&A is part of the global guide to contracts, negotiation and enforcement.

Sameer Parekh, Parekh & Co
Contents

Formation of contracts

Authority and capacity

1. What are the authority/capacity rules for entering contracts, for different commercial entities?

In general terms, anyone (whether a human being or a juristic entity) is capable of entering into a contract under the Indian Contract Act, 1872. However, the following are not capable of entering into a contract:

  • A minor.

  • A person of unsound mind.

  • A person otherwise prohibited from entering into a contract (under various laws, certain persons or entities are not competent to contract, for example, an alien from an enemy country, an insolvent, and so on).

Various juristic entities are competent to contract under Indian law, including:

  • Companies.

  • Partnerships.

  • LLPs.

  • Trusts.

  • Charities.

A person entering into a contract on behalf of a juristic entity must be duly authorised to do so both under the law and under the rules governing the juristic entity (for example, the memorandum or articles of association, or trust rules, and so on). Government entities are also entitled to contract, and have their own rules concerning the authorisation of a person capable of acting on behalf of the entity (either under statute or under internal rules).

Formal legal requirements

2. What are the essential requirements to create a legally enforceable contract?

Offer and acceptance (which amounts to a consensus ad idem, which means "a meeting of the minds"), along with consideration, are the general essential requirements to create a contract.

However, in order to create a legally enforceable contract, all of the following elements must be present:

  • Offer and acceptance.

  • The parties to the contract must be competent to contract (that is, they must not be a minor, or be of unsound mind, or be prohibited from contracting under the law).

  • An intention to create a legal contract.

  • Consensus ad idem.

  • Consideration.

  • Free consent.

  • The object of the contract must be legal.

There is no general requirement that a contract must be in writing. However, for certain types of contract, the contract must be in writing and be duly registered. A contract for the sale or purchase of immovable property must be in writing and duly registered.

Ordinarily, a contract that does not have consideration is void. An agreement without consideration is void, unless it is:

  • In writing and registered.

  • A promise to compensate for something done.

  • A promise to pay a debt barred by limitation law.

 
3. What are the main forms of contract?

The law of contract in India is governed by the Indian Contract Act, 1872, which purports to codify the law relating to contracts (although terms concerning usage and trade customs also continue to apply alongside this Act). In essence, Indian contract law is based on the English common law, and therefore allows for the same concepts of offer, acceptance and invitations to treat.

An offer occurs where one person expresses his will to another person to do (or not to do) something, and asks for that other person's approval (acceptance) of that offer. The objective of an offer is to gain approval (acceptance) of the offer and enter into a contract.

An invitation to treat occurs where one person expresses something to another person, inviting that other person to make him an offer. The objective of an invitation to treat is to receive offers from other people and negotiate the terms on which a contract can be formed. An invitation to treat is essentially a pre-offer, and the offer only occurs where the party to whom the invitation to treat is made makes an offer in response to the invitation to treat.

Indian law allows terms to be incorporated by reference. Incorporation by reference occurs where the terms of a secondary document are included in another main document merely by mentioning the secondary document in the main document. Where terms are properly incorporated by reference, all of the terms in the secondary document will form part of the main document.

An offer can be withdrawn at any time before the acceptance of that offer is communicated to the offeror (it cannot be withdrawn once acceptance of the offer has been communicated to the offeror).

Similarly, an acceptance of an offer can be revoked at any time before that acceptance is communicated to the offeror (it cannot be revoked once the acceptance has been communicated to the offeror).

A contract can be made either orally or in writing, although certain types of contract require registration and must therefore be made in writing. A contract can be formed by an exchange of emails. An email is admissible by way of evidence to show the formation of a contract under section 65B of the Indian Evidence Act, 1873.

Contracts can be categorised in the following ways:

  • On the basis of their formation:

    • express contracts, where there is an express offer and acceptance;

    • implied contracts, where the offer and/or acceptance is implied by law;

    • quasi contracts, where the contract is created by the court by virtue of law, and which have no offer or acceptance (sections 68 to 72 of the Contract Act cover these types of contracts).

  • On the basis of the nature of the consideration in the contract:

    • bilateral contracts, where there is consideration between both parties once the contract is concluded;

    • unilateral contracts where the consideration is only received by one party once the contract is concluded.

  • On the basis of their execution:

    • executed contracts, where performance of the contract has been completed;

    • executory contracts, where the contractual obligations are to be performed in the future.

  • On the basis of their validity:

    • valid contracts: contracts which are enforceable in a court of law, and which have certain essential features including: certainty; free consent; consideration; a lawful object; capacity of the parties; possibility of performance; and so on;

    • void contracts: contracts which are not enforceable in a court of law, and which are deficient in any one or more of the abovementioned essential features;

    • voidable contracts: contracts which are deficient only in free consent and which may become valid or void at the innocent party's option;

    • illegal contracts: contracts that have an unlawful object;

    • unenforceable contracts: contracts which contain technical defects that result in the legal formalities being incomplete, which may become enforceable and valid after the legal formalities have been completed.

 
4. How are preliminary agreements used in your jurisdiction?

An agreement reached prior to a final contract is often referred to as a preliminary agreement. The most popular types of preliminary agreements are:

  • Term sheets.

  • Memorandums of understanding (MoUs).

  • Memorandums of agreement (MoAs).

  • Agreements to sell (for real property).

Although, historically, it was not common to use non-disclosure agreements (NDAs) in India, these are currently being used much more frequently and many negotiated contracts will now commence the process of negotiation with an NDA. An NDA is binding under Indian law and it is possible to obtain an interim order to enforce an NDA. In most cases, obtaining an interim order can resolve the issue for the party applying for the order.

An NDA is often followed by a term sheet, MoU or an MoA. A term sheet is entered into when the principal terms are agreed upon by the parties, and the details of the agreement are yet to be worked out or agreed upon. Whether a term sheet, MoU or MoA is legally binding or not depends on the language of the particular document, and this area has formed the subject matter of numerous judgments. Sometimes, certain terms of an MoU are binding (for example, confidentiality), while others are not.

Another preliminary agreement which is very common in India (particularly with respect to real property transactions) is an "agreement to sell". This type of agreement covers the situations where, before a transaction of sale can be carried out, certain approvals are required. As a result, an agreement to sell can be entered into prior to the sale deed. An agreement to sell can be specifically enforced. Therefore, a party entering into an agreement to sell can be directed by a court to enter into a sale deed.

Preliminary agreements can play an important role in documenting agreed principles and facilitating complex commercial transactions. However, they must be clearly drafted in order to avoid disputes concerning what parts of the document are binding, and what parts are not binding.

 
5. Can negotiations become legally binding in any circumstances? What are the principles and rules (if any) on pre-contractual liability and good faith in negotiations?

Negotiations by definition are not legally binding in India. However, the parties may incur certain obligations during the period of negotiations (for example, an obligation not to compete or not to disclose the terms of negotiations or confidential material can be imposed during negotiations).

The main difficulty that arises in relation to negotiations is whether, on any particular issue, the parties were still at the negotiation stage (in which case it is not legally binding) or whether they had actually entered into an agreement (in which case it is legally binding). Indian law also recognises the doctrine of estoppel. As a result, if one party changes their position as a direct result of a representation from the other party, the other party cannot then back out of that representation if the party relying on the representation has changed their position to their detriment.

In certain cases, negotiations can be deemed to have solidified into a contract even if no formal contract has been signed. For example, if two parties in the course of negotiations enter into a transaction where one party hands over possession of immovable property and the other party pays full consideration for that immovable property, the fact that no sale deed is signed or registered will not prevent either party from asking the court to provide directions to have the sale deed executed.

Formalities for execution

6. When are written contracts required and for which assets/interests?

Under the Indian Contract Act, 1872, there is no specific requirement that a contract must be in written form. However, certain types of contract require registration and therefore must be in writing. Most types of agreement in writing require the payment of stamp duty. For example, the sale of immovable property must be registered to be valid, and must therefore be made in writing and will require stamp duty to be paid.

Under the Registration Act 1908, certain agreements require compulsory registration, while for others registration is optional. The following agreements require compulsory registration:

  • An agreement for the sale or gift of immovable property.

  • A lease of immovable property for a period of one year or more.

  • Agreements that extinguish certain rights.

Registration is optional for a lease of immovable property for a period of less than a year, and for wills.

 
7. Are there different formalities for different types of contractual document?

There are no different formalities with respect of different types of contractual documents under the Indian Contract Act, 1872. However, certain types of contract may have some additional requirements (for example, a will requires two witnesses).

 
8. What are the formalities for the execution of documents by companies, foreign companies and individuals?

There are no additional formalities for the execution of documents by companies, foreign companies and individuals. However, documents executed outside India may require legalisation (see Question 14).

Contracts with a company must be signed by a person duly authorised to contract on the company's behalf. However, India applies the doctrine of indoor management (also known as the Turquand rule), and where a person dealing with a company is satisfied that a proposed transaction is not inconsistent with that company's memorandum and articles of association, that person is not required to make any further inquiry concerning the regularity of any internal proceeding. Provided that the person signing a contract on the company's behalf has ostensible authority, the contract will bind the company.

 
9. What is the status of electronic and faxed signatures in your jurisdiction?

Electronic and faxed signatures are legal, admissible and enforceable. Under Indian law, a written signature is not required to form a valid contract. Contracts are generally valid if legally competent parties have reached an agreement, whether they agree verbally, electronically or in a physical paper document. Section 10A of the Information Technology Act, 2000 specifically confirms that contracts cannot be denied enforceability merely because they are concluded electronically.

Parties can use any form of electronic signature to create valid contracts and documents of any kind that are not subject to any specific statutory form requirement, and those documents can include the following:

  • Human resources documents (such as employment contracts, benefits paperwork and other documents used when hiring new employees).

  • Commercial agreements between corporate entities (including non-disclosure agreements, procurement documents and sales agreements).

  • Consumer agreements (including documents used to open a new retail account).

  • Limited forms of real estate documents (including certain lease agreements, purchase and sales contracts, and other related documentation for residential and commercial real estate).

However, agreements related to powers of attorney, negotiable instruments, wills, conveyances of immovable property, or other documents notified by the Indian Government under section 1(4) of the Information Technology Act, 2000, are exempt from these provisions and are required by law to be executed in writing on a stamp paper.

Deeds

10. When are deeds required in relation to contracts?

Land transfers, leases, documents appointing trustees, powers of attorney and releases are usually executed in the form of a deed.

There is no legal difference between a written contract and a deed. Most contracts made in writing will be simple contracts, although some are referred to as deeds (for example, a sale deed). However, deeds must be registered, and there are certain additional requirements in each state for the execution of documents which require registration. The following distinctions can be made in relation to deeds:

  • A simple contract can be entered into orally, but a deed must be in writing.

  • A deed must make it clear that it is intended to be a deed.

  • Under a simple contract each party must provide consideration for it to be valid. Deeds do not require consideration in order for them to be valid, because deeds must be registered, and an agreement in writing which is registered can be enforced even if there is no consideration.

  • A deed requires additional formalities in relation to its signature/execution for it to be enforceable. Depending on whether the party signing/executing is an individual, company or other legal entity, signatures may need to be witnessed or more than one signatory may be required (the specific requirements change from state to state).

 
11. What are the legal formalities for a deed?

There is no legal difference between a written contract and a deed. However, there are certain formal requirements that must be met to create a valid deed, and the requirements concerning witnessing, stamping and so on can vary from state to state. A deed must meet the following requirements:

  • It must be in writing.

  • It must be clear on its face that it is a deed.

  • It must be duly executed and comply with requirements of the relevant state law with respect to signatures, witnessing, stamping and so on.

 
12. What are the legal requirements for the execution of deeds?

Despite being based on English contract law dating back to 1872, the Indian Contract Act, 1872 has never had any requirement that a deed must be sealed. Even a company is not required to put its seal on an ordinary contract (although a seal is required for a power of attorney and any other documents so prescribed in the company's articles of association).

Notarisation

13. Is notarisation required for contracts in your jurisdiction?

A contract typically does not have to be notarised. A notary provides an acknowledgment that the signature appearing on the document is that of the person whose signature it purports to be. Unless specifically required by state or municipal law, a contract does not have to be acknowledged before a notary public.

Any private contracts for the sale of goods or services do not require a notary signature. Certain types of court papers (such as petitions and motions) do not have to be notarised. Generally, divorce papers do not require notarisation, although there are exceptions to this rule in a few states. The most common paperwork that requires a notary is real estate papers. In addition, the following documents also require a notary signature:

  • Adoption papers.

  • Wills.

  • Trusts.

  • Medical release forms.

 
14. What are the legalisation requirements in your jurisdiction and how is it carried out?

The Ministry of External Affairs attests original documents//true copies of documents for use abroad. Attestation by the Ministry of External Affairs can take one of two forms:

  • Apostille.

  • Normal attestation.

Apostille

Since 2005, India has been a member of the HCCH Convention Abolishing the Requirement of Legalisation for Foreign Public Documents 1961 (HCCH Convention) that abolished the requirement for the legalisation of foreign public documents. Any document apostilled in one member country is acceptable in all the other 104 member countries that are signatory to the HCCH Convention, which greatly simplifies the process of attestation by making it unnecessary to have documents attested in each, or for each, of the countries separately.

Normal attestation

Normal attestation takes place for all the countries which are not a member of the HCCH Convention, or where an apostille is not accepted.

Powers of attorney

15. What are the main types of powers of attorney in your jurisdiction?

General power of attorney

A general power of attorney is one by which an instrument is executed by the principal authorising an agent to do certain acts, in general, on his behalf.

Special power of attorney

A special power of attorney is one by which a person is appointed by the principal to do some specified act or acts. In this type of power of attorney, an agent is conferred with a power to do a specific act in a single or specified transaction(s) in the principle's name.

As a result of the fact that powers of attorney have frequently been misused in the past, various states have made stringent rules for the execution of powers of attorney. The rules in this regard differ from state to state.

 
16. What are the main transactions when powers of attorney are used?

In general, powers of attorney tend to be used for transactions concerning the following:

  • Contracts/agreements.

  • Real estate.

  • Bank accounts, certificates of deposit and money market accounts.

  • Tax returns, insurance and other similar documents.

  • Stocks, bonds and other securities.

Powers of attorney in contracts/agreements can be used to:

  • Enter into contacts.

  • Perform any contract/agreement, writing or thing.

  • Make, sign, execute, deliver and/or acknowledge any contract/agreement.

Powers of attorney in real estate can be used to:

  • Sell, exchange, lease, collect rents for, make grants for, bargain, borrow against and mortgage real estate property.

  • Execute all deeds, bonds, contracts, mortgages, notes, checks, drafts and money orders.

  • Manage, compromise, settle and adjust all matters relating to real estate.

Powers of attorney in bank accounts, certificates of deposit and money market accounts can be used to:

  • Add to, or withdraw from, any amounts from any bank accounts, certificates of deposit or money market accounts.

  • Make, execute, endorse, accept and deliver any and all cheques and drafts.

  • Execute or release such deeds of trust or other security agreements as may be necessary.

  • Deposit and withdraw funds, or acquire and redeem certificates of deposit, in banks, savings and loans.

Powers of attorney in tax returns, insurance and other similar documents can be used to:

  • File and sign all tax returns, insurance forms and any other similar documents.

  • Represent the principal in all matters concerning tax returns, insurance forms and other similar documents.

Powers of attorney in stocks, bonds and securities can be used to:

  • Sell any and all shares of stocks, bonds or other securities.

  • Make, execute and deliver any assignment, or assignments, of any such shares of stocks, bonds or other securities.

 
17. What are the key provisions in a power of attorney?

A power of attorney is a written document that is usually, but not always, executed under the seal of the person that is authorising that power of attorney. It allows the person appointed under it (who is called the attorney) to do any lawful act instead of the person authorising the power of attorney (for example, to receive debts or sue a third person). The original power of attorney must contain specific provisions granting any power of delegation. If a power of delegation is not contained in the original power of attorney, then the attorney cannot delegate that power to any other person without a specific power to do so.

 
18. What are the formalities for the execution of a power of attorney?

The formalities for the execution of a power of attorney are as follows:

  • Stamp duty. A power of attorney attracts stamp duty, the amount of which varies from state to state.

  • Attestation. Attestation of a power of attorney is not compulsory, but in order to avoid any disputes and to establish proof of the power's genuineness, it is advisable to have the document attested by two witnesses (although the law on this can vary between states).

  • Registration. Registration of a power of attorney is not compulsory, but in most states, a power of attorney concerning land transactions requires registration. In order to be registered, it must be presented at the sub registrar's office who has jurisdiction over the immovable property referred to in the power of attorney.

  • Notarisation. Notarisation of a power of attorney has the equivalent effect of registration. Powers of attorney can be notified by the persons outlined in section 85 of the Indian Evidence Act (see below).

Any power of attorney executed outside India will require authentication, which means it must be executed in the presence of certain designated officers. Under section 85 of the Indian Evidence Act the following persons are empowered to authenticate documents:

  • Notary public.

  • Any court judge or magistrate.

  • Indian consul or vice consul.

  • Representative of the central government.

Section 85 of the Indian Evidence Act also applies to documents authenticated by a notary public of another country (or other countries).

Other

19. Is virtual closing used in your jurisdiction?

Virtual closing is not used in India and it is doubtful if it is permissible.

 
20. How are legal opinions obtained and used in your jurisdiction?

Legal opinions are generally obtained by a person/company from:

  • Lawyers.

  • Senior counsel.

  • Retired judges.

Legal opinions are not generally provided for use in court. However, the taking of legal opinions is very common, as it assists a party in deciding on the proper course of action to be taken to comply with the law. A legal opinion often helps in convincing one party of the merits of another party's point of view. In some cases, a legal opinion can help in showing one party's bona fide conduct, therefore avoiding a penalty or criminal action.

 
21. What are the key issues in the conduct of completion meetings?

There are no formal rules for the conduct of completion meetings. The usual common sense measures should be taken for such a meeting. The parties attending the meeting should be duly authorised, and where appropriate should carry the company stamp and/or a copy of their power of attorney.

In case of a sale or purchase of company shares, very often an escrow agent is appointed (often a law firm) to hold the shares and the demand draft, who will hand over the same after the completion. In some cases where the transfer of monies is by an escrow account, the banks are appointed as an escrow agent.

 

Content of contracts

22. What is legal status of contractual terms in your jurisdiction?

A contract will have express terms and can also have implied terms. India follows the doctrine of caveat emptor (buyer beware) and as a result only those terms implied by statute or which are otherwise likely to be implied by the courts will apply.

An illegal or unenforceable term of a contract may vitiate the whole contract unless that term is segregable in such a way so that the rest of the contract is enforceable. In the case of a breach of contract, the party claiming breach can seek specific enforcement of the terms of the contract or claim damages.

Some of the terms of the contract will have specific legal provisions applicable to them. For example, an arbitration clause is enforceable even if the rest of the contract is not legal or valid.

Warranties and guarantees must be explicitly incorporated into a contract and will not be implied into the contract, as is the case in certain other jurisdictions. Such guarantees and warranties are enforceable where they have been incorporated into the contract. However, certain negative covenants may not be enforceable either fully or in part. For example, in a contract of employment, in the event a person is generally prohibited from taking any other employment for a particular period after termination of employment, that provision will not be enforced. However, if the same provision is narrowly tailored (for example, it extends to only a particular type of work, and applies for only a short period), it may be enforced. The law in this regard is still developing and changing and has not yet been entirely settled.

 
23. Are warranties recognised in your jurisdiction?

Warranties are recognised under Indian law. The Sale of Goods Act defines a warranty as a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. The extent of coverage of a warranty can differ from case to case. Contracts with warranties will usually contain a provision limiting the time period in which a claim for damages can be made as a result of that warranty.

 

Variation and assignment

24. What are the main ways to transfer contractual rights?

Assignment

Assignment of a contract (that is, the rights and liabilities under the contract) with notice and the consent of the other party to that contract normally vests in the assignee as an absolute interest in the contract which has been assigned. Assignment falls into the category of a transfer of property, which transfers absolute property to the assignee similar to a sale (which will normally transfer all the property in the goods or other property absolutely and unconditionally).

As a rule, a party to a contract cannot transfer their liabilities under a contract without the consent of the other party to that contract. This rule applies both at common law and in equity.

Novation

If a party wishes to transfer both the burdens of a contract and the benefits under it, the contract must be novated. As with an assignment, novation transfers the benefits under a contract, but unlike an assignment, a novation will transfer the burdens of the contract even where the other party to that contract has not consented to the novation.

Subcontracting

Subcontracting has the effect of assigning the benefit of the contract to the subcontractor, and subcontracting or delegating the burdens of the contract to the subcontractor. A subcontract does not constitute a transfer per se, but it does allow the person subcontracting the contract to behave as though a transfer has taken place, with the important distinction that the person subcontracting remains liable for the subcontractor's actions.

 
25. What are the rules relating to waiver of contractual rights?

The general principle with regard to the waiver of contractual obligations can be found in section 63 of the Indian Contract Act, 1872, under which a party to a contract can dispense with or remit (wholly or in part) the performance of that contract, or can instead accept some other form of satisfaction that they think fit than that originally envisaged by the contract. Under Indian law, neither consideration nor another agreement are required in order to initiate the waiver.

 

Enforcement

Liability and remedies

26. What are the rules relating to invalidity, misrepresentation and mistake relating to contracts?

Invalidity

Invalidity refers to an illegal contract. Under section 23 of the Indian Contract Act, 1872 the consideration or object of a contract are lawful unless they are:

  • Forbidden by law.

  • Of such a nature that they would defeat a provision of law.

  • Fraudulent.

  • Implying injury to the property of one of the parties or others.

  • Regarded as immoral by the court, or opposed to public policy.

Misrepresentation

Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. Under section 18 of the Indian Contract Act, 1872 there are two types of misrepresentation:

  • Fraud in the factum. If the party did not know that they were entering into a contract, there is no meeting of the minds and the contract is void.

  • Fraud in inducement. Misrepresentation of a material fact (if the party knew the truth, the party would not have entered into the contract) makes a contract voidable.

Mistake

A mistake is an incorrect understanding by one or more parties to a contract that may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract:

  • Common mistake occurs when both parties to a contract hold the same mistaken belief of the facts.

  • Mutual mistake occurs when both parties to a contract are mistaken as to the terms of the contract.

  • Unilateral mistake occurs when only one party to a contract is mistaken as to the terms or subject matter of the contract.

A common mistake of fact between both parties makes an agreement void under section 20 of the Indian Contract Act, 1872. However, under section 21 of the Indian Contracts Act, 1872, a contract is not voidable where a mistake of fact is caused by a mistake of law in force in India.

 
27. What are the main performance and discharge rules relating to contracts?

Termination of contract

Use of termination for convenience clauses. Contracts can contain a "termination for convenience" clause, which enable a party to the contract to terminate that contract on the payment of compensation to the other party. However, a contract cannot provide any express limitation on when, or in what circumstances, a termination for convenience clause can be operated. Case law tends to suggest that, in the absence of sufficient wording, it will be a breach of contract to exercise a termination for convenience clause simply so that one party may obtain a better price to complete the works from another party. To be effective, termination for convenience clauses must provide for compensation to the party not exercising the termination for convenience clause. As with most contract provisions, clear wording will be required before a termination for convenience clause will be fully effective.

Repudiation. This occurs when a party commits a breach of contract that is sufficiently serious that it entitles the innocent party to treat the contract as terminated with immediate effect and to sue for damages for breach of contract.

Frustration. This occurs when neither party has defaulted on the original contract but other circumstances have intervened which prevent the contract from being performed as originally intended.

Force majeure

Force majeure (from the French for "superior force") is a common clause included in contracts that frees both parties from liability when an extraordinary event or circumstance beyond the parties' control prevents one or both of them from fulfilling their obligations under the contract.

 
28. What are the key rules on privity of contract and third party rights?

The doctrine of privity of contract provides that a contract cannot confer rights, or impose obligations arising under it, on any person or agent except the parties to that contract. The third party is not bound by the contract as there is no doctrine of mutuality.

However, contracts can sometimes specify that the benefits accruing to one party will be conferred upon a third party. The effect of a third-party provision of this kind is to provide, to a party who has not assented to it, a legal right to enforce the contract. A third-party beneficiary can sue to enforce the contract if it was intended that the third party would have enforceable rights. For example, if Party A promised, in return for a payment of US$200 by Party B, to give his car to Party C. Party C, who has no obligations under this agreement, will be a third-party beneficiary.

Section 2(d) of the Indian Contract Act, 1872 provides that the act which is to constitute consideration may be done by "the promisee or any other person". Therefore, provided that there is consideration for a promise, it is immaterial who has furnished it. It may move from the promisee or, if the promisor has no objection, then from any other person. This is the principle as established by the English courts in Dutton v Poole (1678) 2 Lev 210; 83 ER 523.

In Khirod Behari Dutt v Man Gobinda and Others, AIR 1934 Cal 682, 152 Ind Cas 351 Lord Williams J said: "…though ordinarily only a person who is a party to the contract can sue on it, where a contract is made for the benefit of a third person, there may be an equity in the third person to sue upon the contract". The Indian judiciary has recognised a beneficiary to a contract as an exception to the general rule of the doctrine of privity.

 
29. What are the main rules relating to contractual liability?

If the parties have joint liability, then they are each liable up to the full amount of the relevant obligation. If one party dies, disappears or is declared bankrupt, the other party (or parties) remains fully liable. Section 43 of the Indian Contract Act, 1872 states that any number of joint promisors may be compelled to perform the obligation under a contract, and that, in the absence of an express agreement to the contrary contained in the contract, a joint promisor can compel other joint promisors to contribute equally with himself to the performance of the contract, or to share in any loss suffered as a result of a default of contract.

Conversely, several liability arises when two or more persons make separate promises to another party under a single or different instrument. Joint and several liability may be apportioned either among two or more parties, or to only a few select members of a group, at the discretion of the person making a claim against the parties. With joint and several liability, each liable party is individually responsible for the entire obligation, but a paying party may have a right of contribution and indemnity from non-paying parties.

 
30. What are the main rules relating to excluding contractual liability?

Unlike the Unfair Contract Terms Act 1997 in the UK, there is no specific legislation in India concerning the rules regarding the exclusion of contractual liability. An unreasonable bargain can be struck down either under section 16 of the Indian Contract Act, 1872 on the ground of undue influence, or under section 23 of the Indian Contract Act, 1872 on the ground that it is opposed to public policy.

Under section 67-A of the Indian Contract Act, 1872, a contract is likely to be regarded as unconscionable or unreasonable (and therefore unenforceable) if it attempts to exclude liability for wilful breach of contract or the consequences of negligence. A contractual exemption clause cannot generally exclude liability for tort.

As regards negligence, the courts have generally taken the view that it is unlikely that a party would enter into a contract that allows the other party to evade fault-based legal liability. As a result, if a party wishes to exclude its own liability for fault-based negligence, this fact must be clearly communicated to, and understood by, the other party to the contract in order to be enforceable.

 
31. What are the main contractual remedies?

Rescission of the contract

Where one party to the contract breaches the contract, the other party need not perform their obligations under that contract. The aggrieved party may rescind the contract. In such cases, the injured/aggrieved party can rescind the contract, or file a suit for damages, or do both. Generally, rescission of the contract is also accompanied by a suit for damages.

Damages

The aggrieved party to a breach of contract is entitled to monetary compensation where the contract is breached. The objective of a suit for damages is to put the aggrieved/injured party in the position in which that party would have been in had the contract been performed as agreed. The aggrieved/injured party must be able to prove the actual loss suffered, or no damages will be awarded.

Damages are calculated by using one of two methods to assess the loss suffered:

  • The difference in value to the claimant had the contract been performed.

  • The cost of curing the breach of contract.

The court will ordinarily try to apply the more appropriate of either of these methods.

Quantum meruit

The term quantum meruit is derived from Latin which means "what one has earned". The injured party can file a suit for quantum meruit and may claim payment in proportion to any work done or goods supplied. Sections 65 to 70 of the Indian Contract Act, 1872 deal with the provisions relating to a suit for quantum meruit.

Specific performance

This is an order by the court requiring one party to perform their contractual obligation. Whilst contracts are made to be performed and parties should be held to their contractual obligations, the courts are often reluctant to order an unwilling party to perform a contract and specific performance is only available in limited circumstances. In considering whether to grant specific performance, the courts will consider:

  • Whether damages would be an adequate remedy.

  • The type of contract involved.

  • Whether equity requires such an order.

The courts most commonly order specific performance for contracts for the sale of land, where damages would be an inadequate remedy. They are unlikely to order specific performance for contracts of personal service.

Injunctions

An injunction is an order of the court restraining a person from doing a particular act. Where the defendant is doing something which he has promised not to do, the injured party will have a right to file a suit for an injunction.

Remedies for unilateral mistake

If a contract was entered into on the basis of unilateral mistake by both parties, various types of contractual remedies can be applied, such as rescission of the contract or modification of the original contract.

 
32. What are the main differences between indemnity and damages? Are penalty clauses subject to any limitation?

An indemnity is a form of security or protection against a loss or other financial burden. Other definitions interpret the term to mean a promise or undertaking to pay for a particular type of damage or loss.

The term "damages" is technically defined as financial compensation which is sought by a person for a particular loss or injury to his/her person, property or rights caused by the commission of some wrongful act by another. Damages are a remedy available to a claimant that determines the financial loss or extent of harm suffered by the claimant as a result of the defendant's actions.

Damages are typically of a financial nature. In contrast, an indemnity is a form of exemption or immunity from liabilities incurred by another, and are not limited to financial liability.

Penalties are not permissible under Indian law and are regarded as a legal threat (in terrorem). Only damages that have in fact been incurred by a party as a result of a breach of contract can be awarded. However, in the case of liquidated damages, provided that the liquidated damages are a genuine estimate of the likely damages that will be suffered, those liquidated damages will be imposed by the court unless the party in breach can show that in fact no damage has been caused.

 

Enforcement and cross-border issues

Choice of law

33. Is a foreign choice of law in a contract upheld by the local courts?

A provision agreeing to a choice of law is valid under Indian law and will generally be upheld. However, there is some doubt as to whether two Indian parties, with respect to a contract to be executed in India, can agree to a foreign choice of law. Such a clause is not likely to be enforced.

 
34. Are any mandatory terms implied by statute?

Generally speaking, implied terms are rare under Indian law. Terms are implied in a contract either under statute or if, under the rules of interpretation of contract, these are required to be implied. However, many implied terms can be excluded by the parties by express agreement.

Jurisdiction

35. Is a choice of jurisdiction in a contract upheld by the local courts?

Section 20 of the Civil Procedure Code, 1908 provides that only a court with exclusive jurisdiction will have the power to hear such a matter. Further, under the Indian Contract Act, 1872, section 28 states that any agreement in restraint of legal proceedings will be void.

On the issue of jurisdiction, the Indian courts have stated that, in respect of an agreement specifying a foreign court as having exclusive jurisdiction, an Indian court will still have jurisdiction to entertain a suit if the cause of action arises wholly or in part within its local limits of jurisdiction. Section 20(c) of the Civil Procedure Code, 1908 states that an Indian court has jurisdiction to try all cases of a civil nature, unless expressly or impliedly barred from doing so.

However, in a recent decision (Rhodia Ltd v Neon Laboratories Ltd, AIR 2002 Bombay 502), the Bombay High Court upheld the validity of a contract where the parties had expressly agreed that any disputes would be settled under English law in the English courts. The court held that, even when the agreement was signed by some of the parties in France, a country to which none of the parties belonged, the parties would be governed by the law that they chose under the agreement.

In National Thermal Power Corporation v Singer Company, AIR 1993 SC 998 the Indian Supreme Court's judgment held that the express intention of the parties is generally decisive in determining the proper law of the contract. The only limitation to this rule is that the intention of the parties must be expressed bona fide and must not be opposed to public policy. The proper law is therefore the law which the parties expressly or impliedly chose, or which is imputed to them by reason of its closest and most intimate connection with the contract.

Enforcement of foreign judgments

36. When are foreign judgments recognised in your jurisdiction?

Foreign judgments are defined under section 2(6) of the Civil Procedure Code, 1908 to mean any judgment pronounced from a foreign court. Section 2(5) of the Code defines a foreign court to mean a court outside India and not established or continued by the authority of the Indian Central Government. Sections 13, 14 and 44 of the Civil Procedure Code, 1908 deal with foreign judgments/decrees. Section 13 embodies the principle of private international law that the Indian courts will not enforce a foreign judgment if that foreign judgment has not been addressed by a competent court. A foreign judgment may operate as a matter already judged (res judicata) except in the six cases specified in section 13 of the Civil Procedure Code, 1908 and subject to the other conditions mentioned in section 11 of the same Code.

Binding nature of foreign judgments

The Civil Procedure Code, 1908 provides that a foreign judgment will be conclusive as to any matter directly adjudicated upon in that judgment between the same parties, or between parties claiming title under the original parties, except under the following circumstances:

  • Where the judgment has not been pronounced by a court of competent jurisdiction.

  • Where the judgment has not been given on the merits of the case.

  • Where the judgment appears on the face of the proceeding to be founded on an incorrect view of international law, or a refusal to recognise the law of India in cases where such law is applicable.

  • Where the proceeding in which the judgment was obtained was opposed to natural justice.

  • Where the judgment has been obtained by fraud.

  • Where the judgment sustains a claim founded on a breach of any law in force in India.

Enforcement of foreign judgments

A foreign judgment can be enforced by instituting a suit on that foreign judgment. The general principle of law is that any decision by a foreign court, tribunal or quasi-judicial authority is not enforceable in another country unless that decision is embodied in a decree of a court of that other country. In such a suit, the court cannot go into the merits of the original claim and the judgment will be conclusive as to any matter directly adjudicated upon between the same parties. Such a suit must be filed within a period of three years from the date of the foreign judgment.

A foreign judgment may also be enforced by proceedings executed in certain specified cases mentioned in section 44-A of the Civil Procedure Code, 1908. This section provides that where a certified copy of a decree of any of the superior courts of any reciprocating territory has been filed in a district court, the decree may be executed in India as if it had been passed by the district court. When a foreign judgment is sought to be executed under section 44-A, it will be open to the defendant in that judgment to make any and all of the objections that would have been available to the defendant had a suit been filed in the ordinary way, under section 13 of the Civil Procedure Code, 1908. A judgment or decree can only be executed under section 44-A if all of the conditions under section 13 (a-f) of the Civil Procedure Code, 1908 are satisfied (it is not sufficient to only satisfy some of these conditions).

 

Contributor profiles

Sameer Parekh, Managing Partner

Parekh & Co

T +9111 4152 6601
E Sameer.parekh@parekhco.com

Professional qualifications. Admitted to practice in India and New York, USA. Advocate on Record of the Supreme Court of India.

Areas of practice. Litigation; arbitration; infrastructure projects.

Non-professional qualifications. BA (Hons) Economics and LLM, University of Pennsylvania.


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1248446833429", "objName" : "Contracts, negotiation and enforcement in India", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/1-638-7113?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "2-62dceab2:15aff4982df:524d", "analyticsSessionCookie" : "2-62dceab2:15aff4982df:524e", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }