National Workshop on Drafting of Commercial

Agreements

Organised by : ASSOCHAM

3rd September 2016 New Delhi

Presented by

S. Ravi Shankar, Arbitration lawyer & Senior Partner

Law Senate Law Firm – New Delhi, Mumbai

ravi@lawsenate.com

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Binding and Enforceable Contracts

To bind a party fully a contract is required to be neither void or voidable

Void Contracts are not enforceable

A contract signed by an unauthorised person is void

A contract with no consideration is void (S.25)

A contract for an illegal activity is void

A contract which prohibits a Doctor from practising as Doctor for three years, if he resigns from the hospital (S.27)

A contract which restricts the legal rights of a party (S.28) (BSNL Vs Motorola 2009 (2) SCC 337

A contract with uncertainty is Void (S.29)

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Voidable Contracts

If an agreement is enforceable by law at the option of one party

and not at the option of the other is voidable contract (S.2.i)

Means contract is enforceable until repudiated by one party

Example is a contract, after the period mentioned in the contract

and where time is the essence (S.55)

A Contract entered into by coercion S.19

A Contract entered by undue influence S.19A.

Impossibility created by one party S.53

Refusal of Party refusing to perform. S.39

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Damages - Features

Damages is a compensation for an injury (S.73)

Damages is not a Penalty (Subramania Satri Vs KS Raghavan 1987(2) SCC 424)

So Damages have to be reasonable ONGC Vs SAW pipes (2003) 5 SCC 705

Damages is a compensation for Loss

Loss is a pre condition for claiming damages

Damages can not be determined by a party

Damages have to be determined in an Adjudication

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Liquidated Damages S.74

Pre-estimated loss can be quantified and incorporated into a contract, as

liquidated damages (BSNL Vs Reliance Communication (2011) 1 SCC 394))

Liquidated Damage amount is the maximum damage which can not be

granted since it is in the contract (BSNL Vs Reliance)

Parties claiming liquidated Damages also have to prove that they incurred

loss (Kailash nath Associates Vs Delhi Development Authority 2015 SCC

Liquidated Damages specified in the contract must be granted when it is

not possible to ascertain the actual damages Chunilal Vs Century Spinning

1962 Supp (3) SCR 549

Damages/ Liquidated damages is not a debt. Union of India Vs Ramon Iron

Foundary 1974(2) SCC 231

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Time is the Essence of the Contract &

Liquidated Damages

Specifying a date of completion in a contract does not mean “ Time is the essence”

Contract stating many times “ Time is the essence of the contract” is not sufficient to make time the essence of the contract

Time is the Essence means parties wanted to complete the contract on a particular date

If the contract is not completed on the date specified in the contract, then it is voidable (S.55)

If the contract work is allowed to be completed after the said date mentioned in the contract, then time is not the essence of the contract

If time is not the essence of the contract then contract can be completed within a reasonable time so Liquidated Damages does not apply

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Time is the Essence of the Contract &

Liquidated Damages

If time is not the essence of the contract, then liquidated damages can not be claimed

Even in contracts where time is not the essence and Liquidated damages are prescribed – Damages can be claimed for the delay

If Liquidated Damages are prescribed for delay of one day, delay of one week, delay of one month etc., then the parties did not have the intention to complete the contract on a particular date hence time is not the essence.

In the contracts where time is not the essence, time can be made as the essence of the contract by issuing a notice fixing the revised date for completion Hind Construction Vs State of Maharashtra (1979) 2 SCC 70

If the owner waives a right to impose Liquidated Damages, then even when time is essence the liquidated damages are not payable J G Engineers Vs Union of India (2011) 5 SCC 758

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Bank Guarantee & Legal Position

Bank Guarantee can be Conditional & Unconditional

Bank Guarantee is an independent contract between the beneficiary and the Bank

The Beneficiary (Alone) can invoke the Bank Guarantee (Hindustan Construction Vs State of Bihar (1999) 8SCC 436)

Injunction restraining invocation of an Unconditional Bank Guarantee can be granted only on the grounds of fraud and irreparable loss to one party Mahatma Gandhi Shakra Vs National Heavy Eng Corporation 2007 (6) SCC 470

Injunction restraining invocation of a Conditional Bank Guarantee can be granted, if conditions are not fulfilled by the beneficiary (Hindustan Construction Vs State of Bihar (1999) 8SCC 436)

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THANKS

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