THE INDIAN

CONTRACT ACT (ICA),

1872

Contract Management
Two Important Clauses to be included

Force Majeure Clause

Arbitration Clause

[As per Arbitration (Amendment) Act, 2015 (w.e.f. 1.1.2016)

Arbitral award to be given within 12 months and
hearings to be on day to day basis.
If the Arbitrator gives the award in 6 months, he may be
paid an additional remuneration]

Force Majeure Clause does not cover:

Difficulty of Performance
Strikes and Lock outs in the establishment
Default of a Third party
Commercial impossibility

INDIGO Ticket- A good Example of

Force Majeure Clause
Terms and Conditions
This booking is governed by IndiGo's Fare rules and
conditions of carriage that are Flight Delays,
Reschedule or Cancellations. At any time after a
Booking has been made, we may change our
schedules and/or cancel, terminate, divert, postpone,
reschedule or delay any flight where we reasonably
consider this to be justified by circumstances beyond
our control, or for reasons of safety, or for commercial
reasons.

INDIGO Ticket -- Contd

Circumstances beyond IndiGos control can

include, without limitation, weather, air traffic

control, mechanical failures, acts of terrorism,
acts of nature, force majeure, strikes, riots,
wars, hostilities, disturbances, governmental
regulations, orders, demands or
requirements, shortages of critical manpower,
parts or materials, labour unrest, etc.

Air Vistara: Additional Grounds

The following are not considered within the
airline control:
Bandh; Bird Strike; Operating Crew unable to
reach due to congestion on roads; Security
congestion at airport terminals; Delays in
departure due to Offloading due Gate Noshows; Consequential delay due to late arrival
of the incoming aircraft due to congestion

What is a contract?
Section 2(h)
An agreement enforceable by law is a
contract.
Thus,
Contract = Agreement + Enforceability at
Law

Agreement?
Section 2(e)
Promise/(s)

Promise/(s)

= Agreement

(in exchange for)

Promise?
Section 2(b)
Promise = Proposal/Offer + Acceptance

Proposal?
Section 2(a)

Expression of willingness

With a view to seek the assent of the

other
Thus, mere expression of willingness doesnt
constitute offer/proposal.

Acceptance
Section 2(b)

Giving of assent to the proposal.

Enforceability by Law

Agreements which are not enforceable:

Illegal/unlawful agreements, e.g.,

to smuggle/to kill

Social Agreements (Balfour vs.

Balfour)

Agreements Declared Void under

ICA
e.g.
Agreement with or by a minor
Agreement in restraint of trade
Marriage brokerage contract
Wagering/Betting Agreements

Kinds of Contracts
From the point of view of
Enforceability

Void
Voidable
Valid

Void Agreement vs. Void Contract

Void Agreement

i.e., void-ab-initio i.e. unenforceable from the very

beginning
Void Contract
i.e., Becomes void at a later date
Voidable
i.e., void + able
i.e., capable of being declared void
(unenforceable) at the option of one of the parties
to the contract but not at the option of the other.

Valid Contract
Section 10
To be a valid contract, it must satisfy the
following:
1. Offer and Acceptance
2. Consensus-ad-idem (Meeting of minds)
i.e., persons must agree to the same thing in
the same sense and at the same time.
3. Intention to create legal relationship as
against social relationship or illegal/unlawful
relationship.

4. Free and Genuine Consent, i.e., free from

coercion
undue influence
fraud
misrepresentation
mistake
5. Parties competent to contract
6. Lawful consideration and object, i.e.,
something in return and that must be
lawful.

Valid Contract
(Object and Consideration usually overlap.
However, there may be difference at times
e.g., object may be to kill competition and for
that purpose in view, a senior manager of the
competitor may be paid a certain amount to
give unrealistically high quotation.)
Here: Object is to kill competition.
Consideration is :
(i) payment of money
(ii) giving high quotations

Valid Contract
7. Agreement not declared void.
8. Certainty of Meaning: e.g. sale and

purchase of 100 tonnes of oil. But which

oil? Thus, agreement being uncertain
not valid.
But, if the seller deals only in one kind of
oil and one variety, then it shall be valid
since it is capable of being made certain.

Valid Contract
9. Possibility of performance:

Impossibility whether known to the

parties or not, renders a contract
invalid.
10. Necessary legal formalities: e.g.
sale-deed of immovable property.

Void vs. Illegal Agreements

Void Agreement
Unenforceable
Not Punishable
Collateral transactions unaffected.
Illegal Agreement
Unenforceable
Punishable (fine or imprisonment or both)
Collateral transactions are also void.

Specific and General Offer

Specific Offer:
made

to a specified person or a group of

persons.
can be accepted only by the person to
whom made.

Thus, if offer is addressed to A, B

cannot accept it.
Case Law: Boulton vs. Jones

 General Offer:
which

is not a specific offer.

made to the world at large.
can be accepted by anyone by
complying with the terms of the offer.
Case Law: Carlill vs. Carbolic Smoke

Ball Co.

Offer vs. Invitation to offer

Illustrations of Invitation to Offer:
Prospectus

issued by a college.
Prospectus issued by a company.
Invitation of bids in an auction.
Price-catalogues, price lists, quotations
Display of goods with a price-tag in a
shop window/or in a store.

Special Terms in a Contract

Examples: Dry cleaners receipt, couriers
receipt, shipment receipt, insurance policy,
etc.
Binding if communicated or attention drawn to
the fact that there are certain special terms
and conditions.
Not binding if attention is not drawn and the
other party not aware of.

Express and Implied Contract

Express contract: i.e, where terms

of the contract are stated in wordsspoken or written.

Implied Contract: i.e, where terms
of a contract may be inferred from
conduct of the parties or
circumstances of the case.

Cross Offers & Counter Offers

Cross Offers

Identical offers cross each other and none of

the parties is aware of the same. Doesnt
result in a contract unless one of them is
accepted.
Counter Offer
Instead of accepting an offer, the offeree
makes a counter offer, i.e., accepts the same
subject to certain conditions or qualification.

Contracts through Post

Communication of Offer

is complete when the offeree has the

knowledge of the same.
Communication of Acceptance
It has two aspects, viz.,
As against the proposer
As against the acceptor

As against the proposer

Communication is complete as soon as a duly

addressed letter of acceptance is put into the

course of transmission.
Whether the same reaches the proposer or not.

As against the acceptor

Communication is complete only when the

proposer has received the letter and learnt the

contents thereof.

Communication of Revocation
Communication of revocation (of offer

or acceptance) is complete:
As

against the person who makes it

when it is put into the course of
transmission.
As against the person to whom it is
made, when it comes to his knowledge.

 Comparing offer to a train of gunpowder

and acceptance to a lighted match stick

How far correct?
William Ansons observation though valid in
the English context doesnt hold good in India
since in India acceptance is revocable.

SERVICE AGREEMENTS
Legal position

Capacity to Contract
Section 11

Only a person:
who is of the age of majority
of sound mind, and
not forbidden under any other law

Minor
Who is a Minor?

Already discussed.
What happens to a contract with or by a
minor?
Contract is void-ab-initio, i.e., neither the
other party nor the minor can enforce.
Case law : Mohiri Bibi vs. Dharmdas Ghose.

Minor cannot be asked to refund

the benefits received.
However,
Minor can be a promisee/beneficiary.
Minor cannot ratify even after
attaining majority.
What about a situation where minor
represents to be of the age of
majority?

Contract still void

If benefits received can be traced in the same

or altered form, Minor liable to restore.

Minor liable for necessaries supplied to him
or any loan for necessaries to him or to any of
his dependants.
However, only properties of the minor, if any
shall be liable.
Case law : Nash vs. Inman.

Mental Incompetence
Idiots
Lunatics
Intoxicated persons
Contract void-ab-initio except for
necessaries as in the case of
Minor.

Section 12
Person usually of unsound mind but

occasionally of sound mind can make a

contract when of sound mind (Onus on
the other party)
Person usually of sound mind but
occasionally of unsound mind cannot
make a contract when of unsound mind
(Onus on the person claiming to be of
unsound mind)

Free Consent
Coercion (Sections 15 and 19)
Committing or threatening to commit
an act forbidden under IPC
Unlawfully detaining the properties
of another
Contract voidable at the option of the
aggrieved party.
Benefits received to be returned.

Undue Influence
One party is in a position to
dominate the will of the other.
Uses that dominance to secure
undue/unfair contractual
advantage

Free ConsentContd
In some relationships, it is

presumed, e.g., Parent and

Child; Spiritual Advisor and
Disciple; Trustee and
Beneficiary; Doctor and Patient;
Lawyer and Client.

Fraud (Section 17)

Active misrepresentation of a material fact
Active concealment of a material fact
A promise made without any intention of

performing it
Any other act fitted to deceive
Any such act or omission which the law
specifically declares to be fraudulent

Fraud
Contract voidable at the option of the

party defrauded.
Claim for damages.
However, relief available only if party
actually defrauded.
A fraud that does not defraud is no
fraud.
Case of defective cannon

Misrepresentation
Contract rendered voidable.
Damages cannot be claimed.

Mistake
Of Law
Of Fact
Mistake of Indian Law doesnt

render a contract void or voidable.

Ignorance of law is no excuse
Mistake of foreign Law to be treated
as mistake of fact.

Mistake of Fact
Unilateral

- does not render contract void except

where induced by fraud
Case Law: Cundy vs. Lindsey
Bilateral
- absence of consent contract is void-abinitio
Case Law: Henkel vs. Pape (30 Rifles)

Consideration - Meaning
Something in return
Section 2(d)
When at the desire of the promisor, the

promisee or any other person has done or

abstained from doing, or does or abstains
from doing, or promises to do or promises
to abstain from doing something, such act
or abstinence or promise is called a
consideration for the promise.

Consideration - Rules
Past, present or future
Must move at the desire of the

promisor
May move from promisee or any
other person
Need not be adequate but must
have value in the eyes of law

No Consideration, No Contract
Exceptions
(1)(a) Natural love and affection
(b) Between parties in a near relation
(c) Written
(d) Registered
(2)(a) Promise to compensate
(b) Voluntary act which promisor was legally
bound to do

No Consideration, No Contract
(3) (a) Written promise
(b) to pay time-barred debt.
(4) Bailment
(5) Agency
(6) Gift

Breach of contract
Both parties are promisors as well

as promisees
If any of the promisors refuses or
fails to perform, he is said to be
guilty of breach of contract.

Anticipatory Breach
Breach before time for performance

arrives
Promisee may proceed:
(a) As soon as breach is committed; or
(b) Wait till the time of performance arrives

Remedies
(1) Suit for injunction Brook Bond Ltd. vs. Vijay
Mallya
(2) Claim for damages

Actual Breach
(Refusal or failure when time for

performance is due, or
During performance.
Remedies

Right of Rescission
Claim for damages
Suit for specific Performance
Suit for Injunction
Quantum Meruit

Remedies for Breach of Contract

Claim for Damages
Damages
U/S Section Special
73 Damages

Only damages
naturally flowing
from breach
(Ordinary
Damages)

(No claim for

consequential loss
unless in the
Contemplation
of the parties
(Hedley v. Baxendale)

Exemplary
Damages

Nominal
Damages

Damages
U/S Section 74

Pre-fixed
Damages

Penalty
Liquidated Damages
(What can be recovered
is actual loss or
amount prefixed,
whichever is less)

Ordinary Damages
Measure of ordinary damages is :
The difference between the market price and

the contract price, i.e,

Market price-Contract Price = Ordinary Damages
Any change in price subsequent to the date

of breach is not to be taken into account

No claim for any Remote Loss or
Consequential Loss

Special Damages
Special damages not directly resulting from

the breach, e.g., Loss of Profit

Special damages are not recoverable unless
the same were in the contemplation of the
parties at the time of making the contract
Case: Hadley vs. Baxendale

Exemplary/Punitive/Vindictive Damages
Such damages have been awarded in cases

like:
(a) for breach of promise to marry
(b) for wrongful dishonour of a cheque by a
bank
The measure of damages in case of (a) is
dependent on the severity of the shock to the
sentiments of the promisee and in case of (b)
the rule is smaller the amount of the cheque,
larger shall be the amount of damages

Nominal Damages
Nominal damages means : damages in name

only.
Such damages are awarded where the
promisee suffers no monetary loss
Such damages are awarded at the discretion
of the court

Liquidated Damages vis--vis Penalty

Both are pre-fixed in the contract itself
If the specified sum represents a fair and genuine pre-

estimate of the likely loss due to breach, it is called

Liquidated Damages.
But, if the sum fixed is disproportionate to the
damages likely to occur, it is deemed to be a Penalty.
In India, what may be recovered, in the event of
breach is :
Lesser of the two:
1. The amount of Penalty
2. The amount of Actual Loss

Stipulation for Interest

A stipulation for interest, in case of default, for the
period of default is not a penalty, if the interest is
reasonable
A stipulation for increased interest from the date
of default shall be a stipulation by way of Penalty.
Compond interest: Not Penalty, if stipulated in the
Agreement
Forfeiture of Earnest Money or Security
Deposit

Resolution of Disputes through

Arbitration
Must be in writing
As per the Arbitration and
Conciliation Act, 1996, no
separate agreement is required;
a clause to the effect that in case
of dispute, matter shall be
referred to Arbitration is sufficient.

Even, the word Arbitration is not

required to be specifically
mentioned- [Malikarjun Vs.
Gulbarga Univ. AIR 2004 SC 716;
Punjab State Vs. Dina Nath AIR
2007 SC 2157].

NOTE: As per Section 5 of the Arbitration

and Conciliation Act, 1996, provisions of
the Arbitration and Conciliation Act, 1996
are overriding.
In case of reference to Arbitration in the
contract, no party is allowed to move the
Court. Matter must be referred to
Arbitrator(s).

Terms of Arbitration
Parties are free to decide:

the manner of appointment

The language
Place of arbitration etc.

In the case of Pricol Ltd. v. Johnson Controls

Enterprises Ltd. (2014), the sole arbitrator was

to be appointed mutually but in case of
disagreement by the Singapore International
Arbitration Centre (SIAC) for proceedings to
take place in Singapore.

 Since the parties could not agree Johnson

moved the SIAC to appoint the arbitrator to

which Pricol did not agree and moved the
Supreme Court for appointment of arbitrator.
Supreme Court upheld the appointment of
Arbitrator by SIAC being in accordance with
the arbitration agreement.

Number of Arbitrators (Section 10):

Parties are free to determine
However, the number should not be
an even number.
Where the parties do not fix any
number, reference shall be to a sole
Arbitrator

 In arbitration with three

arbitrators, each party shall

appoint one arbitrator, and the two
appointed arbitrators, shall appoint
the third arbitrator who shall act as
the presiding arbitrator.

Where parties fail to appoint the sole

arbitrator or the two arbitrators fail to
appoint the Presiding Arbitrator within a
period of 30 days, the appointment
shall be made upon request of a party,
by the chief justice of the High Court
or any person or institution
designated by him.

 In case of an international

commercial arbitration, the Chief

Justice of India or the person or
institution designated by him may
appoint an arbitrator of a nationality
other than the nationalities of the
parties where the parties belong to
different nationalities

Appointment of an Expert by
Arbitral Tribunal
Unless otherwise agreed by the parties, the

arbitral tribunal may

Appoint one or more expert to report to it
on specific issues to be determined by
the arbitral tribunal, and
Require a party to give the Expert any
relevant information,
Ask the Expert to be present during oral
hearings to clarify matters.

Correction and Interpretation of

Award; Additional Award
Within 30 days of the Award, a party, with a

notice to the other party, may request the

Arbitral Tribunal to correct any clerical or
computational errors.
Likewise, if so agreed by the parties, a party,

with notice to the other party, may request the

arbitral tribunal to give an interpretation of a
specific point or part of the award.

 Again, a party with notice to the other party

may request, within thirty days from the

receipt of the arbitral award, the arbitral
tribunal to make an additional arbitral
award as to claims presented in the
arbitral proceedings but omitted from the
arbitral award.

 If considered justified, the Arbitral Tribunal will

make the additional award within a period

of 60 days.

Setting Aside an Arbitral Award

Application to the Court , within a period of 3

months,
only on the following grounds:

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid

under the law ; or

(iii)the party making the

application was not given

proper notice of the
appointment of an arbitrator or
of the arbitral proceedings or
was otherwise unable to
present his case; or

(iv) the arbitral award deals with

a dispute not contemplated by

or not falling within the terms
of the submission to arbitration,
or it contains decisions on
matters beyond the scope of
the submission to arbitration

 (v) the composition of the arbitral tribunal or

the arbitral procedure was not in accordance

with the agreement of the parties.
Again, the Court will set aside the Award if the
Court finds that
the subject-matter of the dispute is not capable
of settlement by arbitration under the law for the
time being in force, or
the arbitral award is in conflict with the public
policy of India.

DISPUTES BEYOND JURISDICTION OF

ARBITRATION
Disputes involving criminal offences
Even in case of civil rights following matter

cannot be referred to arbitration:

(a) Matrimonial matters

(b) Industrial Disputes and Revenue matters

(Income Tax & other Tax matters).

(c) Testamentary matters under Succession Act.

(d) Motor Vehicle Accident Claims.

(e) Matters under Indian Trust Act, Trusteeship

of Charitable Institutions, Public charity
matters.

(f) Determination of guardianship of wards.

(g) As per Section 24 of Indian Contract Act

matters relating to unlawful agreements

Enforcement of Arbitral Award

As per Section 36, an Arbitral award shall
be enforceable in the same manner as if it
were a decree of the Court.

Enforcement of Certain Foreign

Awards
New York Convention Awards, 1960 and Geneva

Convention Awards, 1924

Regarding Enforcement of Foreign Award/Nonenforcement, same provisions apply as are contained
in the Arbitration and Conciliation Act, 1996 except:
The award should have become Final in the
country in which it has been made;
The Award must not have been annulled in
that country
The Award in original/English Language
certified copy is deposited.