ADVANCED CONTRACTS, TENDERING

AND
PUBLIC PROCUREMENT

Prof. Sairam Bhat

Law
IIT Madras
 INDEX

S.NO TOPICS PAGE.NO

Week 1
1 Course Outline and Overview - Part 01 4
2 Course Outline and Overview - Part 02 8
3 Introduction to Contract Law 13
4 Development of Contract Law 23
Week 2
5 Evaluation of Contract Law 31
6 Formation of Contract - Offer 45
7 Formation of Contract - Revocation of Offer 58
Week 3
8 Formation of Contract - Capacity to Contract 64
9 Formation of Contract - Capacity & Consideration 71
10 Formation of Contract - Free Consent - Part 01 83
11 Formation of Contract - Free Consent - Part 02 91
Week 4
Formation of Contract - Free Consent III: Unconscionable and
12 Standard Form of Contracts 96
13 Formation of Contract- Free Consent IV: Voidable Contracts 107
14 Formation of Contract: Legality of Object & Public Policy - Part 01 112
Week 5
15 Formation of Contract: Legality of Object & Public Policy - Part 02 125
16 Formation of Contract: Legality of Object & Public Policy - Part 03 130
17 Formation of Contract: Legality of Object & Public Policy - Part 04 142
18 Void Agreements - Part 01 150

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19 Void Agreements - Part 02 156
Week 6
20 Void Agreements - Part 03 164
21 Void Agreements - Part 04 172
22 Discharge of Contracts - Part 01 180
23 Discharge of Contracts - Part 02 190
Week 7
24 Breach of Contracts - Part 01 199
25 Breach of Contracts - Part 02 208
26 Breach of Contracts - Part 03 215
27 Liquidated Damages in Government Contracts - Part 01 224
28 Liquidated Damages in Government Contracts - Part 02 238
Week 8
29 Special Contracts: Bailment - Part 01 253
30 Special Contracts: Bailment - Part 02 269
31 Special Contracts: Pledge 280
32 Special Contracts: Indemnity - Part 01 291
33 Special Contracts: Indemnity - Part 02 299
34 Special Contracts: Guarantee - Part 01 303
35 Special Contracts: Guarantee - Part 02 312

Week 9
36 Special Contracts: Agency - Part 01 323
37 Special Contracts: Agency - Part 02 336
38 Special Contracts: Sale of Goods - Part 01 342
39 Special Contracts: Sale of Goods - Part 02 348
40 Special Contracts: Sale of Goods - Part 03 357
41 Special Contracts: Sale of Goods - Part 04 368
Week 10

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42 Special Contracts: Sale of Goods - Part 05 374
43 Tendering, Contracts, Public Procurement 388
44 Public Private Partnerships: Law and Policy in India - Part 01 396
45 Public Private Partnerships: Law and Policy in India - Part 02 416
46 Public Private Partnerships: Law and Policy in India - Part 03 429
Week 11
47 Public Private Partnerships: Law and Policy in India - Part 04 453
48 Government Contracts - Part 01 463
49 Government Contracts - Part 02 477
50 Government Contracts - Part 03 490
51 Government Contracts - Part 04 507
Week 12
52 Government Contracts - Part 05 525
53 Bank Guarantee 539
54 Writ Reliefs in Government Contracts - Part 01 560
55 Writ Reliefs in Government Contracts - Part 02 568
56 Arbitration Clauses in Government Contracts 587
57 Drafting of Contracts - Part 01 619
58 Drafting of Contracts - Part 02 626
59 Challenges to Drafting of Contract - Part 01 641
60 Challenges to Drafting of Contract - Part 02 645
61 Challenges to Drafting of Contract - Part 03 650
62 Challenges to Drafting of Contract - Part 04 654
63 Challenges to Drafting of Contract - Part 05 662

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture - 01
Course Outline and Overview – Part 01
(Refer Slide Time: 00:16)

Hello everyone. Welcome to the course on advanced contracts. We will start the course by
understanding the course content. This course is going to be offered for 12 weeks and the
week-wise plan on dealing and understanding contracts is as follows.

In the first week we will try and understand the basics of contract law. We enter into
contracts on a day to day basis in our everyday lives some are implied some are expressed.
Implied contracts include instances such as promise to pay for newspaper that is being
delivered to us early in the morning along with the milk that comes to our door, taking public
transport or an OLA or Uber. Express contracts include employment contracts that we sign to
get employed or the commercial contracts on the sale or purchase of property. So, we will try
and understand what it takes to understand the law in relation to contract, and what does the
law say. And hence a discussion on basic introduction to Indian Contract Act, 1872, will be
attempted in week one.

In week two we will discuss the essential conditions of a valid contract that includes an offer,
acceptance, capacity, consideration and free consent. Without these a contract will not be

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enforceable at law. So, we will try and understand them in a modern context i.e. in a sense
how in today's times these conditions of a valid contact are important.

In week three we will discuss unfair terms in contracts. This is a major problem in today's
world especially in the context of globalization and privatization. Sometime contracts are
used to exploit the other party and that is why there was a necessity for a consumer
protection law. So, that consumers are protected from some of these unfair transit contracts.
Further, we will try and understand the difference between void and voidable contracts. But
most importantly in week three we will try and look at public policy and how the courts can
intervene on the grounds of public policy to hold a contract as being void. This is also a
major part of the course. Because, in the later weeks of the course we will be talking about
clauses like non-compete clause, confidentiality clauses, employment bonds etc. Further, it is
also important for to understand the mechanisms in which the contract has to be performed
and what are the conditions for discharge of contract. These topics will also be covered along
with the aspects of Quasi contracts.

In week four, we will try and look at the different remedies for breach of contract. We will
discuss the various aspects of the Specific Relief Act which was also amended in 2018 to
bring in a very interesting remedy called substituted performance. This will be discussed
along with the law on damages.

After having laid the foundations of contract law in the first four weeks and discussing issues
such as which is a valid, which is voidable, which is void contract, and what are the remedies
that parties have, then in week five, we will get into the understanding the law on special
contracts. The Indian Contract Act, 1872, lays down the basic principles of the rights and
obligations of parties in special contracts. It contains contracts such as agency contract, which
is also called as representative contract, Indemnity and guarantee.

In week six we will be discussing special contracts such as Bailment, Pledge, Lease and Hire-
purchase. After that, we will discuss the law on sale of goods and partnership in week seven.

Starting from week eight, we will branch out to understanding some of the modern forms of
contract. For example, we will try and evaluate whether a student university relationship can
be governed under contract law as is being done in the United Kingdom currently as of now.

We will also try and understand electronic contracts. With the passing of the Information
Technology Act we can also enter into electronic contracts. We know e-commerce is catching

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up and there are a lot of consumer contracts that happen online. Business contracts can also
be entered into online. we have moved from physical signature to electronic signature all of
those aspects will be discussed and analysed in week eight. Further, we will also look at some
of the aspects of Escrow agreements. These are special types of agreements that are now
being created which closely resemble an agency contract.

In the last four weeks, we will be discussing government contracts, tendering and
procurement. We will start with government contracts. The constitution of India does define
the aspects that are required for an enforcement of a government contract under Article 299.
government contracts kind of assumes a major part of contracting and business in India and
there are so tenders are floated and public procurement is being done on a daily basis.
Further, there is privatization of government businesses and hence this is a unique
opportunity to understand the law on government contracts. Firstly, we look at the
constitutional basis, and discuss the issues of transparency and accountability. Secondly, we
will also be looking at competitive pricing and when tendering is required in law and can it
be avoided. We will also discuss some of the pre-tendering processes, evaluation of tender
bids, determination of L1, H1, the difference between a letter of intent and MOU, the process
of issuing work orders. We will also discuss the Central Vigilance Commission (CVC) and
Comptroller and Auditor General (CAG) of India guidelines on public procurement.

We will bring a lot of practical aspects in the course where we will try and look the various
aspects of negotiation, drafting a contract, evaluating certain clauses in a contract. A very
practical hands-on approach will be adopted in the advance weeks so that the students are not
only getting an experience of theory of contract law but they will also get into some of the
practice and the interpretation and construction of contract law. We will look at specific
clauses for example evaluating a force major clause, what has been the supreme court
guidelines on force Majeure. After the COVID pandemic, the force Majeure clause has been
a very important critical clause in most contracts.

Section 56 of the Indian contract act talks about the law of impossibility of performance. We
will compare impossibility of law in contract to force majeure and whether there a difference
between the two. Judicial review of government contracts will also be a critical factor
because it can be used to check unfairness in contracting both in the procedural sense and
also in the substantive sense. And hence, these cases inform us how the courts try and

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scrutinize some of these contracts because there is public money that is involved in making
government contracts.

In the last week, we will discuss Alternate Dispute Resolution such as arbitration. We will
also discuss about the Commercial Court which is now being established to handle disputes
in contracts. We will try and understand the Commercial Court Act, 2015. Further, we will
try and look at aspects of confidentiality, intellectual property protection, data protection in
government contracts as a specific issue as well.

In this 12 weeks course our attempt is to make this course useful for practitioners i.e. those
who are actually executing, implementing, negotiating contracts for organizations. This
course will be useful to government officers, managers, leaders in organizations who would
want to have an insight into contract law in order to understand the practicalities of contract
law. This will ensure that their contracts make a business profitability, are legally tenable,
and do not run into disputes. We hope that this course will have a learning outcome which
can be taken forward in organizations to actually strengthen contracts in both individual as
well as an institutional sphere. So, welcome to the course and in the next part we would start
with week one in understanding the basics of contract as we go forward.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture - 02
Course Outline and Overview – Part 02

(Refer Slide Time: 00:16)

Contracts play a very critical part in our day-to-day activities. Be it contracts of implied
nature (e.g. hiring an auto rickshaw or a bus) or contracts that are expressed, which have a
formal documentation of what has been agreed, say, buying of immoveable property. And
hence contracts being an integral part of our day-to-day activity. The law that governs this
relationship becomes a very important point of understanding. Why?

It is because the kind of challenges that contracts give rise to have also given rise to
numerous disputes. These disputes are either resolved through arbitration or land up in the
courts. And because, of contractual disputes either we have a good business or we have bad
business. A good contract results in good business whereas a bad contract results in bad
business. Hence an understanding of contract law is essential for good business. In India there
is Federal law or a Central law on contracts called the Indian Contract Act, 1872. It is a
British made law. It is a uniform law for the whole of India, including Jammu & Kashmir.
The Britishers said that this is a uniform law which will actually promote commercial
transactions.

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Since, commercial transactions are the basic market forces of an economy. hence, a robust
contract law gives a kind of a confidence for a robust commercial and business relationship
and hence the foundation of all business. It is kind of a law that actually promotes and
protects business relationship between the parties.

There are few books that the CEERA team has authored and which can be useful for further
references and readings while we understand contract law in this course. The first book is
published by the National Law School of India University. it is titled Contracts, Agreements
and Public Policy in India. We call it the NLS book series 1. It has some very interesting
articles on modern forms of contract it has included different aspects of development that the
courts have actually contributed in understanding and interpreting contract law. It is a very
interesting book that can be read to understand contact law in a much better way.

The sage law book on law of business contract is also very interesting. It has some modern
kinds of contracts like joint ventures and franchisee contracts. The legal development of these
contracts are very important for this course to look at contract law in the current context
especially as in understanding about the challenges of globalization of contract law.

There is another book that has been published by Eastern Law House. It is on privatization
and globalization. This is an era that has brought in a lot of multinational dimensions in
contract law especially when we talk about international principles of contract law and how
arbitration has moved away from India. Further, there is an influence of other jurisdictions
especially the American law, the common law (that is the United Kingdom) on the contract
law in India. Some principles from Singapore are also influencing contract law. This book
will help to understand the impact of privatization and globalization to Indian businesses.

If you want to look at specialized contracts especially in the energy sector, for example, we
talk about power purchase agreements. The energy sector is the sector that is actually
booming, it is a sector that has a lot of opportunities both in the renewable sector about in
terms of solar, in terms of wind and so on and so forth. There is a lot of emphasis on
renewable sector because of climate change and other policies. The entire law and policy on
that is available in this book. It looks at the non-renewable sector as well including coal and
other fossil fuels that have been contributing to energy and power. The production and
distribution of the same is done through contracts. And hence, contracts play an important
role in the dimension of energy policy in India as well.

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This book has discussed about the privatization of the energy sector post the Electricity Act,
2003. It talks about the regulators that has come into place. It talks about the powers of the
central electricity regulated commission, which include the power to moderate contractual
prices in the energy sector. There are some very interesting cases from the energy sector that
we will discuss in contract law. So, this book can also be an additional useful tool.

Finally, coming to public private partnership. This is the mantra for government contracts
right now. The government does not want to entirely privatize because, there are a lot of risks
involved in entire privatization. India is a welfare state based on a socialistic model at least in
the benchmark of grassroots policy and developmental debate. And hence, the PPP model has
become the model of doing contracts and businesses at the governmental level. Government
holds a great amount of opportunity for business and contracts and hence government
contract has received a whole new dimension through public private partnership.

The last book that you see on the slide is a book that actually gives a fantastic introduction to
the model or the history of PPP, the current model on PPP and the development into EPC
contracts. Engineering, Procurement and Construction (EPC) contract is also one of the
methods that the government now adopts in its model. We see PPP in so many sectors right
from the airports to the highways to the defence to even the railways. The public private
partnership model is an interesting model and the bedrock of a PPP is a contract. Everything
happens through the contract model. they are long-term concession agreements and hence
there are a lot of implications of how this can be looked into.

Let us move on to understanding the different aspects of contract law i.e. the Indian Contract
Act, 1872. You can keep a bare act of the same or you can download it online, It is the
foundation law, it is the mother law in understanding which is a valid contract and what is an
enforceable contract.

Some of the contracts in India are not going to be enforced by the courts of law. There are
strict regulations of which contracts are acceptable and which contracts are not acceptable.
So, understanding the entire law becomes critical and hence this is the first law that we will
take into consideration in this course.

The Indian Contract Act, 1872 does have certain remedies for breach of contract. So, if the
parties do not fulfil their promises if they do not fulfil their obligations there is a penalty and
liability. So, one cannot get away with the law, one cannot get away with contractual

10
obligations simply like that. The law imposes certain obligations if a party fails to honour the
contract. And hence, while damages are one of the remedies that are looked in the law of
contract there are several other remedies that are also available to the parties and those are
mentioned in the Specific Relief Act of 1963. It has been amended in 2018. So, when we talk
about what courts can do in case a contract is breached, what is the function of the court and
how do they remedy the relief that the parties require for breach, the Specific Relief Act is a
very important legislation to refer.

Next, we have the Indian Partnership Act, 1932. It is a form of business and is a very integral
form of business. But, in India we have two laws on partnership. One is the Limited Liability
Partnership Act of 2008 which is a recent law. It is mostly part of business and corporate law.
It is an alternative model of doing business if you do not want to form a company for
business.

The earliest form of doing business through partnership was the Indian Partnership Act of
1932. Again a law made during British times. One man is limited in terms of resources
manpower or finance which may not be sufficient to propel the economy and business. So,
two or more people can come together, put in their human resources, capital and can actually
start doing business in India.

So, when two or more people come together and join their stocks together either a public
limited company or a partnership model of business can be formed. However, when two or
more persons come together and they want to do business, the bedrock of this kind of a
business is also a contract. This is called the partnership deed which is the basis on which the
two or more people decide to form a partnership, actually go about their business. And hence
there is a strong linkage of contracts even for formation of a business and even for running of
a business.

The fourth law that is be useful for the present course is the Information Technology Act of
2000. This law was amended in 2008. We will refer to this legislation because, we are talking
about modern forms of contract which we call as electronic contracts or digital contracts or
contracts in the internet world. These forms of contracts are now increasing. Most of us are
actually ordering online, we are booking online, everything is online right from hotels to
flights to trains even food or grocery, everything has moved to the digital space and internet
is widely used for contract making.

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While the Indian Contract Act, 1872 encompasses all kinds of contract. It is a good law that
has withstood the test of times. But the aspects of information technology law which governs
internet and commercial transactions or what we call as E-commerce transaction is also very
important. There are a couple of sections in Information Technology Act that are very critical
for our understanding of contract including Section 10A. We will refer to this law to actually
look into E-contracts.

Finally, we have the Sale of Goods Act. This was a law that was brought about in 1930. It is a
special enactment that deals with goods or commodities or material that are kept on sale.
There are two kinds of sales that can take place - one is a moveable property the other is of
immoveable property. “Goods” which are part of the moveable property are covered under
this special legislation. The Sale of Goods Act interestingly gives us the dimension of what
can be a warranty, when does sale actually take place. Incoterms (i.e. international
commercial terms) are also covered under this law. It is a complimentary law, a special law
because it talks about special remedies for sale of goods. There are special rights to the
parties especially to the sellers and the buyers. The aspect of auction sale for the first time
gets defined under this law and hence this law adds a lot to our understanding of contracts.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 03: Introduction to Contract Law

(Refer Slide Time: 0:27)

Let us take a oath in this course: “The views, thoughts and opinions expressed in this
lecture belong solely to the author, that is me, and not necessarily to the author's
employer, organization committee or other group or individual.” “We assume no
responsibility; that means ‘we’ means ‘this course’ assumes no responsibility or liability
for any errors or obviously in the content of this course, you cannot sue us.

The information contained in this presentation is provided on and as is basis condition.”

So, I give you no guarantee of what the course content is, either of the completeness of
the topics to be covered or the accuracy of the information that is shared or the usefulness
or timeliness of this information for you. This is my oath friends for this course. I hope
you have read this and you have agreed to take this course. Thank you.

This is a standard disclaimer in most contracts, so wherever contracts are made, the one
who provides the product or the service comes up with such kind of disclaimers in which
the service provider or the product manufacturer clearly says that we assume no

13
responsibility or no liability for any kind of fault, defect, errors, omissions, shortcomings.
They simply make a very tall statement which many customers, consumers, citizens have
already agreed to and this becomes their defense in court, saying that the customer or the
consumer has already agreed to this contract, we already told him the disclaimer and
hence we are not responsible.

Now, why do people get into such a habit is because please note in any kind of contract,
the market conditions play a very critical role. In market conditions, many of these
service providers or these manufacturers or these producers are in a position of
dominance and the position of dominance is that they have a higher bargaining power.
There is a higher bargaining power because there is a disparity between the demand of
the market and the supply in the market.

So, whenever demand increases and the supply is in short, the supplier has a higher
bargaining capacity and the supplier or the producer dominates contractual terms and
conditions. So, he creates this clause. Why? Because he has the power to draft the
contract, he has the power to put across the terms and conditions of the contract and he
clearly then says, “Look I will hold no responsibility of that”.

The question that comes is - what is the legal validity of such disclaimer clauses. Are
these disclaimer clauses valid and enforceable? If they are valid and enforceable, the
seller can escape liability or responsibility. Are they entirely invalid? If they are entirely
invalid the citizens and the consumers get to protect their rights in contract but the
question is to what extent.

The next question is how are consumer rights to be defined? Are they defined under the
consumer protection law? or can they be also be brought about in Contract Law? In many
cases one may enter into a contract but not necessarily as a consumer. So, it is important,
in this context, to understand that the importance of modern day contract probably comes
across from such kinds of one-sided, arbitrary, unfair, clauses and terms and conditions in
a contract which we all would see in your everyday life.

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For example, when we go to a cinema theater - where do we see the terms and conditions
to see a movie in a similar theater. Secondly, most often than not the cinema theatre
owner will say look I assume no responsibility or liability for the content of the film or if
the film closes or forecloses a little bit early.

So, all of these are standard clauses, they are there in the market, we have to test and
evaluate whether these clauses are valid, whether such kind of contracts are permissible
or not because if such kind of contracts or clauses are allowed in a legal system,
obviously it will result in exploitation. It will result in market trying to make profits from
the vulnerable sections of the community and that is probably the reason why there is a
need for Contract Law to understand, evaluate, moderate and determine the rights and
obligations of the parties to a contract.

Why should we study Contract Law?

Why should we study Contract Law? What is the importance and what will Contract Law
study do? Contract Law is a law that attracts human behavior. E.g. the behavior of the
seller and also the behavior of the buyer. Law basically is called a power, it actually
regulates discipline, law regulates human behavior in one sense, because if we do not
regulate human behavior, the human behavior can be that of a social animal, he can get
exploitative, he can actually get dominating and people will feel that law and legal
system does not exist.

So, to bring peace and order in a society law is required. Now, to bring peace and order in
commercial transaction, in market transaction, in economy, in businesses, Contract Law
is very, very important. And what does this law set across? When the legislature sets out
Contract Law they expect a certain kind of behavior. The certain kind of behavior is
expected from the parties in the contract, for example, when we talk about special
contracts, we may be talking about payment, pledge, integrity, guarantee and agency
these are special kind of contract, sale of goods is also a special kind of contract.

So, what does the legislature prescribe in the law. They prescribe what should these
parties to the contract do. For example, in bailment we say what should the bailor do and

15
what should the bailee do? The interesting concept is that the law sets out the rights of the
parties. For example, rights of the bailor, interestingly will become the duties of the
bailee, so the contracting parties can make a contract, they have the freedom, no problem,
no challenge regarding the same. But that freedom is not an absolute freedom, the law
will actually set out the societal norms for those kinds of freedom to come as well.

Continuing on our discussion - why should we study Contract Law? There are certain
theories which have said that there is actually no need for law in contract, and that there
cannot be a law for every kind of contract. For example, say a cab service driver is taking
you from destination A to destination B, can you have a separate law, can you say that
because a company is hiring an employer can you have one law just for that.

Let’s take another example, suppose we come across market buying and selling of
different products, can we have a separate law for each of these contracts. No, we cannot
have specialized Contract Law but we can have a general Contract Law, the reason being
that when we say there is freedom of contract, there is a theory called the freedom of
contract theory, it says that the parties must be free to enter into any kind of contract.

This must be let, go in a society because that must be something that everyone should
have a choice of and this will encourage freedom of choice, freedom of business and it is
one of the essential freedoms that every democratic country would want to nurture and
actually develop and hence freedom of contract is actually very important.

However, when we have freedoms, we have certain reasonable restrictions. No freedom

is absolute and hence freedom of contract also cannot be absolute. While we must have
the freedom to choose who we want to contract with and what we want, there ought to be
some kind of a law or regulation that is necessitated by saying, ‘Okay, look you cannot
probably hire someone to cause damage to a third party’, we say this is called a Supari
Contract. We cannot hire someone to actually do some contract killing or say kidnapping.
We have to have certain public order in place about which contracts can be permitted and
which kind of contracts cannot be permitted and hence there are some reasonable
restrictions which are justified by a public order.

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Secondly, although we have should have this freedom, the freedoms often get abused or
exploited by a few individuals who probably think that this is something that they can
actually do. So, freedoms have to be regulated in good faith and hence it is very
important that when parties choose each other or try to trade or contract with each other
they must do so in good faith.

It is one of the principles in contract, that parties must exercise good faith. Good faith
means that there should not be any malafide intention, there should not be a bad motive
and when people actually contract, both the parties must benefit, and hence contract must
promote that win-win situation. For which some curtailment of the freedom of contract
through law or through Contract Law is probably one of the justified reasons.

Further, very often than not we can actually make an agreement in which we say I do not
want to make it enforceable. Parties can actually make such agreements which are not
enforceable of law, they just want to make a social agreement. There may be so many
such relationship that may resemble like contract but should not be treated as contracts.
And that is where the law will try to intervene, and set down certain regulations, certain
guidelines, certain essentials to ensure which contracts have to be enforced and which
contracts can be left outside because it is just an arrangement or some kind of relationship
between the parties and it is best left to maybe some other legislation to regulate and
govern or left to the freedom of choice of the parties as well.

This kind of a freedom theory does not say that this freedom is not available but rather
says that you still have the freedom, but the freedom should be in such a place where you
can negotiate the terms of the contract in a trust relationship in a good faith relationship.
We can form the contract on a fair basis and that will properly promote the parties, that
will promote the legal system to be an orderly legal system following rules and
regulations of law. This way every person's right in business and in contract and in
commercial transaction can be protected. And hence, study of Contract Law becomes
very, very important.

Third, contract Law originates from the law of obligation, and when we say law of
obligation - it is the law of duty, more than the law on rights. Obligations are always

17
there in the society, every society, is an organized society, be it a village be it a town, be
it a state, be it a country, every such kind of society is an organized society and in
organized societies people must owe obligation to each other, this is the duty that we
have.

In contracts there are certain obligation such as not to misrepresent, to show good faith
while entering into contact, obligation not to hide any vital information in this contract.
Societies flourish when these obligations are respected and honored by the parties.
Hence, one of the easiest definitions of contract is that contract is called the law on
promises.

Promises, for example can mean that the seller promises to sell his house and the buyer
promises to buy the house. This is the law on promises and when we make promises, we
actually owe an obligation of fulfilling that promise, so we cannot make promise without
having no intention of fulfilling this.

In a contract it is the duty of the law to ensure that the obligation is completed. So, if the
seller makes a promise to sell his house, he has undertaken the obligation to deliver the
house to the buyer and the law of contract tries to fulfill and enforce that obligation which
the seller has undertaken towards his buyer.

They are not social obligations, they are commercial obligations, they are legal
obligations. In social obligations the law still probably need not intervene, but in a legal
obligation, a promise to someone else, the law must actually value that legal obligation,
must treat it in a way that the rights and duties and the obligations between the parties are
actually insured.

Just imagine if Contract Law was not there, in these circumstances, where the seller has
made a promise to sell his house. What will happen? The rights of the buyer may be
adversely affected by the seller. The seller may make these promises to two or more
persons and the buyer then who has probably paid an advance who is expecting that
house to be delivered to him, who actually has invested his only saving to buy the house,

18
his rights will be infringed and he would have no way for the legal system to redress his
grievances.

And hence the seller ought to have obligation to sell the house and the buyer ought to
have an obligation to make the payment towards buying the house. These are obligations
that parties to a contract usually have and these are obligations that the law tries to
enforce. It tries to fix and it tries to state who should do what in contract and if suppose
one fails to do it, what is the kind of liability that the law would want to impose. When
obligations are breached or broken, there ought to be liability that will bring about an
effective legal system and an orderly society in any given country.

Futher, obligations are of two kinds. One obligation is something that we can take on our
own, we call this self-imposed obligation. Second, there are certain obligations which are
externally imposed, it could be something that a public law puts on a party. For example,
the law that prohibits smoking in public places. we say do not smoke in public place, if
you do so there is a penalty. This obligation not to smoke in a public place is an
externally imposed obligation, it is a public law. There may be in-policing regarding the
city, there may be punishment or fine regarding this thing and hence, yes, for the
betterment of the society, for betterment of orderly behavior among all citizens, public
obligations are very, very critical and important.

But the obligations in Contract Law are not imposed by somebody else, the obligations in
Contract Law are self-imposed, if you wish to take a contract, if you wish to enter into
the contract you actually undertake the obligation yourself, it is a choice that you have, it
is a freedom that you have. If you do not wish to sell your house do not sell it, if you do
not wish to buy you do not buy it.

Nobody is going to be force you to do so, contract does not actually insist upon that,
right, unless there are certain instances where the courts may probably force you to do it
because you have breached the law, you have breached the obligation, the court may
actually do it, but initially when the contract is made you have the complete freedom to
either take the obligation, one. Two, determine the extent of the obligation and this is
something that parties can actually exercise and that is why very often then our Contract

19
Law is also called domain of private law. It is private obligations but with public policy
and public perception and Contract Law actually takes you forward and this study makes
that relationship all that very interesting.

Moreover, the purpose of Contract Law is to actually not only to categorize a fair contract
but also it tries to bring about attitudinal and behavioral change in the parties. Fair
contract is fair business and fair business is fair behavior. Hence, fairness in contract is an
aim that Contract Law attempts to achieve. One ought to be fair to the other party. It's not
about that the law does not say that one cannot make profits, we can but that must be a
fair profit. Profit cannot be made at the expense of someone else, and hence any term in
the contract, any procedure in a contract should be so fair, so that it actually is rendering
justice to both the parties and it looks fair to both the parties.

Finally, we have the theory of collective bargaining. Contract Law actually comes from
the theory of bargain which is also used in labor law in terms of collective bargaining.
The fact is when we say collective bargaining we have legislations like Competition Act,
Consumer Protection Act both of which actually promote the spirit of collective
bargaining of the consumer. It strengthens consumer rights, consumer movement. it
strengthens consumer’s ability to actually look at their rights which are not going to be
suppressed by the other party and look, this is no longer a seller's market, it looks to be a
buyer's market, right. So, when it is a buyer's market, the buyers ought to seek protection,
they ought to seek their redressal of grievances, their rights need to be protected, and
hence the study of Contract Law in that sense furthers the spirit of collective bargaining
more so in employment.

Now, if you look at employment and collective bargaining, you notice that it was
employers who were exploiting the employees at this first stage. During the industrial
revolution and during the first issues of independence, quite simply because there was a
mismatch of demand and supply, the demand for jobs were so much and the supplier
market was so sharp that the employees started exploiting.

And hence they actually had a lot of unfair terms in contract, they had unfair policies
towards their workers in a contract and hence the spirit of collective bargaining meant

20
that when the laborers formed the union together, they could actually negotiate better
wages, they could actually negotiate better conditions, they could actually negotiate
better pay. So, it is important that when markets get exploitative, people must come
together and the Contract Law actually facilitates that kind of collective spirit in terms of
ensuring fair bargain between both parties.

Historical Background of the Indian Contract Act, 1872

The need for the Indian Contract Act 1872 was felt during the colonial rule in India and
while contracts existed in India, there were regulated under different rules in the Indian
society. One rule dominated the Hindus under Hindu law, the other rule dominated the
Muslims as Muslim or Mohammedan law.

Both Hindu and Muslim law where religious quotes and religious principles that govern
human behavior in one society and hence being a law that applies to a religious
community. The Hindu law and the Mohammedan law lay down certain obligations for
contract, there are certain principles of contract that actually derive its basis from
customary practices and customary law or usage and many of these customary usages and
practices are imbibed in religious and personal laws.

So, when the Britishers came and ruled in India, they realized that the Hindus were
probably practicing Hindu law in contracts, the Muslims were adopting Muslim law in
their contracts and when a Hindu, Muslim probably makes a contract, we are not sure
which law should actually apply and hence there should be a law that can govern the
same.

Further, we had other different people who came to India, the Portuguese, the French
they came to India and basically, they came here for trading for the spice. And to exploit
that trading, to exploit resources in this country the Britishers realized that they had to
bring in rules, they had to bring in rules of trade and they had to say that look for the
entire country you must have one law.

And, if you look at the drafting of the Indian Contract Act it was the third law
commission that drafted the Indian Contract Act, if one would want to look into the

21
history it was the first law commission that contributed in drafting the Indian Penal Code,
1860, and by the year 1872 the third law commission was present and they drafted the
Indian Contract Act 1872. It was supposed to be a uniform contractual code for the entire
country and this governed contractual relations from now on.

So, the Indian Contract Act, had to be applied to the entire territory of this country and
that is how the whole aspect of the background of this legislation becomes very, very
critical at this point of time. Now, an interesting part of the 1872 law is that while the Act
has come into place at that point of time there is no requirement for rules to be brought
into force and even after independence the Indian Contract Act is a substantive law. it is a
law on obligations. It is the law of definitions, it is the law on what is valid what is void,
it is something that defines the various obligations in law but it does not anywhere state
the procedural aspects of Contract Law. Interestingly, even after independence, even as
we speak today, it is one of those substantive laws which does not have procedural rules,
so there is no Contract Act rules as we speak in the Indian contract.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 04: Development of Contract Law

(Refer Slide Time: 0:18)

Continuing on our discussion on understanding the basic principles of contract law, we

have to understand that contracts come from the law of obligations. As we discussed
previously one of the simplest definitions of contracts is that it is nothing but an exchange
of promises between two parties and that is why we say that contract law is law of
promises.

When two parties make promise to each other, for instance it could be the promise of the
seller to the buyer, there is an obligation that is incurred as soon as the promise is made.
And this obligation is important, it is an obligation that you owe to the other party,
because the other party will now have expectations of fulfilling the promise and hence,
contract law actually is a branch of the laws of obligation.

But broadly to understand the laws on obligations we have two obligations that we
generally discuss, one, is moral obligation the other is contractual obligations. Moral
obligations are based on high value systems in a given society, these are moral

23
obligations that men and women have to fulfill in society and these are obligations
probably that are laid down by personal or religious laws.

Moral obligations are very significant. Sometimes moral obligations are more valued in
society more than the legal obligations. But moral obligations are a choice based. They
depend upon the consciousness of a given individual. He can actually follow the moral
obligation or he need not follow the moral obligations. For example, we say there is a
moral obligation to stay married, but of course divorce can definitely happen, so these are
moral obligations that we look forward as a man and a woman in a marriage to be equal
partners, but the legal obligation is that the man has to maintain the woman. The aspect of
maintaining a wife or even maintaining your parents, there is a law that imposes
obligation on citizens to maintain their elderly parents. The necessity of bringing the legal
obligation is because the moral obligations were not being fulfilled. The morality of
individual would always say that he cannot abandon his parents or his wife even after
they have separated, if she has no means of taking care of herself. So, the moral
obligation was already there but unfortunately when the moral obligations are not going
to get complied with, are not going to be enforced, are not going to be fulfilled by
persons in the given society, then there is a law that actually converts that moral
obligation into a legal obligation.

Similarly, fulfilling your promises is also a moral obligation. So, when you make a
promise, there is a moral obligation to complete what you promised to the other party.
These contractual promises are also called as gentlemen promises, which literally means
that if you are a gentleman you will actually complete that promise and you do not need
law to enforce your promise, this is an example of moral obligation in contracts. If you
have no intention to fulfill the promise do not even make a promise, but because many
people do not fulfill their promises, do not fulfil their moral obligation, the moral
obligation has to be converted into a contractual obligation, a legal obligation. And that is
where the law of contract actually came in. It prescribed, that If promises are not going to
be fulfilled because people do not care about morality, people do not value their promises
and they are at their free will of breaching that moral obligation, then a law has to be
brought in to make the promises enforceable.

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The law will bring about an obligation, recognize that obligation and any breach of the
same is going to be provided with some kind of remedies. In this way, contract law can
also be understood from the premise of obligations and some of these obligations are
either externally imposed and some of these obligations are self-imposed.

Contractual obligations are self-imposed, i.e. you can take it, you need not take it, it is not
something that the law always expects you to do. But some of the contractual obligations
are imposed by law such as quasi contracts, where whether you like it or not the law
wants you to fulfill some of these obligations. But mostly contractual obligations are self-
imposed, rarely the contractual obligations are externally imposed. Quasi contractual
obligations will be covered later on in the course, at least not in government contracts and
in understanding special contracts, quasi contract plays a very, very important role and
the next principle will help us in better understanding the same.

Understanding the basic law on obligation helps us understand the law of contracts
because it helps us understand the evolution of contract law as one of the laws that fulfills
obligation, it is one of those laws that promotes promises, it is one of those laws that
recognizes that promises have some legal system, legal value and any breach of the
promises must have consequences, must have sanctions and must have remedies.

Contract law is based on the bedrock of two very interesting principles, one is the law of
unjust enrichment and second is the law of restitution. The law of unjust enrichment is a
principle that governs contract, not only at the stage of its formation. At this stage please
note that contract law has three stages. One, contract law that defines the stage of
formation. The rules, right from Section 2 to Section 36 are the rules of formation. Two,
the contract law that defines the stage of performance because there is a lot of sections in
the Indian Contract Act that actually define the rules of performance, if you want to refer
to Section 37 to almost to Section 75 including the law of damages, all of them can
actually be attributed as the rules of performance, so how should you perform once you
have made a contract. Third, are the rules of breach of contract, so if parties do not
perform and they fail to perform, there is a breach and so what happens in case of breach
is the third stage.

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Now, interestingly the law of unjust enrichment or the principle of unjust enrichment
applies to each of these three stages. Look at it from the perspective of just enrichment
and unjust enrichment. Just enrichment is possible, you are allowed to do it everyone has
the right to profit, because contracts is about commercial transactions, you are in market,
you are in trade, you are in economy, you have every business to actually perform get
into profits and enrich yourself, just enrichment vis a vis unjust enrichment.

The law actually has to step in when just enrichment seems to be exploited, just
enrichment seems to be abused, just enrichment is now going to be unjust. Unjust
enrichment is a principle for judges, the courts to intervene in contracts, if they find that
one of the parties of the contract is exploiting the other party, he is making unjust
enrichment.

Please note, enrichment is not necessarily monetary enrichment, it could be enrichment of

a higher amount or quantity of goods, it could be even that, so it's not only monetary, it
could be anything of that. So, unjust enrichment very clearly says that you should enter
into contracts, you should make promises but it should be a win-win situation for both the
parties, one person cannot dominate the contract in such a way that he runs away with
everything that is there in the contract.

So unjust enrichment is the rule to intervene, to moderate, to kind of temper down any
such contract which can actually give undue advantage only to one party as against the
other party. So, the principle of unjust enrichment is almost applied in most cases where
the courts want to intervene and hold a contract to be voidable and to actually remedy the
aggrieved or the party that feels aggrieved from the contract and the unfairness in the
contract.

The second principle is the law on restitution. The law of restitution is also very
important because very often than not the duty of the court is that when parties litigate,
the parties bring their grievance before the court because the contract is unfair, it is one-
sided, it is arbitrary, it has caused a loss to one party then the court will have to put a rule
of restitution, what does the court do? The court tries to remedy the wrong, so restoring
the party to a position where the wrong can be negated or remedied is what is the duty of

26
the court. So, the law of restitution actually speaks about the kind of remedies for the
breach of obligation, if a promise is not fulfilled how should a party be restored with the
kind of remedies or rights that the law recognizes.

So, the law of restitution is also very important. However, you will notice that there is
nothing like an absolute restitution, but yes, the courts do apply the principles such as
principles of damages, principles of specific performance, also the principles of
substituted performance, the suit for price, the right of lien and so on and so forth.

So there are many such restitutory kind of remedies that the parties can actually seek in a
court of law and that is how the obligation is enforced in the court of law, the court
actually comes to the rescue of the injured party or the aggrieved party and actually puts
him in a position as if no contract has been made.

Thus, the law of unjust enrichment and the law of restitution are the guiding principles
for contractual obligation and the duty of the court is to ensure that contracts result in a
just contract and a fair deal between both the parties and the legal system protects the
interest of not only the parties but also the market, the economy and vis-à-vis the country
as such. So, what does the courts do? It lays down the principles for contractual
obligation. Contract law is not only about the law, it is about the doctrines and the
principles that the courts have evolved from time to time and these principles guide the
application of contract law as we go forward.

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(Refer Slide Time: 13:31)

Now, let us take one assignment just for our understanding. Whether a will is a contract?
Let us first understand what a will is. A will is a kind of a declaration of an individual
who intends to give his property after his death to probably someone who is surviving the
drafter of the will.

Please note will is your declaration of intention, what should happen to your property
after your death, that is what is the expression of the will, now please note, it is a kind of
an expression, it is kind of a promise it says that after my death this is what will happen
to my property. So, in a sense, it is kind of a commercial transaction with an expression
of intention.

There are two parties to the will and the will can be registered, need not be registered. In
India it plays quite a significant part in how the property is going to be managed after the
death of an individual. Now, interestingly when we talk about inheritance of property,
who are the people - who are children or the surviving spouse can actually inherit the
property of the deceased. Inheritance of property is kind of a law that actually provides a
succession to property and this is quite an important principle as we go forward. Now,
can Will be considered as a contract, can will be brought under the contract law, does it
fulfill all the essentials of a contract and suppose there is a breach of will can parties
actually litigate under contract law?

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Now, please remember will is covered under the Indian succession law, it is not covered
necessarily under the contract law. Now, the Indian Succession Act does talk about the
different attributes or requirements of will and it very looks, will resembles the contract,
it looks like a contract, it is like I am giving property to someone else and this is a
transaction, it is commercial transaction, it is an expression of my intention.

Probably it is an expression of my promise to my son. Please remember will can be to

family members or will can actually give property to someone else as well, so we have
seen a lot of controversies on will in India, a lot of litigation that have gone to the court
on whether the will is right, wrong, was the will done under coercion and so on and so
forth. It is kind of a similar litigation that will be looked into and that is why many of us
may think that will is nothing but a contract, but the distinction between will and the
contract is as follows. While will is covered under the Succession Act, contract is covered
under Indian Contract Act. So, there are two different laws that govern and will is
probably into a special legislation altogether. Point two, Will actually comes into reality
after the death of an individual, so it is not something that comes into execution as soon
as the will is made, contracts are actually executed simultaneously most often than not, so
today if I assign a contract I probably transfer the property today itself, during my
lifetime. Thus, the purpose of the will is slightly different and the purpose of contracts are
slightly different. Thirdly, in most contract there is a consideration that has to be
supported in a contract. Will probably does not have consideration at all, so while will
looks like a document close to contract, it is not necessarily to be treated as one, so we
have to remove will from contract law and actually treat it under some other legislation.

And the remedies of contract are not necessarily the remedies that are going to be applied
for the will, because remember if suppose what is written in the will and if it is written in
my favor is not done who will I sue? Because the executor of the will may be appointed
but the draft of the will is already dead, so I cannot sue for breach saying that look what
you have written I have not actually got it, your promise is not going to be fulfilled, so I
cannot sue the deceased drafter of the will.

29
So, there are numerous reasons why we want to treat will differently and hence there was
a statute that was enacted to treat will and hence this was taken out probably from the
domain of contract law. However, contracts today are different, they have a different
contextualization and will is not considered as a contract. So, this is just a kind of
evaluation of relationships and evaluation of documents in a society for a better
understanding of what it is.

30
 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 5
Evaluation of Contract Law

(Refer Slide Time: 0:12)

Contract law encompasses fundamental principles and serves as the foundation for legal
agreements. It is worth considering whether contract law can be applicable to the relationship
between students and universities. It is widely recognized that universities in various regions,
such as India, play a significant role in providing education. While education can be
categorized into primary, secondary, and higher education, our focus here is on university
education. This type of education is typically geared towards adult learners and is regulated
by relevant authorities such as the University Grants Commission, which oversees the
university sector.

Now, the reason why we are examining this within the framework of contract law is because,
in the present times, we can observe a significant shift from the pre-liberalization,
privatization, and globalization (LPG) era, which refers to the period prior to 1991.During
that time, education in India was exclusively offered by the government through state
universities, serving as the sole providers of education. However, with the introduction of
privatization in the education sector, we now witness the existence of numerous private
universities that offer education services. Consequently, students may encounter grievances
or issues, and it becomes crucial to determine the applicable legal framework for addressing
such concerns within the student-university relationship.

31
This is the type of evaluation that we must consistently undertake. Now, in addition to the
provisions outlined in the Constitution, which highlight education as a public service and a
public good, we consider the perspectives put forth by the Supreme Court over time. The
Supreme Court has deliberated on various issues such as the permissibility of demanding
capitation fees by institutions, the existence of management seats, the modernization of
education, and the associated costs. It is worth noting that the Supreme Court has often been
called upon to adjudicate such matters, with most cases involving public institutions or
publicly aided institutions as the parties involved.

Now, it is important to acknowledge that when a private institution receives aid, it acquires
certain characteristics of a public nature. Aided institutions, as you may observe, fall under
the purview of writ jurisdiction due to the significant financial assistance they receive from
the government. This aid can encompass various aspects such as teacher salaries and
developmental grants provided by the University Grants Commission (UGC). Consequently,
privately managed yet publicly aided institutions are bound by the constitutional mandate,
and writ jurisdiction can be invoked to ensure accountability of these universities.

However, when it comes to completely unaided institutions, which are purely private entities,
besides constitutional law, another legal framework that comes into play for evaluation is tort
law. Tort law, known as the law of civil wrongs, becomes relevant in this context. It should
be noted that within tort law, there is recognition of the concept of educational malpractice.
Educational malpractice refers to the provision of deficient educational services by an
educational institution, resulting in negligence that causes harm or injury to the student's
learning experience or assessment. Consequently, in such instances, the student retains the
right to pursue legal action against the institution, seeking redress under the tort of
educational malpractice.

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(Refer Slide Time: 4:14)

However, it is important to note that the recognition of educational malpractice as a tort has
been established through judgments in both the United Kingdom and the United States. This
establishes a legal basis for students to address and seek redress for their grievances.

Nevertheless, why should we consider contract law in this context? The rationale behind this
lies in the United Kingdom, where universities have made a conscious decision to govern the
student-university relationship under contract law. This choice has been uniformly adopted
by all universities in the UK. The universities assert that contract law is advantageous due to
its statutory nature, unlike tort law, which relies more on judicial interpretation. In contract
law, parties could explicitly articulate and communicate the terms and conditions of their
agreement, ensuring explicit consent and clarity, instead of relying on the discretion of judges
in tort law.

Therefore, universities in the UK have unequivocally stated that every student admitted is
bound by contract law, and any disputes arising between the student and the university can
potentially constitute a breach of contract. In India, however, a notable observation can be
made regarding various educational institutions, particularly coaching institutes that offer
preparatory courses for medical, law, or engineering examinations. Deficiencies in the
services provided by these coaching institutes present a significant issue, as it raises concerns
regarding the fulfillment of promises made by the institute to the students.

In India, students who have enrolled in private tutorials, coaching institutes, or online
coaching platforms such as Byju's or Akash, are recipients of learning and educational

33
services. It is noteworthy that the consumer protection law in India can serve as an additional
legal avenue for students in such cases. Whether students have opted for offline or online
coaching services, they can seek redress through the Consumer Forum if they encounter any
deficiencies in the services provided. The Consumer Protection Act of 2019, in its current
form, can address issues related to unfair trade practices and unfair terms imposed by
coaching institutes or tutorial services.

When considering universities, it is essential to recognize that they provide formal education.
Within university settings, there exists an academic rigor encompassing an academic
curriculum and academic bodies. It is crucial to understand that various aspects fall within the
domain of academic matters. These aspects may include classroom teaching, teacher
qualifications, examinations, grading systems, and more. It is important to note that many of
these academic matters do not involve commercial transactions or considerations.
Consequently, universities do not make promises of degrees, as academic matters extend
beyond commercial deals or understandings.

However, if universities provide administrative services such as hostels, cafeterias, or other

student facilities, these services can be subject to contractual agreements. These
administrative services establish a contractual relationship between the university and the
students, as they involve specific obligations and expectations.

For instance, if I choose to rent a room in a paying guest (PG) accommodation, wouldn't that
be considered a contract? Similarly, if I opt for a room in the university hostel, shouldn't that
also be treated as a contractual arrangement? Here, it becomes necessary to distinguish
between the two types of services provided by universities: academic and administrative.
Academic services, which are not acquired through purchase or hire, encompass factors such
as examination performance, grading systems, research projects, and regulations pertaining to
plagiarism, academic integrity, and disciplinary matters.

Instances of indiscipline may require appropriate action, but they are not inherently
contractual in nature and should be treated separately from contractual matters. On the other
hand, administrative services provided by universities, such as accommodation in hostels or
other administrative facilities, can certainly be subject to the principles of contract law. This
differentiation ensures that administrative services are governed by contractual obligations.

34
Thus, in the student-university relationship, it is crucial to regulate contract law in a manner
that distinguishes between academic and administrative aspects. Contract law offers distinct
advantages in addressing the latter, while matters pertaining to academic performance and
discipline should be addressed through separate mechanisms, going beyond the realm of
contracts.

Hence, it becomes essential to explicitly define the duties and obligations of the parties
involved in a contract. This includes understanding the grounds for contract termination and
the implications of breaches, as well as determining the appropriate remedies and damages in
case of contractual disputes. In the United Kingdom, contract law is widely utilized to govern
the university relationship. Given that Indian law is fundamentally rooted in common law,
which draws inspiration from UK contract law, India may choose to continue using contract
law as the framework for this relationship. Alternatively, India could introduce a dedicated
statute under the University Grants Commission or the Higher Education Council,
specifically addressing the grievance redressal mechanism and the adjudicatory processes
pertaining to this unique relationship.

It is inevitable that we take this matter seriously, my friends, considering the privatization of
education and the rapid proliferation of universities offering various services. We must not
overlook the fact that many of these universities make significant representations to students.
Therefore, it is imperative to establish a comprehensive system that effectively governs this
relationship and safeguards the interests of all parties involved.

Universities often make various promises to students, including the availability of dual
degrees, partnerships with foreign institutions, off-campus placements, and more. Students
rely on these promises, and when they are not fulfilled or go awry, it is crucial for students to
have a mechanism for addressing their grievances. Holding universities accountable is the
central issue at hand. Without a legal framework that ensures their accountability, students
may face exploitation, which is detrimental to the integrity of the legal system. Therefore,
moving forward, either the regulatory body, such as the University Grants Commission, or a
specific law governing this relationship needs to be established.

This topic serves as an introductory evaluation because it involves an old law, the Indian
Contract Act of 1872, being applied to new relationships. It raises questions about the
feasibility and effectiveness of applying this outdated law to contemporary circumstances. In

35
our course, titled "Advanced Contract," we delve into these interesting aspects by examining
present-day relationships and their interaction with contract law.

Now, it is crucial to draw a conclusion from the discussion. The key conclusion is that a
distinction must be made between academic and administrative services within the university
context. Applying a contractual relationship framework is appropriate for administrative
services. However, when it comes to academic examinations, evaluations, and disciplinary
matters, contract law may not be a suitable legal framework.

(Refer Slide Time: 11:50)

The sources of contract law are of great importance to understand. Contract law primarily
derives from legislation. In the Indian context, the Indian Contract Act of 1872 is a legislation
passed by the parliament or state assemblies, post-independence. Another example is the
Consumer Protection Act of 2019, which is also a legislative mandate. Legislation serves as a
foundational source of law. However, my friends, legislation is not the sole source of law.
Law can also be established through judge-made law, commonly known as case law. It is
through the interpretation and application of the law by judges that we gain a comprehensive
understanding of contract law in practice. Therefore, case law plays a significant role as one
of the primary sources of contract law, as it helps us comprehend the operation and
application of contract law through the analysis of relevant legal cases.

Hence, it is evident that even within the Constitution, specifically in Article 141 and 142,
along with various other provisions, it explicitly grants judges the authority to create law,
issue directions, and deliver judgments. The pronouncements made by judges carry the

36
weight of law. This aspect is known as precedent. Precedent refers to a binding legal decision
that establishes a framework for interpreting the law and serves as a guide for future cases.
Case law is essentially a collection of precedents that must be followed in subsequent cases.
In India, we have the Supreme Court, which sets the law for the entire nation, and we also
have high courts whose judgments have significance not only within their respective states
but also hold persuasive value in other states. It is important to note that high courts also
function as constitutional courts, further emphasizing their legal authority.

High Courts also have the authority to interpret the law. Therefore, it would be incorrect to
assume that the judgments of one High Court have no implications in other states. High
Courts play a crucial role in shaping the understanding of contract law through their case law
and interpretation of statutes. In the United Kingdom, contract law is largely derived from
judge-made law, which is commonly referred to as common law. Common law encompasses
the legal principles and doctrines established by judges to govern common situations in the
relationships between individuals.

In the UK, judges have consistently developed various principles and doctrines that form an
integral part of contract law. One such doctrine is the principle of promissory estoppel, which
has been recognized and applied by both UK and Indian judges. This principle holds
significant importance in cases involving government contracts. Additionally, there are
numerous other principles pronounced by judges, such as the principle of unjust enrichment
and the principle of restitution. These principles are applied by judges in conjunction with the
relevant statutes to adjudicate cases effectively.

It is interesting to observe how judges have played a significant role in the evolution and
development of contract law by introducing principles and doctrines that have become
integral to contracts. Additionally, international law serves as another source of contract law.
In India, although there haven't been many bindings international laws specifically related to
contracts, there is an international arbitration law to which India is a party. International
arbitration is a crucial aspect of contract law. Furthermore, apart from arbitration, there is the
UN Convention on the International Sale of Goods, although India has not ratified this
convention. Instead, India has the Sale of Goods Act of 1930. Nevertheless, international
trade involves various agreements such as the World Trade Organization (WTO) and the
General Agreement on Tariffs and Trade (GATT) that govern trade relationships. Hence,

37
international law becomes an important source of law due to the critical practices and
principles it encompasses.

Bilateral investment treaties (BITs), multilateral trade treaties, and other international
agreements play a significant role in shaping contract law. For instance, bilateral investment
treaties between countries like India and Australia have contributed to disputes and
challenges related to investment protection. The influence of global events on contract law is
evident, and there is a growing trend towards the harmonization of laws, particularly with the
establishment of arbitration mechanisms. International contract law, sponsored by
organizations like the United Nations, takes the form of treaties, conventions, or declarations.

However, it's important to distinguish between international contract law and comparative
contract law. International contract law pertains to agreements between countries, while
comparative contract law involves analyzing and comparing the positions of different legal
systems, such as Indian contract law with UK, US, or Australian law. Comparative contract
law aims to incorporate beneficial aspects from one legal system into another.

Custom and usage also hold significance in contract law. Section 1 of the Indian Contract Act
1872 recognizes that customs and usages can serve as sources of contract, if they are not
inconsistent with statutory provisions. Customary practices and usages can shape contractual
relationships and be considered as a source of law in contract matters.

So, it is a common practice that customary practices and usages in contract law can continue
unless they are directly contradictory to statutory provisions. If a custom is inconsistent or in
contravention of the law, it cannot be upheld. However, customary practices and usages that
are in alignment with the law can still have relevance in contract law.

To illustrate this, let us consider the customary practice observed on ships. When a ship
encounters rough weather while on a voyage at sea, and there is a risk of sinking due to heavy
load, the captain has the customary right to offload certain goods to maintain the ship's
balance and ensure its survival. This action is taken to save the lives of those on board and
protect specific goods. The captain has the authority to make decisions regarding which
goods should be offloaded in such circumstances.

This is a common practice observed in many cultures and societies around the world. It is
important to acknowledge that various customary practices exist in different countries, each
with their own unique traditions and societal norms. These customs hold significant influence

38
in the realm of contract law. As we continue our exploration, we will uncover more examples
of such customary sources of law.

For an example of the role of custom in contract law. In legal matters, the concept of agency
often arises when one person requires another person to act on their behalf. This need for
representation can manifest in various situations, such as hiring an attorney, engaging a
broker, or appointing an insurance agent. These individuals serve as agents and enter
contracts on behalf of the principal.

However, when we consider the application of customs to the concept of agency, intriguing
questions arise. For instance, can the notion of agency extend to marital relationships? Can a
spouse represent their partner, and vice versa? It is worth noting that customs and traditions
vary across different societies and communities. In certain customary practices, the
representative character of spouses may be restricted or denied altogether. For example, in
some customs, wives may not have the same representative capacity as husbands, and vice
versa.

While the rule suggests that spouses can represent each other in commercial transactions, the
extent and limitations of this representation require careful consideration. It is essential to
understand the specific customs and norms governing these situations. For instance, the
ability of a wife to pledge her husband's property may depend on whether it is for any
purpose or limited to necessities of life. These nuances within customs and practices demand
thorough examination to ascertain their implications in contract law. However, it remains
clear that a wife can certainly make purchases on behalf of her husband in various customary
practices.

It is crucial to consider whether husbands should be granted the authority to deal with the
streedhan (gifts given to the wife) as a customary practice. Allowing such representation
could potentially lead to situations where many men would sell the gold and jewelry received
by the woman during marriage. Hence, it is possible that excluding men from this
representative character could be a customary practice. These examples highlight the
intriguing nature of customs as a source of law.

Custom, legislation, case law, international law, and comparative law are all significant
sources for understanding contract law. It is important to explore these diverse sources to
gain a comprehensive understanding of the law. This applies not only to private contracts but

39
also to government contracts. International law can indeed play a vital role in government
contracts. For instance, bilateral investment treaties (BITs) involve the government as a party,
and government entities often benefit from these treaties and may be involved in related
disputes. Understanding these sources of contract law allows for a holistic and integrated
interpretation of the subject.

By examining these various sources, we can develop a more comprehensive understanding of

contract law and its application in both private and government contexts.

(Refer Slide Time: 23:21)

In India, it is important to examine why we have a central contract law and whether state
governments can also enact laws governing contracts. To understand this, we need to
consider the constitutional distribution of responsibilities among the central government, state
governments, and local governments. Currently, the 73rd and 74th Amendments to the
Constitution of India, implemented in 1992, grant certain powers to municipalities and
panchayats for governance.

the Seventh Schedule of the Indian Constitution, we find that certain subjects are reserved
exclusively for the Union Government, some are reserved for the state governments, and
there is also a concurrent list. The Union Government has the authority to legislate on
subjects such as foreign affairs, currency, and defense. These powers are exclusively reserved
for the central government.

However, when it comes to contract law, it falls under the concurrent list, which means both
the central and state governments can legislate on this subject. This implies that while there is

40
a central contract law, state governments also have the power to enact their own laws
governing contracts.

It is essential to analyze the constitutional provisions and the division of responsibilities to

understand the framework for contract law in India and the role of the central and state
governments in its legislation.

The division of powers between the central and state governments in India is outlined in the
Constitution through various subject matters. The state governments are entrusted with
powers such as police administration and public health within their respective states. It is
important to note that while public health is a subject for state governments, matters
pertaining to interstate public health fall under the jurisdiction of the central government.
This division ensures that both levels of government have their respective governance roles.

The subject matters falling under the Concurrent List, known as List 3, are those on which
both the central and state governments can legislate. However, if the central government
enacts legislation on a concurrent subject, it will prevail over any conflicting state laws. This
is because India is a union and a federation, and the central government holds significant
authority.

Therefore, while both the central and state governments have the power to legislate on
subjects in the Concurrent List, the central laws will have supremacy over state laws in case
of any inconsistencies or conflicts.

The Indian Contract Act is a central law that was originally enacted during the British rule
and is applicable to the entire territory of India. Initially, there was an exception for Jammu
and Kashmir when the Constitution was adopted. However, due to the reorganization of
Jammu and Kashmir, the Indian contract law now applies to the entire territory of India,
including Jammu and Kashmir.

Contracts and partnership laws are included in the concurrent list, which means that both the
central and state governments have the power to enact legislation in these areas. Therefore,
either the central government or the state governments can legislate on contract and
partnership laws, making them applicable to all states. This background information is
important to understand the legislative jurisdiction and applicability of contract law in
India.(Refer Slide Time: 26:14)

41
The fundamental principle in understanding the basic principles of contract law is the
statement "All contracts are agreements but all agreements are not contracts." all contracts are
agreements, which means that for a contract to exist, two or more parties must come together
and reach an agreement. Traditionally, they would meet in person and agree on the same
thing in the same sense. This principle is known as consensus ad idem, which means a
meeting of minds. Once they reach a mutual agreement, a contract is formed.

An agreement is crucial for a contract, but not all agreements are considered contracts. The
reason for this is that for an agreement to be treated as a contract, it must fulfill certain
essential conditions.

Firstly, a contract requires an offer from one party and an acceptance from the other. This
offer and acceptance are essential for the formation of a contract.

Secondly, there must be free consent of the parties involved. It means that the parties should
not be coerced or forced into making the offer or accepting it. Consent should be given
voluntarily.

Thirdly, when the offer and acceptance are made, both parties must have the intention to
enter a legal and commercial relationship. This intention distinguishes agreements made in a
social context from contracts. Social contracts or obligations may exist, but they may not
necessarily be enforceable as contracts.

For instance, an agreement between a husband and wife. It is still an agreement where two
parties come together and discuss the same matter in the same sense. However, due to their

42
social relationship, this type of agreement between a husband and wife or a father and son is
not necessarily a contract. It remains an agreement but not a contract. For an agreement to
become a contract, the parties involved must have the intention to create a legal obligation.
This is why we refer to agreements with a commercial nature as contracts, whereas
agreements with a social nature are simply agreements.

Now, when it comes to making an agreement, it is a simpler process and one does not
necessarily need to be competent. However, if that agreement is to be treated as a contract,
the parties must be competent to enter a contract. According to the law, one must be above 18
years old and of sound mind to be considered competent. This principle also applies to
companies; their competency to enter into a contract needs to be assessed. This is crucial;
otherwise, it will be an agreement, but not a contract.

Furthermore, consideration is a vital element of a contract. Without consideration, there can

be no contract. Consideration refers to something of value that is exchanged between the
parties involved. It serves as the basis for supporting the contract, and only with consideration
can an agreement be treated as a contract.

Finally, it is important to understand that agreements can only be treated as contracts if they
are valid and have a lawful object. When an agreement is treated as a contract, it means that
you have the rights and remedies provided by the law, and you can seek protection from the
court in case the other party breaches the contract. However, in a simple agreement, the
parties have to bear their own risks because not all types of agreements are supported by the
law. The law only supports those agreements that meet the requirements to be considered and
enforced as contracts.

For an agreement to be considered a valid and enforceable contract, it must comply with
certain essential conditions of the law. Without meeting these conditions, an agreement
remains just an agreement and not a contract. It is important to understand that while all
contracts are agreements, not all agreements qualify as contracts.

The first step towards enforceability is reaching an agreement between the parties. This
agreement must be made with the intention to create legal obligations, and the consent of the
parties should be freely given. Additionally, the parties involved must be competent to enter a
contract, there must be consideration exchanged, and the object of the contract must be

43
lawful. Only when these essential conditions are met can an agreement be recognized as a
contract and be enforceable under the law.

These principles were initially developed for oral and implied contracts, as well as paper
contracts. In oral contracts, the fulfillment of these conditions needed to be proven before a
judge could intervene. Paper contracts were introduced to provide evidence of the agreement,
the competency of the parties, and the terms and conditions of the contract.

With the advancement of technology, we now have electronic or digital contracts, where
parties may not even meet face to face. However, even in modern forms of contract, these
basic principles still hold true. Failure to fulfill these conditions can prevent the enforcement
of contracts, including emerging forms such as smart contracts.

It is crucial for parties entering into contracts to ensure that they fulfill these essential
conditions if they want their contracts to be considered valid and receive the protection of the
courts of law.

44
 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law School of India University
Lecture 6 Formation of Contract - Offer
(Refer Slide Time: 0:17)

The various essentials that make an agreement a contract. Now, the first essential ingredient
for an agreement to be treated as a contract and to be enforceable as a contract is that there
must be an offer. The term 'offer' is used in common law and in UK contract law. Whereas, if
you refer to the same word being used in the Indian Contract Act 1872, it is termed as
'proposal.' To be honest, offer and proposal are essentially an initiation of a commercial
relationship.

Of course, we know that for any contract or commercial relationship, you need two parties.
So, one party typically makes an offer, and the other party makes an acceptance. For
example, the seller may say, 'I am willing to sell my house to you,' and the buyer then
responds by saying, 'I am willing to accept your offer.' This offer and acceptance create a
contractual relationship. This can also be related to receiving an offer letter in employment,
where a company may offer a job and you can respond with an acceptance letter or a joining
letter.

Therefore, the offer serves as the foundation for the start of the contractual relationship.
Interestingly, there are certain requirements for what constitutes a valid offer. Sometimes, the
offer is expressed, meaning it can be communicated through spoken or written words. As

45
mentioned before, in the early days, contracts were generally oral contracts, as seen in most
cases decided under common law.

So, even if it is orally expressed, it is still considered an expressed contract because the offer
can be understood. Interestingly, we also have what we call implied contracts. These
contracts are based on conduct or actions. For example, if I place my phone on your table and
say, 'Use it, let's see,' it implies a contract based on our conduct.

Similarly, when an auto rickshaw is standing at a designated stand, it implies an offer. The
implied offer is that the auto driver is willing to transport you from destination A to
destination B if you are willing to pay the fare. This kind of offer is implied by the nature of
the situation. The same goes for a bus that arrives at a bus stand. You can board the bus, and
there is a destination displayed, indicating that it will take you there if you are willing to pay
the price.

These are examples of the different types of offers or proposals that can be made. Offers can
be made through various methods. Some offers are very specific, meaning they are made
from one individual to another, and no other person can accept the offer. It is limited to two
parties. For instance, I may state that this offer is only open to Mr. P and no one else. In
specific offers, most details regarding the subject matter of sale and the terms of the contract
are clearly stated.

And, will notice that in a specific offer, it is often stated that if you don't accept before 5pm
today, the offer will expire. Everything is clear in a specific offer, and it is not open-ended.
The terms are very explicit. In most modern-day commercial transactions, offers tend to be
very specific. For example, in employment, they clearly state not to join before the first of
April, indicating that the offer will be terminated after that date. The specificity is crucial in
such cases.

The distinction between a specific offer and general offers is that in a general offer, the offer
is made to the world at large. It's a public offer. For instance, an IPO (Initial Public Offering),
which is an offer by companies for share subscription, can be considered a general offer.
Anyone from the public can apply for it. A general offer is like making a request and
providing a reward. For example, if I say, 'Whoever is willing to find my dog, I will give
them a reward.' It is open to anyone who is willing to fulfill the specified condition.

46
An offer is made when a person makes a promise or proposal and invites anyone in the public
to accept it. For example, in a class, someone might say that anyone who achieves the highest
marks will receive a gold coin. This offer is not directed at any specific individual but is open
to anyone in the class, regardless of the group's size (whether it's 100, 200, or 1000 students).
Accepting such an offer would be considered accepting a general offer.

In contrast, a counter offer occurs when parties engage in a back-and-forth exchange of

offers. For instance, if someone offers to sell their house for 15 lakhs and the potential buyer
responds by offering to purchase it for 12 lakhs instead, that would be considered a counter
offer. Conditional acceptance, such as expressing a willingness to buy at a lower price,
creates a new proposal that the original offeror needs to accept or reject.

So, Counter offers can be considered as a form of conditional acceptance, but they are not
considered as actual acceptance. Instead, a counter offer is subject to acceptance itself. In
modern contracts involving negotiations and bargaining, offers and counter offers are
exchanged between the parties. It is important to understand that counter offers, although
they are offers, do not automatically lead to a binding contract. They do not amount to
acceptance, and unless a counter offer is accepted as it is, a contract will not come into
existence. Therefore, it is crucial to have a clear understanding of what a counter offer entails.

A continuing offer. A continuing offer is like a standing offer, where the offeror states their
willingness to supply goods or services for an extended period. For example, a stationery
shop owner may offer to supply various items such as pencils, erasers, papers, and more to a
university for the next year, specifying the rates and available items. This type of offer is
commonly seen in long-term contracts, such as the supply of coal to a thermal plant, where
the offeror commits to providing the specified goods over an extended duration.

Continuing offers involve ongoing transactions rather than one-time exchanges. They are
sought after for business arrangements that require consistency, uniformity, and a reliable
source for the goods or services. Businesses often prefer continuing offers when they seek
long-term partnerships and a predictable supply of commodities or products.

Lastly, the concept of a cross offer in terms of the timing and nature of offers. A cross offer
occurs when both the buyer and the seller simultaneously propose offers to each other for the
same item, without knowing if the other party is willing to accept the proposal. In essence,

47
these offers "crisscross" each other. However, it is important to note that cross offers do not
result in a binding contract.

One of these offers, which is exchanged between the parties, must be accepted by the other
party. Therefore, it is important to consider this type of offering. To clarify, cross offers are
subject to acceptance. Just because they have been made at the same time between the same
parties and are still in the proposal stage, they are still considered offers. However, unless the
offer is accepted, a contract does not come into existence. Therefore, offers require
acceptance for a contract to be formed. These are some of the jurisprudential aspects of the
contract offer that you should understand.

Understanding who can make an offer in a contract is the next important point. Firstly, it is
crucial to note that a person of unsound mind is disqualified from making an offer and
forming a contract. The essential condition is that the person must be of sound mind. We will
discuss other essential conditions shortly.

Now, the reason why this element is important is that if you are a natural person and meet
physically with two other individuals, the offer can be made and accepted in person.
However, when you make an offer as a natural person on your own behalf, there is no
problem. I can assess whether you are of sound mind and whether you are of legal age, and
then your offer can be considered serious. But when it comes to institutions or corporate
entities, the question arises: who can make such an offer? Whether it's a company, a
university, a partnership firm, a cooperative society, or a trust – these legal entities have to
determine who within their organization has the authority to make an offer.

Let us take the example of a university. We might assume that the Vice Chancellor, as the
highest authority in the university, can make an offer. However, that is not necessarily the
case. It could be the registrar who has the authority to make an offer on behalf of the
university. Therefore, it is crucial, particularly for institutions, to understand who can make
the offer, as it involves the delegation of authority. Unless the delegation of authority is
established, the offer will not be considered valid. For instance, when the government enters
a contract, it is essential to determine who within the government has the authority or
capacity to make that kind of offer. Only then can the offer be legally recognized and
validated by law.

48
Now, an interesting case that highlights this point is Powell versus Lee. If you want to know
the facts of this case, let me explain. A gentleman applied for a job at a school. He went
through the application process, attended the interview, and performed exceptionally well. He
returned home, expecting a confirmation call for the job. Eventually, he received a call
informing him that he had been selected. Filled with enthusiasm, he immediately resigned
from his current job, believing he had secured the position of headmaster.

However, after some time passed, he received no official offer letter, only the call. Confused
and concerned, he went to the school and asked why they had not contacted him. The school
responded by saying that they had not officially confirmed his appointment or issued an offer
letter.

The gentleman argued that he had received a call stating he was selected. But the school
countered, asking whether he had verified the caller's authority to make the offer. In this case,
it is noteworthy that if a clerk from the school made the call without proper authorization, the
call and any offer made cannot be considered valid. Without a valid offer from someone with
the authority to make it, there can be no acceptance. The initiation of the commercial
relationship must be valid and enforceable for acceptance to occur. If this requirement is not
met, a contract cannot be formed.

The basis of a call can indeed be an offer, without a doubt. However, it is essential to
consider who made the call and whether they had the authority to do so. Additionally, it is
crucial to examine whether the caller clearly communicated an offer or simply communicated
the selection without providing the details of the offer, which would typically be included in
an appointment letter. This forms the basis upon which acceptance can proceed. Therefore,
this case emphasizes the significance of understanding that not everyone can make an offer. It
is important to identify who has the authority to make an offer.

For instance, let us consider the joint Hindu family system, known as the HUF (Hindu
Undivided Family), which represents the joint family system in India. In this context, there is
a head of the family called the Karta, along with other coparceners. While everyone in the
family is an owner of the property, determining who can make an offer on behalf of that
property becomes a critical question.

Similarly, in a partnership firm, being a joint owner does not automatically grant the right to
make an offer. One must consider whether they are an executive or managing partner, or even

49
a sleeping partner. Only the executive or managing partner, as authorized by the partnership
deed, can represent the partnership, and make an offer on its behalf.

Therefore, it is crucial to understand that not every individual has the capacity or authority to
make an offer. Identifying the person with the proper capacity and authority is necessary for
an offer to be made and subsequently accepted, leading to the formation of a contract.

Joint owners can indeed make an offer, but it is important to note that the offer can only be
made in relation to their share of ownership, not the entire property. Unless the other joint
owner has given consent or the proposal is joint, the offer will not be considered valid. This
distinction is crucial for our understanding.

Additionally, it is important to grasp the difference between offers and invitations to treat.
Let's explore this concept. You may have visited a shopping mall with a grocery store. As
you enter the grocery store, you are provided with a cart, whether it's physically or online.
You take this cart and begin shopping, moving around the store and encountering various
displayed products. Now, can we consider these displayed products as invitations to offer?
Take a moment to consider this.

The goods displayed in the shop can be seen as an invitation to offer. However, the act of
picking up the goods does not necessarily imply acceptance. Although the displayed goods
are considered an offer since they are available for sale, picking them up does not
automatically result in acceptance and the formation of a contract. This is because, in a
shopping mall, consumers have the flexibility to change their minds and switch between
products or even withdraw certain goods at the cashier. Similarly, the cashier retains the right
to decline the sale if the consumer is dissatisfied.

Therefore, it is crucial to understand that in a shopping mall scenario, it is not the mall itself
that is making the offer. Instead, the mall is simply inviting customers to view the goods
available for purchase, and it is the consumers themselves who are making the offer to buy
the selected goods.

Once you have selected the goods you wish to purchase, you present them to the shopping
mall or store owner. It is then up to the owner to make the final acceptance. They may refuse
to sell the goods for various reasons, such as if they have been reserved for someone else or if
there are no stocks available. They might also indicate that certain promotional offers are

50
subject to specific conditions of sale. Ultimately, the shopping mall or store owner will
determine whether they will sell the goods to you and at what terms.

Understanding the concept of an invitation to treat is crucial, as it precedes the actual offer. It
is a stage where individuals are invited to view and consider the goods or services, and then
decide whether they want to make a purchase. As the consumer, you hold the final decision-
making power to either proceed with or decline the offer.

Now, let us consider the role of advertisements in contracts. Advertisements come in various
forms, such as online ads, print ads, radio ads, and social media promotions. Today,
advertisements are a prominent method of marketing. When advertisements mention sales,
discounts, promotional schemes, or other enticing offers, it is important to understand how
they are treated in contract law.

Suppose you come across an advertisement for a government or Development Authority

auction of plots, with a fixed date and time for the auction. You express interest in purchasing
a plot and arrive at the designated location on time, only to discover that the auction has been
canceled. In such a case, can you take legal action against the government for the promise
made in the advertisement to conduct the auction?

Advertisements are not typically considered binding promises. They serve the purpose of
providing information rather than making specific contractual commitments. Advertisements
lack the necessary specificity and clarity to be treated as offers. Generally, advertisements are
regarded as invitations to make an offer. Thus, attending the auction and placing a bid would
be considered making an offer, which is subject to acceptance by the auctioneer (in this case,
the government). If the auctioneer accepts the bid, a contract is formed.

Bidders are required to make an offer, and the act of calling for bids is generally an invitation
to make that offer. Therefore, anything preceding the offer should be treated as either an
invitation to treat, where individuals are encouraged to visually explore and evaluate the
goods or services before deciding, or as an invitation to make an offer, where individuals are
invited to a specific location to consider and potentially make an offer.

In contract law, judges recognize that not every kind of proposal or initiation can be
considered a formal offer. Certain proposals are considered pre-offer or simply informational
in nature. The proposal needs to contain specific obligations and promises to be treated as an
offer; otherwise, it should be regarded as new information.

51
The content of the offer and its specificity play a crucial role in determining whether it
qualifies as an offer under contract law, capable of being accepted by the offeree. In a
contract, there are two parties involved: the offeror and the offeree. The exchange of
promises between these parties is what establishes a contract, as contract law revolves around
the exchange of promises, which must demonstrate the intent of the parties involved.

Intention is a critical factor because an offer must be intended to be binding; otherwise, it

fails to be a valid offer. Additionally, there must be a degree of definiteness and clarity in
what is being communicated as part of the offer. The offer must be communicated clearly,
whether through electronic means, physical documentation, or oral communication. The
offeror needs to ensure that the offer reaches the offeree for it to be considered valid. Once
the communication of the offer is complete, it can be enforced to that extent.

52
(Refer Slide Time: 24:20)

The next issue for consideration is whether advertisements can be considered offers. While
advertisements are primarily intended for providing general information, there are cases
where advertisements can be deemed as offers. There are two types of advertisements to
distinguish: those containing genuine offers and those that make specific promises.

In the famous case of Carlill v. Carbolic Smoke Ball Company, Mrs. Carlill filed a lawsuit
against the pharmaceutical company for failing to fulfill a promise made in their
advertisement. The company had advertised a product that claimed to prevent influenza, and
they further stated that if the product failed to work, they would pay £100 as a reward. The
company argued that the advertisement was merely informational and not an offer, as they
could not identify who had read it or purchased the product.

However, the court determined that this advertisement went beyond mere information and
constituted a binding offer. The court held that when a reward is announced in an
advertisement, fulfilling the conditions stated in the advertisement becomes acceptance of the
offer. In this case, Mrs. Carlill's act of purchasing and using the product as instructed
constituted acceptance of the offer, and the company was obligated to pay the reward.

It is essential to categorize advertisements clearly. Some advertisements make specific

promises and obligations, such as job placement guarantees or reward offers for providing
information about a crime. In such cases, these advertisements can be treated as offers, and
failing to fulfill the obligations outlined can result in a breach of contract.

53
However, not all advertisements qualify as offers. Many advertisements, particularly
tendering contracts announced by the government, are invitations for individuals or
companies to participate in a bidding process. These advertisements generally lack specific
promises or obligations and are considered pre-offers or invitations to treat, rather than
binding offers.

In summary, advertisements can be considered offers if they contain specific promises and
obligations. When an offer is made in an advertisement, fulfilling the conditions stated in the
offer constitutes acceptance, leading to a binding contractual obligation. Contract law
revolves around fulfilling obligations, and advertisements that create identifiable and certain
obligations can initiate legal implications, where failure to fulfill those obligations may result
in a breach of contract.

(Refer Slide Time: 35:05)

Moving forward, let us discuss the importance of understanding offers as an essential aspect
of making agreements or contracts. In the Indian Contract Act of 1872, Section 2(a) defines a
proposal or offer as when one person signifies to another their willingness to do or abstain
from doing something with the intention to obtain the other person's assent. This signifies the
making of a proposal.

Furthermore, Section 2(e) of the Indian Contract Act defines an agreement as every promise
and every set of promises that form consideration for each other. This highlights the
requirement of separate promises to constitute an agreement.

54
When considering offers, it is crucial to examine the intention behind them. An offer should
be made with the intention to establish a serious or commercial relationship. Additionally, for
an offer to be binding and create a contractual obligation, it should be made by a person who
has the capacity, such as being an adult or above 18 years old, and possesses the necessary
resources, like money.

It is important to differentiate between social contracts and legal contracts. While legal
contracts are enforceable by law, social contracts and agreements are not. A notable case that
illustrates this distinction is Mr. Balfour v. Mrs. Balfour. In this case, Mrs. Balfour filed a
lawsuit to compel her husband to fulfill his promise of providing her with maintenance
money while she stayed in England. However, the court ruled that social promises made
within a household or existing relationships, like between family members, do not create
binding contractual obligations unless there is a clear intention to do so.

The concept of intention becomes crucial in contract law. Judges must determine whether an
offer or promise was made with the intention to create a legal obligation and result in a
binding relationship. Social promises, such as those made between friends or within a
household, are generally not considered contractual promises unless there is a clear intention
to create a legal relationship.

It is worth noting that in commercial contracts, even a memorandum of understanding

(MOU) can be either binding or non-binding. Not every agreement or understanding leads to
a contract, and an MOU can serve as evidence of the parties' intentions but may not be legally
enforceable.

Another case, Jones v. Padavatton (1969), involved a mother promising her daughter to
support her studies in England. However, when the daughter did not show seriousness in
completing her studies, the mother stopped providing financial support. The court held that
this was not a legally binding obligation of the mother to maintain her daughter. While
statutory obligations exist for maintenance claims, a social promise like this lacks the
necessary intention to create a legal relationship and enforceable contract.

The theory of intention is particularly relevant when oral contracts were prevalent, often
involving existing or subsisting relationships like family ties. Nowadays, when two parties
without a pre-existing relationship make promises, the intention is typically presumed to
create a legal relationship and contractual obligations unless otherwise disputed. However, an

55
MOU can still be used as evidence of the parties' intentions, whether it is binding or non-
binding.

In conclusion, understanding offers is crucial in the formation of agreements or contracts.

Offers can be explicit or implicit, but communication of the offer is essential. Intention plays
a vital role, and specific or general offers, as well as advertisements, can all be considered
offers depending on the specific obligations they entail. With this understanding, let us now
proceed to the second aspect of contract formation, which is acceptance.

(Refer Slide Time: 45:26)

Now, interestingly, in the context of contracts, an offer needs to be accepted and

communicated to a second party. According to Hanson, a jurist and author in contract law,
acceptance is like a lighted matchstick to a train of gunpowder - once it happens, it cannot be
revoked. The legal obligation is formed, and the contract becomes enforceable in a court of
law. Acceptance must be absolute, unconditional, and communicated in the usual or
reasonable manner.

Acceptance is comparable to a mirror image of the offer. If any additional conditions or

changes are made to the offer, it becomes a counter offer. Furthermore, acceptance can only
take place if the person has knowledge of the offer. This rule was exemplified in the Lalman
Shukla v. Gauri Dutt case, commonly known as the missing nephew case.

In that case, the landlady announced a reward for finding her missing nephew. Lalman
Shukla, the domestic servant, found the boy and returned him to the landlady without

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knowledge of the reward. Later, when he learned about the reward, he claimed it, but the
court ruled that he was not entitled to it since he had no prior knowledge of the offer.

Acceptance can only be made by the specific person to whom the offer was directed. It
cannot be assigned to a third party. Silence generally does not constitute acceptance, as
communication is crucial in contract law. There have been cases where silence was
interpreted as acceptance, such as when specific conditions were communicated beforehand,
or when actions were taken indicating acceptance.

It is important to note that communication of the offer and acceptance is essential for a
contract to be formed. Internal processes within an organization, like document preparation or
premium deposit, do not necessarily constitute acceptance unless there is communication
with the offeror. Communication can sometimes be dispensed with in certain cases of
conduct or implied acceptance, but generally, it is a fundamental requirement for the
formation of a binding contract.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law School of India University
Lecture 7 - Formation of Contract – Revocation of Offer
(Refer Slide Time: 0:16)

Revocation is an important aspect to understand in contracts. Once an offer is made and

accepted, it creates a legally binding obligation that cannot be withdrawn or called back.
However, in practicality, there may be instances where parties reconsider the offer or
acceptance, and this is where the concept of revocation comes into play.

Revocation means to call back or withdraw an offer. It is essential to communicate the

revocation, just as the offer and acceptance need to be communicated. The offeror must
inform the offeree about their intention to revoke the offer. This communication can be done
through various means such as written notice, oral notice, email, or any other mechanism.

Another way an offer can be revoked is through the lapse of time. Every offer is open for a
reasonable amount of time, which may vary depending on the subject matter, the parties
involved, and customary trading practices. If a specific time is mentioned in the offer, such as
"the offer is valid until this evening," the offer will lapse and no longer exist after that time
has passed.

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Furthermore, an offer can be revoked by the occurrence of certain events. For example, if the
offeror dies or becomes insane before the acceptance is made, the offer terminates
automatically. This is because many contracts are based on the personal character of the
offeror and offeree, and their absence or incapacity affects the validity of the offer.

Non-fulfillment of a condition precedent to acceptance can also lead to the revocation of an

offer. If the offer includes a condition that must be met before acceptance, such as paying an
advance amount, failure to fulfill that condition renders the offer invalid. In such cases, no
valid acceptance can take place, and the offer loses its legal existence.

A counteroffer is another way in which an offer can be revoked. If the offeree responds to the
original offer by making a counteroffer instead of accepting it, the original offer no longer
exists. The counteroffer becomes a new offer, and the original offeror can either accept or
reject it.

Additionally, the offer can be revoked by non-acceptance in the prescribed or usual mode.
The offeror has the right to prescribe the mode of acceptance and set the terms and conditions
of the contract. If the offeree does not follow the prescribed mode or contravenes the
conditions of the offer, it is considered a counteroffer, and the original offer expires.

It is important to note that an offer remains valid until it is revoked or any of the events occur.
Once an offer is revoked or terminated, it ceases to exist, and no further obligations or
enforceable contracts can be created based on that offer.

In terms of acceptance, it can also be revoked, although the conditions for revoking
acceptance are different. Acceptance can be revoked before it reaches the offeror.
Communication and knowledge play a crucial role in acceptance. If the offeror is not aware
of the acceptance, it is as if no acceptance has occurred. The offeree can revoke their
acceptance by using faster means of communication, such as phone calls, emails, faxes, or
other instantaneous methods, before the communication of acceptance reaches the offeror.

In conclusion, revocation is an important aspect of offer and acceptance in contracts. An offer

can be revoked through communication, lapse of time, occurrence of certain events, non-
fulfillment of conditions, or the presence of a counteroffer. Acceptance can also be revoked
before it reaches the offeror. Understanding the concepts of revocation and its various modes
is crucial in comprehending the dynamics of offer and acceptance in contract law.

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(Refer Slide Time: 22:20)

As we delve into the final part of our discussion, it becomes evident that offer and acceptance
are the fundamental ingredients necessary to form a contract. When both parties engage in the
process of offer and acceptance, the obligations under the contract come into effect. Referring
to the earlier example of Bangalore and Delhi, an important question arises: When is a
contract considered made? A contract is only established when acceptance is communicated
and reaches the offeror. The act of dispatching the acceptance alone does not signify the
completion of the contract. It is only when the dispatched acceptance reaches the offeror that
the acceptance is deemed complete.

Completion of acceptance results in a binding contract, establishing a legal obligation. It is

crucial to determine when and where the contract is made as it facilitates the resolution of
potential disputes in the appropriate jurisdiction. While parties have the freedom to choose
the dispute resolution location in modern contracts, certain rules and considerations apply.
The court's jurisdiction depends on various factors, such as the choice of jurisdiction and the
convenience of the court, as defined by the Civil Procedure Code.

Was it at the offeror's location or the place of acceptance? The conclusion of the contract
determines the jurisdiction of the local courts to handle matters like offer revocation, validity
of acceptance, contract enforcement, breaches, and more. Therefore, the contract's place is
determined by the location where acceptance is finally communicated. For instance, if an
offer originates from Bangalore, and the acceptance is posted from Delhi, the contract is
made only when the acceptance reaches the offeror in Bangalore. Prior to that, the contract is

60
not valid, and obligations between the parties do not arise. The place also defines the
jurisdiction where courts may need to intervene.

It is crucial to note that unless the parties have explicitly agreed to a different jurisdiction or
timeframe, the rule stands that the contract is made at the place where the offeree receives the
acceptance. This is also the time when the contract is considered made. However, in modern
contracts, parties may agree to sign the contract today but specify that its obligations will
commence in the future. This flexibility is possible when the place and time of the contract
are agreed upon. Otherwise, the place where the acceptance is received determines the
jurisdiction, and that is where and when the contract is made.

In conclusion, it is essential to understand which agreements can be treated as contracts,

considering the importance of a valid offer and acceptance. Whether an agreement, such as a
memorandum of understanding (MOU) or a letter of intent, constitutes a contract depends on
the intention of the parties. Intention plays a significant role in reaching a contract. Without a
valid offer and acceptance, an agreement like an MOU or a letter of intent may be considered
a plain agreement without enforceability in a court of law. However, it may result in private
obligations. Therefore, intention, expressed either positively or negatively, is a crucial aspect
to establish a contract. With this, we conclude the discussion on offer and acceptance and
move on to the next important topic: capacity to contract. Capacity to offer, accept, and make
contracts is highly relevant in determining who can enter a contract.

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(Refer Slide Time: 28:50)

Now, moving forward, let us examine Section 10 of the Indian contract, which specifies that
only certain categories of people should be granted contractual rights (29:02). Therefore, not
everyone in society can freely enter contracts. There are certain individuals who need to be
excused from contractual obligations due to the nature of the contract, which creates
responsibilities and obligations for the other party. The legal system needs to trust that you
can shoulder these legal responsibilities, and if that trust is lacking, you may not be qualified
to enter a contract.

Let us consider the example of child labor in labor law. We have restrictions on child labor
for various reasons, primarily to protect the interests of children. Children should be
attending school instead of engaging in labor. We do not trust children to have the mental
capacity to understand contracts, so minors are excluded from entering contracts, including in
labor law. However, there are exceptions in place, particularly regarding hazardous activities.
Minors should not be allowed to participate in hazardous industries as it can adversely affect
their health. But between the ages of 14 and 18, there may be certain non-hazardous activities
where minors could be allowed to enter contracts. This exception is made due to
socioeconomic circumstances in the country. Even in labor law, while striving for fairness in
labor conditions, the legal system aims to protect the innocence and infancy of the child,
ensuring they are not exploited.

When discussing the capacity of parties, we can generally categorize it into two types: mental
and physical. While physical incapacities are a consideration, I will focus on mental capacity,

62
which primarily relates to age and the maturity of one's mind. Since dealing with contracts
involving minors can be a major challenge, the Indian Contract Act does not explicitly
address it. It simply states that minors are excluded, and one must exercise caution. The age
of maturity is not specified in the Indian Contract Act itself; instead, we refer to another
legislation called the Indian Majority Act. This complementary legislation determines the age
of majority, which is currently set at 18, as per the Indian Constitution's requirement for
voting rights.

Earlier, the Indian Majority Act stipulated the age of majority as 21, even for voting, but it
was later reduced to 18. The Indian Majority Act governs the age qualification for exercising
certain rights and is applicable to inter-contracts. Minors are excluded for reasons of
protecting their interests and ensuring they are not burdened with commercial transactions or
obligations. Can we clearly state that minor contracts are not enforceable? Well, in the case
of Mohoribibi v. Dharmodas Ghose, the court declared minor contracts as void ab initio.

A void contract holds no legal recognition whatsoever. The court went even further and
declared it void ab initio, which means it has no existence from the very beginning. It is not
just a matter of invalidity or unenforceability; it is completely void ab initio. The intention
behind this ruling in the Mohoribibi case was to protect the innocence of minors, as they
could be vulnerable to exploitation in commercial bargains where one party usually holds a
stronger position and can take advantage of the minor. The court was firm in its stance,
treating every minor contract as void ab initio. Consequently, the parties involved would not
receive any relief under the Indian contract law. The law would not recognize the contract
from its inception.

It is important to understand the distinction between void and void ab initio because, in the
case of a void contract, such as this, Section 65 of the Indian Contract Act can still apply the
principle of unjust enrichment. Even if the contract is void, the principle of unjust enrichment
allows for the recovery of any unjustly received benefits.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 8: Formation of Contract - Capacity to Contract
(Refer Slide Time: 00:16)

The Indian Contract Act of 1872 contains a section known as Section 68, which deals with
externally imposed obligations, also known as quasi contracts. Quasi contracts are similar to
contracts but are not considered full-fledged contracts. They represent contractual relations
that resemble contracts to some extent. This section and the subsequent sections from 68 to
72 outline the obligations that can be imposed under these quasi contracts, regardless of
whether an actual contract exists or not.

Under the Indian Contract Act, parties can enter into agreements and assume obligations
based on their own choices. These obligations are considered self-imposed obligations.
However, there are situations where, even in the absence of a present agreement or the
presence of the other party, certain obligations can still be imposed due to the nature of the
relationship between the parties. Therefore, the Act recognizes that in certain cases,
obligations resembling contractual obligations can be enforced, even without a formal
contract.

The law of contracts is primarily based on the law of obligations, which are enforced by the
legal system. Section 68 of the Indian Contract Act deals with incapacitated persons,
including minors, who lack the capacity to enter into contracts. According to this section, if a
minor is provided with necessary goods for their life, such as food, clothing, and shelter, the

64
minor is obligated to pay for those goods. This exception to a minor's liability in contracts
ensures that essential goods are not withheld from them.

It is important to note that this obligation of a minor to pay for necessaries of life is not a full-
fledged contractual obligation but a legal obligation based on the principle of unjust
enrichment. If a minor cannot afford to pay, there is an option to return the goods. However,
if the goods are retained, payment is expected.

Determining what constitutes necessaries of life is subjective and depends on the minor's
lifestyle, culture, and background. For instance, items like a marriage engagement ring or a
suit for a wedding may be considered necessaries of life in certain cases. The definition of
necessaries can vary from one jurisdiction to another.

Society encourages the provision of necessaries to minors, and the law ensures that those who
supply these goods will be paid. However, it is the responsibility of the adult supplying the
goods to assess whether they qualify as necessaries. If the goods do not meet the necessary
criteria, the supplier may not be able to recover payment.

Overall, minors can be obligated to certain quasi-contractual obligations, primarily relating to

necessaries of life. These obligations ensure that minors are supported and provided with
essential goods, even if they lack the full capacity to enter contracts.

Apart from medical advice, legal advice, and rent, which are considered necessary for a
minor's well-being, there are other important necessities as well. For instance, a rental
agreement can serve as evidence of providing shelter to a minor. Legal advice becomes
essential for matters like inheritance, property sales, and the appointment of a guardian.
Additionally, items such as bicycles for commuting to college or school have been
recognized by courts as necessaries. On the other hand, loans and cash do not fall under the
category of necessaries, as established in the Mohoribibi versus Dharmodar Das Ghose case.
The law explicitly prohibits entering contracts with minors, especially for loans.
Moneylenders are strictly advised against engaging in such transactions, as they are
considered void. It is crucial to understand these distinctions, as they shape an interesting
discussion on the topic.

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(Refer Slide Time: 9:04)

It is important to note that the law concerning minors and contracts has evolved over time,
shifting from a rigid interpretation to incorporating exceptions and allowing for a more
flexible approach. Apart from the Indian Contract Act, other legislations have also introduced
exceptions to protect the interests of minors. For instance, the Trade Union Act of 1926,
which promotes collective bargaining, permits minors to become members of trade unions.
This membership emphasizes the rights of workers and laborers in relation to their respective
industries and managers.

Additionally, certain statutes have created exceptions allowing minors to enter into contracts.
One such example is the negotiable instrument, which is used to understand payment
obligations in contracts. While the use of promissory notes and bills of exchange may have
diminished in contemporary times, they were significant in ensuring payment obligations.
The Negotiable Instruments Act of 1881 does not prohibit minors from executing promissory
notes or negotiable instruments.

These statutory exceptions highlight the evolving nature of the law and its recognition of the
rights and capacities of minors in specific contexts.

Similarly, the Transfer of Property Act, a law originating from the British era, allows minors
to receive gifts of movable or immovable property. This means that a minor can receive a

66
gift, which entails a beneficial obligation, though not a liability. The Transfer of Property Act
of 1882 specifically permits minors to receive immovable property as well.

Moving on to partnership, which is a significant area of contract law, the Partnership Act of
1932 provides interesting provisions. According to Section 30 of the Act, minors can be
admitted as partners in a partnership. While being under the age of 18, they are admitted
solely for the benefits of the partnership and do not bear the full liability of a regular partner.
They can actively contribute to the partnership and derive benefits from it. This provision
allows minors to engage in various economic activities, such as business, employment, and
entrepreneurship.

These statutory exceptions demonstrate the evolution of the law, allowing minors to
participate in certain economic and social activities within defined parameters. It is evident
that exceptions have been crafted through different statutes to accommodate the rights and
involvement of minors in specific.

The concept of judicial exceptions comes into play when certain contracts are deemed to be
solely for the benefit of a minor, such as service contracts. For example, contracts involving
young athletes being employed by sports clubs are considered beneficial contracts. These
contracts, which contribute to the minor's potential success and benefit society and the nation,
are enforceable under common law and in India. Minors have the right to approach the court
to enforce such contracts, even if they require the guardian's countersignature. This judicial
exception expands the scope of minors' rights to enter contracts, adding an interesting
dimension to contract law.

Shifting the focus to mental incapacity, soundness of mind is crucial in commercial

transactions where performance and payment obligations exist. While there is no specific test
for soundness of mind, legislations such as the Mental Health Care Act address mental health
issues and classifications of mental soundness or unsoundness. Traditionally, unsoundness of
mind referred to a mental ailment affecting decision-making abilities and rationality.
However, it is not solely determined by the presence of discounted or inexplicable sales but
also by medical factors, such as mental health conditions or challenges. During periods of
unsoundness, individuals lack the capacity to contract, but they regain it when they are of
sound mind. Persons who are unsound or intoxicated, including drunkards or those under the
influence of substances, are excluded from entering contracts due to their lack of rationality
and understanding. However, it is important to note that individuals cannot intentionally

67
incapacitate themselves and expect legal protection. If the incapacity is self-induced, the law
will not intervene. The law will only come to their rescue if the incapacity was induced by
external factors without the individual's contribution.

Courts will carefully evaluate and assess these factors, such as unsoundness or intoxication,
before deciding whether to intervene in contracts. The courts require a clear understanding of
the circumstances and whether the incapacity was self-inflicted or induced by external factors
before providing legal protection or invalidating a contract.

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(Refer Slide Time: 23:31)

Understanding physical incapacity to contract is crucial alongside mental incapacity, as both

factors determine who can enter a valid and enforceable contract. It is important to consider
visually impaired individuals in society who may face constraints in entering contracts due to
their inability to see and read contractual documents. While they are not prohibited from
making oral promises, their physical challenges may hinder their understanding of contractual
terms, necessitating alternative methods of contract execution such as signatures or
fingerprints. Certain individuals in society may have physical limitations or special
challenges that affect their capacity to contract, including visually impaired persons or
individuals with physical disabilities.

These physical challenges can impact an individual's cognitive abilities, comprehension of

contractual terms, or their ability to read documents properly. Factors such as age, the need
for corrective eyewear, or other physical impairments can also affect an individual's
contractual capacity. In such cases, there is a presumption that these types of contracts may
not be fully enforceable if one party can prove that the contract was influenced or involved
some form of mischief. Physical challenges due to age or other physical issues can be
grounds to invalidate or set aside a contract, and the courts must take these factors into
consideration when enforcing contracts.

Shifting to legal capacity, it is important to note that legal or juristic persons, such as
companies, universities, partnerships, cooperative societies, or trusts, are also considered
persons in the eyes of the law. However, a juristic person cannot enter a contract on its own;

69
it requires representatives to act on its behalf. When it comes to the capacity of a juristic
person, such as a company, it cannot be represented by a minor or an individual lacking
soundness of mind. The capacity of the agent representing the company is a separate topic to
be explored under the chapter on agency.

When a legal person, such as a university or a company, is created, it needs to undergo a

process of incorporation or registration to attain legal personality status. Incorporation or
registration is a crucial step for the legal personality of a company or institution to come into
existence. Certain documents are required in this process, and upon their incorporation, the
company or institution is considered legally established.

In summary, physical incapacity, alongside mental incapacity, plays a significant role in

determining the capacity to enter contracts. Visual impairments or physical challenges may
present constraints for individuals, necessitating alternative methods of contract execution.
Legal capacity, on the other hand, pertains to the capacity of juristic persons such as
companies, which require representatives to enter contracts on their behalf. Incorporation or
registration is an essential step for legal personality to come into existence, and specific
documents are required in this process.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
National Law School of India University
Lecture 9: Formation of Contract - Capacity & Consideration

(Refer Slide Time: 0:16)

When discussing the incorporation of a company, we refer to the memorandum of association

and articles of association. These two documents are prepared by the company's promoters
and submitted to the registrar of companies for evaluation. In the memorandum of
association, an important aspect is the main clause where the company's name is chosen. It is
crucial for the name to be unique, as it serves as the company's identity.

Similarly, the articles of association outline how the company manages its affairs. They cover
various aspects such as the powers and responsibilities of the board of directors, who act as
representatives of the company and make it operational. The company itself cannot act
independently and relies on individuals to act on its behalf.

The articles of association also address important matters such as the allocation of powers
among board members, the requirements for special resolutions versus ordinary resolutions,
and other key guidelines for the company's functioning. These two documents, the
memorandum of association and articles of association, are essential for establishing a
company and define its legal capacity.

In a similar vein, universities have statutes that govern their formation and operation. These
statutes act as regulatory documents, determining the authority and limitations of key roles
within the university. For instance, the vice chancellor's capacity and responsibilities are

71
specified in the statutes, including interactions with the registrar, who has their own
functional capacities. It is crucial for all individuals within the company or university to
operate within their designated capacities. This ensures that the company or university
functions effectively within its defined framework.

The concept of intra vires and ultra vires is significant in various areas of law, including
corporate law. Intra vires refers to actions within the authorized capacity or authority, while
ultra vires pertains to actions that go beyond the authorized capacity or authority. Ultra vires
actions are those that are not permitted or fall outside the scope defined by the incorporating
or registration documents. The capacity of an entity is assessed based on these documents,
and actions are categorized as either intra vires or ultra vires accordingly. It is important to
note that unless a company has the capacity to enter a contract, any action it takes may be
considered ultra vires.

For instance, a notable case illustrating this concept is Ashbury Railway Carriage Company
v. Riche. Companies typically include an object clause in their memorandum that defines
their fundamental purpose, specifying what they should and should not do. If the object
clause of a railway carriage company states that its purpose is to provide for the production
and maintenance of railway carriages, entering into a contract for a different purpose not
defined in the object clause would constitute an ultra vires action. Every company establishes
its own object clause, such as a software company defining its object clause as being in
software services. It is important for the object clause to provide some flexibility to
accommodate business expansion. However, if a company engages in activities beyond the
scope mentioned in the object clause, it is necessary to amend the clause accordingly. The
capacity of juristic persons plays a critical role in determining their contractual capacity.

Another crucial aspect to consider is insolvency. Solvency indicates the presence of capacity,
while insolvency signifies the loss of capacity. Insolvency occurs when an individual or
entity has more debts than assets and is unable to settle those debts from their available
assets. Once declared insolvent, the capacity to contract is lost.

In contemporary times, we have the Insolvency and Bankruptcy Code of 2016, which
governs corporate insolvency and bankruptcy. While companies no longer hold the same
position in contracts due to this code, it is important to note that there is no absolute
prohibition for contracts involving insolvent or bankrupt companies. The remaining assets
must still be disposed of, and efforts should be made to settle as much debt as possible.

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However, complete capacity is not retained in cases of insolvency. Insolvency disqualifies
individuals, both legally and practically, from contracting. In such situations, the capacity to
contract is transferred to an official liquidator or determined by the National Company Law
Tribunal (NCLT). The NCLT decides which contracts are permissible and oversees the sale
of assets belonging to insolvent individuals or companies.

Insolvency fundamentally affects the capacity to contract, and unless there is legal
intervention or protection, the assets of an insolvent entity cannot be dealt with, and the
capacity to contract is revoked.

Furthermore, there is the traditional concept of an "alien enemy," which generally prohibits
contracting with an enemy state. Once a country is declared an enemy state, individuals from
that state are considered enemies, and contracting with them is not recognized in the realm of
contractual capacity. This exclusion is in place to safeguard national interests. Today,
international law has developed sanctions that prohibit contractual relationships with entities
in violation of these sanctions. For instance, during the crisis in Ukraine, many countries-
imposed sanctions on Russia, affecting contracts with Russian citizens and companies.
Contracts formed after the imposition of sanctions are rendered ineffective. These sanctions
demonstrate how the capacity to contract is impacted by international law in certain
circumstances.

This concludes our discussion on the capacity of parties to contract, covering minors,
unsound persons, individuals lacking legal capacity, and juristic persons. Moving forward,
we should delve into the chapter of consideration, which is an essential aspect of contracts.

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(Refer Slide Time: 9:18)

Moving forward, another crucial aspect of contract enforcement is the consideration test.
Section 25 of the Indian Contract Act states that without consideration, a contract cannot
exist. Consideration holds such significance that the absence of it renders an agreement
unenforceable under the law.

So, what happens if a contract lacks consideration? It means that the agreement is not legally
binding. Consideration, in the context of contracts, refers to the price or value that supports
the promise or agreement between parties engaged in a commercial relationship. Typically,
consideration is seen as the price paid by the buyer to the seller in exchange for goods or
services. It is often associated with monetary payment in commercial transactions.

However, consideration has a broader understanding. It can encompass any interest, right,
detriment, loss, or even efforts undertaken in the contract. It is not solely limited to monetary
or economic value. For example, consideration can be the relinquishment of a right or interest
by one party or the incurring of a loss or detriment. Additionally, consideration can also arise
from acts of charity or making a gift, as they may provide a sense of satisfaction to the giver.

Therefore, consideration is not solely confined to monetary exchange but extends to various
forms of value, interest, or loss within the context of a contract. It is an essential element to
establish the enforceability of a contract.

Consideration has a broad context, and it is important to note that under the Contract Act (as
provided in Section 2(d)), it can encompass an act itself. Therefore, if I perform an act in

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furtherance of a promise, that act becomes consideration. For instance, if you make an offer
asking me if I can run 10 kilometers within 30 minutes, my act of running becomes both
consideration and acceptance of the contract. By completing the run within the specified
time, I have supported the contract with consideration, and I would be entitled to the contents
of your offer.

Understanding consideration also leads to the justification for enforcing the contract. In
common law, judges sought a reason or justification to enforce the law, which came in the
form of consideration. The actions, talk, or other contributions of the other party could serve
as justification for enforcing the promise. Consideration, in this sense, was the basis for
enforcing the promise, and it needed to be something of value, commercially viable, and
deemed valuable by the courts and judges.

Consideration can be seen as a "quid pro quo" arrangement. If you expect me to fulfill my
promise, the question arises: What have you done in exchange for the fulfillment of that
promise? If you have provided something in return, then consideration has been given, and
the law can be enforced. This concept of consideration has evolved over time, shaping the
understanding and enforcement of contracts.

Consideration is crucial in ensuring the legality of a contract. It is important to note that in the
context of contracts, the term "quid pro quo" refers to something given in exchange for the
enforcement of a contractual obligation, rather than the understanding of corruption
allegations.

When considering what constitutes consideration in contract law, several possibilities arise. It
could be the monetary value of the contract, a sum paid by one party to another, the
consideration of the contract terms before agreeing to them, or the price paid by each party
for the other's promise or performance. To a large extent, consideration can encompass all of
these possibilities, highlighting its wide scope.

To understand consideration, we must acknowledge that the law establishes a strict rule
requiring consideration for a contract to exist. However, Section 25 of the law provides
certain exceptions. For instance, consideration is not required in relationships based on love
and affection, as seen in the Balfour v. Balfour case. Additionally, if a contract is put in
writing and registered, it may not necessitate consideration, as the act of registration implies a
commercial understanding.

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Exceptions exist to the strict rule of consideration. For example, in the case of a gift, the
recipient may not provide any consideration in return. Certain domestic relationships, based
on love and affection, may not require consideration if the promises are put in writing and
registered. In such cases, the wife, for instance, may not need to seek consideration for
maintenance from her husband if the agreement is formalized in writing.

Consideration operates through these exceptions, which highlight the flexibility of the
concept in specific circumstances.

Today, the exceptions to the rule of consideration have become more prevalent than the rule
itself. In modern contract forms, the requirement of consideration is often dispensed with,
unless challenged. This is because most modern commercial contracts are written and may
even involve registration. In such cases, consideration is rarely debated or tested. However, it
remains essential in cases where oral contracts are made, and that is how the significance of
consideration has evolved over time.

To illustrate the importance and application of the consideration test, let's consider an
interesting case. Imagine a company that sells chocolates introduces a promotional scheme.
Under this scheme, they announce that if customers return the chocolate wrappers to the
company, they will be eligible for an additional prize. For instance, if a customer sends back
100 wrappers, they would receive a reward. This scheme was likely devised by Nestle
company.

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(Refer Slide Time: 18:57)

Continuing our exploration of consideration as an essential element for validating a contract,

we encounter two significant principles and doctrines: the privity of contract and the doctrine
of promissory estoppel.

Privity of contract refers to determining who should possess rights under a contract. Although
this concept traditionally carries conservative implications, it holds considerable relevance in
modern-day contracts. According to the strict rule, only the parties involved in a contract
should have the right to sue each other. For instance, if you and I enter a contract, we are the
only ones entitled to sue each other. However, questions arise when third parties become
involved in a contract.

To illustrate this with a modern example, let us consider a scenario where I enter into a
contract with you for certain services, but you employ a subcontractor to assist in fulfilling
the contract. If the subcontractor faces non-payment or encounters other challenges, can they
sue either you or me? After all, their work is derived from our contract. This issue extends to
the right to invoke arbitration as well, given that many modern contracts include arbitration
clauses.

The strict rule of privity does not grant any rights to third parties who are not signatories to
the contract. However, common law has developed exceptions to this rule since there are
circumstances where parties seek or should be granted rights in a contract.

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To provide a simple example, let's assume you are a bank, and I have taken a loan from you
under a contract. The loan tenure is three years, and I am obligated to repay the principal
amount along with interest. Now, suppose I pass away unexpectedly. Will my son or
daughter have rights to claim the loan returns? Inheritance and succession of property come
into play here. Contracts made by deceased individuals must recognize the rights of their
successors, even though they are not parties to the original contract. However, when we
discuss rights, we also consider liabilities.

The concept of third-party rights is intriguing because, under the principle of consideration,
we argue that only the parties involved in the contract have provided consideration to each
other. Therefore, those who have provided consideration have the right to sue. Third parties,
on the other hand, have not provided consideration, so why should they have rights? This is
the underlying logic behind the privity doctrine.

However, it is important to note that if a third party can demonstrate that they have provided
consideration, they can approach the court and assert their right to sue. Consider the case of a
subcontractor who has contributed their labor and skills to a construction project, such as
plumbers, electricians, masons, or carpenters. Even if they are not direct parties to the
contract, their work has already been performed. Regardless of their formal contractual
status, they have rights and duties related to the project, and thus they should have the right to
sue. In this way, third parties can secure employment opportunities.

The Dunlop tire versus Selfridge case serves as a classic example where the tire company had
a contract with a wholesaler, who in turn had a contract with a retailer. The question was
whether the tire company could sue the retailer, or conversely, whether the retailer could sue
the tire company without involving the wholesaler as the intermediary party.

Generally, if there is an unbroken chain of contracts from party A to party B, and then from
party B to party C, it allows party A to sue party C or vice versa. This dilution of privity
enables certain third parties to sue under the contract. Additionally, the Specific Relief Act of
1963 grants third parties the ability to bring certain claims in a contract.

The common law was initially fixated on the doctrine of privity, which excluded third parties.
However, as difficulties and practical situations arose, exceptions to the doctrine were
recognized. Parties who are part of the contract chain and whose obligations have not been
severed are granted rights. For instance, even if a retailer does not have a direct contract with

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Dunlop, they are still handling Dunlop's brand and selling their goods. The retailer acts on
behalf of both the wholesaler and the tire manufacturer, establishing the role of third parties
as recognized by the doctrine of consideration in Indian law.

Let us consider another example to illustrate the involvement of third parties. Suppose you
want to have your house painted, and I am the painter contracted for the job. I need to
purchase paint, so I go to the shop and make the transaction. Although the contract is between
me and the paint shop, it is ultimately for your benefit as the homeowner. If the paint turns
out to be defective, you, as the final consumer and beneficiary of the contract, have the right
to sue the paint shop for any quality issues, despite not being a direct party to the contract.

The privity doctrine plays a crucial role in determining who has the right to sue in a contract.
While supporting a contract with consideration traditionally grants the right to sue, there are
situations where parties should be granted this right even without providing consideration.
For example, if a contract includes a minor as a named beneficiary, they have the right to sue
despite not being a party to the contract. These exceptions to the privity principle allow third
parties to assert their rights.

It is important to note that third-party rights in contracts can also be used as a defense to
exclude parties' claims and rights. However, if a party can demonstrate consideration and
beneficial interest from the contract, the courts usually recognize their rights and provide
contractual remedies.

Insurance contracts provide an interesting example of third-party rights. In cases of third-

party insurance, such as insuring your car, the contract is between you and the insurance
company. However, the beneficiary of this insurance is any third party who may be involved
in an accident with your vehicle. Although the specific third party is unknown and may or
may not make a claim, they can claim or sue based on the insurance policy.

There are numerous instances where third parties have been granted rights through separate
statutes, such as the negotiable instrument act. For example, if I have an account with a bank
and issue a check to a third party, that third party can sue the bank if the check is not cleared.
Similarly, under the insurance instrument act and trust law, rights have been created for third
parties. In trust law, the trustee manages for the beneficiary who is not directly involved in
the transaction but benefits from it.

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Another example is found in personal law, where partitions between brothers include
provisions for the marriage expenses of their sister. In such cases, the sister can sue based on
the family partition deal if she is named in the agreement. These rights granted through
statutes and customs demonstrate how third-party issues are brought into the legal system.
Third parties can assert their rights if they can prove a beneficial claim or an adverse impact
on their rights in the contract.

However, it is important to consider the privity principle, as it can sometimes serve as a

defense against the rights of third parties. Now, let us discuss the doctrine of promissory
estoppel in relation to consideration. This doctrine holds relevance in government contracts,
tendering, and public procurement. It has often been applied against the government to ensure
that it fulfills its promises.

A notable case in this context is the 1979 judgment of Motilal Padampat Sugar Mills versus
the state of U.P., delivered by former Chief Justice of India, late Shri Bhagwati. In this case,
the government of Uttar Pradesh had promised a three-year tax holiday to any new industry
established in the state. Motilal Padampat Sugar Mills sought clarification from the Secretary
of the industry, who confirmed that the tax holiday would apply to them.

Acting upon this promise, the sugar mill purchased land and prepared to start their factory.
However, when a new government came into power, they reversed the decision, citing loss to
the exchequer. Challenged by this reversal, the sugar mill approached the court, arguing that
the promise should be binding as they had already acted on it. The Supreme Court, at that
time asserting its independence, ruled in favor of the sugar mill, stating that promises made
by the government should not be changed retrospectively to the detriment of individuals or
corporations.

Promissory estoppel, derived from the concept of estoppel, holds that someone can be
stopped from denying a statement, claim, or promise they made in the past. The doctrine
extends this principle to contractual promises, preventing parties from changing a promise
that has been acted upon to the detriment of the other party. This principle is often invoked in
government contracts to ensure contractual certainty, even in cases where the government
changes.

However, it is essential to note that promissory estoppel is not an absolute rule. Courts have
clarified that legislative changes can bring about changes in contracts, and the doctrine

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applies specifically to executive actions by the government. Legislative changes can be made
if a contract is deemed against public policy or national security. Legislative actions are not
subject to estoppel, while executive actions for contracts are bound by the rule of promissory
estoppel.

Promissory estoppel is a significant doctrine that originated from the consideration chapter
and has been applied to modern-day government contracts. There are numerous cases
involving government contracts that utilize this doctrine. In conclusion, consideration is a
critical aspect of contracts, and without it, a contract is not valid. We have discussed different
types of consideration, the importance of adequacy, as well as concepts like privity and
promissory estoppel. Now, let's move on to another crucial aspect. It is worth mentioning the
108th Law Commission report, which delves into promissory estoppel.

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(Refer Slide Time: 38:35)

Consent is important to recognize that parties involved in a contract have a private

relationship, distinct from public discourse or matters of citizenship, constitutional law, or
administrative law. Contracts fall under the realm of private law, where entering a contract is
a voluntary choice and cannot be forced upon anyone.

Free consent is a fundamental requirement for a valid contract. It must be ensured that both
parties have agreed to the contract willingly and of their own volition. If one of the parties
claims in court that they were coerced into the contract, the court will consider the contract
unenforceable or voidable, rather than outright void.

If the consent of either party is tainted by factors such as coercion, undue influence, fraud,
misrepresentation, or mistake, they can seek legal recourse and argue that the contract should
not be enforced against them. This is because they did not genuinely agree to the contract
with their free will and choice. Therefore, consent plays a crucial role in determining the
validity of contracts.

Understanding the concept of consent is essential in the realm of contracts. It ensures that
parties enter into agreements voluntarily and without any external pressures.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of law
National Law School of India University
Lecture 10: Formation of Contract – Free Consent Part 01

(Refer Slide Time: 00:16)

The first ground on which someone's consent to a contract can be invalidated is coercion.
According to the Indian Contract Act, it is explicitly stated that individuals cannot be compelled
to enter a contract against their will. The act of entering a contract is a matter of personal choice
and not an obligation.

Coercion, as defined in the Indian Contract Act, holds special significance as it refers to acts that
are punishable under the Indian Penal Code of 1860. This demonstrates the interrelation between
the Indian Contract Act of 1872 and the Indian Penal Code of 1860. In essence, any act of force
used to obtain consent, which is an offense under the Indian Penal Code, or any act that involves
the threat of committing a forbidden act under the Indian Penal Code, can be considered as
coercion.

For instance, if someone compels you to sign a contract by threatening you with a weapon or by
using physical force, such actions are clearly prohibited by the Indian Penal Code. There are
punishments in place for threatening someone's well-being or property.

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Coercion is a ground for invalidating consent to a contract, and it involves acts that are
punishable or threatening under the Indian Penal Code.

All actions that are covered under the Indian Penal Code and can be classified as coercion can
serve as grounds to invalidate consent and argue against the enforceability of a contract. This
includes situations where someone attempts to commit suicide to force another party to sign a
contract. Although there may not be a punishment for attempting suicide in Section 309 of the
Indian Penal Code, there is still a prohibition on suicide, threats of suicide, or aiding and abetting
suicide. Courts recognize such actions as coercion, providing a basis for setting aside the
contract.

It is important to note that coercion can involve both physical force and mental pressure. Mental
forces, such as emotional manipulation or threats of self-harm, can also constitute coercion and
invalidate consent. Blackmail and threats, whether physical, verbal, or online, are examples of
coercive tactics that may be employed to make someone sign a contract. These issues extend to
cases where children blackmail their parents into signing release deeds or gift deeds, which can
create contractual troubles.

The concept of free consent and its significance in contract enforcement raises larger concerns.
In both common law and India, the notion of duress encompasses coercion, which can be exerted
upon a person or their property. For example, someone may refuse to release funds unless certain
conditions are met, which constitutes duress to property. Economic duress is a modern form of
duress that considers imbalanced bargaining power in contracts, particularly evident in
government contracts where the government holds a superior position. The misuse of this power
can lead to situations where contractors feel compelled to sign documents under economic duress
to protect their future business interests.

Challenges may arise when a party claims that their consent was obtained under duress, coercion,
or economic duress. For instance, a government contractor may argue that their signature on a
declaration was forced due to threats and economic duress. Economic duress involves using a
dominant position to extract consent in a contract. It is important to be cautious of these issues
and understand the implications of economic duress.

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There are various interesting cases related to economic duress, such as workers going on strike
and demanding unreasonable or illegitimate bonuses. Legitimate salary requests would not
amount to economic duress, but unreasonable and illegitimate demands can create economically
pressurized situations where the management may feel compelled to comply, as failing to do so
could lead to business consequences, such as company liquidation.

Actions covered by the Indian Penal Code that qualify as coercion can invalidate consent to a
contract. Coercion can encompass physical force as well as mental pressure. Economic duress is
a modern form of duress that involves the use of dominant positions to extract consent in
contracts. Understanding these concepts is crucial for addressing issues of consent and contract
enforcement.

Unreasonable and illegitimate demands made during strikes or negotiations can be considered
under economic duress, rendering any consent or promises made under such circumstances
questionable. Economic duress involves leveraging someone's economic situation to coerce them
into an agreement, which can be seen in scenarios like flight cancellations where airlines may
refuse refunds unless alternative options are chosen. It is crucial to distinguish between
legitimate and illegitimate demands, as only the latter would fall under economic duress and
potentially make a contract unenforceable.

Persuasion, motivation, and negotiation are permissible actions to obtain consent in contracts if
they do not cross the line into coercion. Coercion occurs when the green line is crossed,
surpassing the limits of permissibility. Therefore, individuals can utilize their oratory skills,
convincing abilities, and negotiation skills without engaging in coercion. Understanding the
distinction between coercion and permissible actions is essential.

Moving forward, it is important to grasp the concept of undue influence. While due influence is
acceptable, where parties are influenced through appropriate means, undue influence arises when
someone exploits their dominant position to harm the other party for personal advantage. Certain
parties naturally hold dominant positions, such as hospitals, banks, teachers, or employers. Being
in a dominant position is not inherently wrong, but abusing that position to gain unfair
advantages is problematic.

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Abusing a dominant position involves obtaining unfair advantages from the influence wielded
due to dominance. The determination of what constitutes an unfair advantage is subjective, and it
depends on the specific circumstances of the transaction. Vulnerable individuals, such as elderly
citizens or minors, are more susceptible to the misuse of power or abuse of dominant positions.
The law acknowledges this vulnerability and, in certain cases, presumes undue influence unless
proven otherwise. Fiduciary relationships, characterized by trust and confidence, require the
dominant party to demonstrate that the transaction was fair and not influenced by undue factors.

Unreasonable and illegitimate demands during strikes or negotiations can fall under economic
duress, potentially invalidating consent or promises made under such circumstances.
Understanding the boundaries between coercion and permissible actions is crucial. Exploiting a
dominant position to gain unfair advantages constitutes undue influence, which must be refuted
by the dominant party. Vulnerable individuals, such as the elderly or minors, may be particularly
susceptible to undue influence, and the law acknowledges this by presuming undue influence in
certain relationships of trust and confidence.

In all relationships where a dominant party holds a position of influence, such as bankers or
doctors, it is their responsibility to present their case in court, demonstrating that no errors of
consent were committed, their influence was fair, and no unfair advantage was gained. The
burden of proof shifts to the dominant party because vulnerable individuals, such as the elderly,
should not be required to prove undue influence, which can be challenging due to the difficulty
of providing evidence or recalling specific details of the influence exerted.

Undue influence commonly occurs when elderly individuals create wills, expressing their
intentions for property management after their passing. Cases where an elderly person leaves
their property solely to a servant, excludes certain family members, or bequeaths it to a lawyer
often raise suspicions of undue influence. Elderly individuals, due to their age and dependence
on those who care for them, may be more susceptible to undue influence. While it is acceptable
to allocate property to those who have provided care, it becomes an issue if the influence is
abused.

A notable case illustrating undue influence is Alkart versus Skin, involving an Oxford student
burdened by significant debts and seeking advice from his uncle. The uncle directed the student

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to a cousin who was a property dealer. Recognizing an opportunity, the cousin exploited the
student's distress, his lack of knowledge about property matters, and convinced him to sell the
property at a significantly lower price than its market value. This advisor knowingly took
advantage of the situation, gaining an unfair advantage through exploitation.

It is important to note that advisors, such as lawyers or policy brokers, are entrusted with
providing independent and unbiased advice. Misuse of their position for personal gain, as seen in
the example of the spiritual guru coercing someone to give away all their property, would be
considered an abuse of trust. Undue influence is often exerted by individuals in positions of
power who feel they can exploit their influence for personal gain, resulting in unfair advantages
and contractual differences. This kind of behavior is not permissible, especially when the
vulnerable party gives their consent to the contract due to the influence exerted upon them.

If the party who agreed to the contract under undue influence later realizes the nature of the
situation, they have the right to approach the court to set aside the contract and declare it void.
Thus, this protection is granted to those who have not given their consent freely and willingly in
a contract.

In today's context, contracts are often documented on paper, and while they may not carry the
same weight as witnessed events, the potential for undue influence still exists. Even in modern-
day contracts, one should not assume that simply because it is on paper, it is valid and binding.
The possibility of falling victim to undue influence, such as signing away property in the
presence of a spiritual advisor who exerts a captivating aura or hypnotism, remains.

Although these concepts may have traditional connotations, they remain relevant in the modern
economy. They can be used as evidence, arguments, and proof to challenge the validity of
consent in contracts. Understanding these factors is crucial in discerning which contracts are
enforceable and which are not. In conclusion, when considering factors that can impact free
consent, it is necessary to differentiate between actual instances of undue influence and instances
where undue influence is presumed.

Actual undue influence is proven by presenting evidence to the court, demonstrating that your
consent was obtained through the exertion of undue influence. On the other hand, presumed
undue influence is a legal concept where the law presumes that certain types of relationships

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carry a higher probability of undue influence, placing the burden on the dominant party to prove
that no undue influence was exercised.

Instances of presumed undue influence often arise in relationships where one party holds a
position of dominance or power. There have been instances, both in India and abroad, where
famous film actors have claimed to have been under undue influence while being associated with
spiritual or religious ashrams.

A notable case that highlights the influence that can be exerted on one's mind is the Alkart v Skin
case. In this case, a woman joined a religious institution and, during her stay, decided to donate a
significant portion of her property to the institution. However, after leaving the institution, she
realized her mistake and sought to reclaim her property, alleging undue influence. The court was
inclined to grant her relief, but due to the technical matter of exceeding the three-year limitation
period, she was not successful. It is important to note that in cases of fiduciary relationships,
such as the one between a spiritual advisor and a disciple, there is a presumption of undue
influence, which the advisor must refute. The court must be satisfied that no unfair advantage
was gained through the advice provided. If an advisor misuses their position of trust and gains an
unfair advantage, the courts are inclined to set aside such contractual arrangements.

It should be noted that there are time limitations within which one can exercise the right to treat a
contract as voidable in cases of undue influence. If the affected party approaches the court within
the specified time frame, relief may be granted. However, if the limitation period has expired, the
chances of obtaining relief diminish.

Understanding the distinction between actual and presumed undue influence is essential in
identifying instances where undue influence may invalidate a contract. The courts are inclined to
protect individuals from situations where unfair advantages are gained through the misuse of
trust and confidence.

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(Refer Slide Time: 23:28)

Misrepresentations are a common occurrence in today's market, where the demand and supply
dynamics often lead to exploitation of consumers. The Consumer Protection Act of 2019 in India
specifically addresses the protection of consumer interests in cases of misrepresentations.
However, even the Indian Contract Act recognized the need to safeguard buyers from
misrepresentations. Misrepresentation can occur not only in consumer contracts but also in
business contracts, particularly in the context of online purchases or service hires.

When we analyze the term "misrepresentation," we can break it down into two categories:
innocent misrepresentation and negligent misrepresentation. Vendors often engage in what is
known as "puffery" or exaggeration to promote their products. This can sometimes lead to
innocent misrepresentation, where the seller innocently conveys information that later proves to
be untrue. On the other hand, negligent misrepresentation occurs when the seller makes
statements without verifying their accuracy or truthfulness.

Counterarguments for misrepresentation focus on the concept of "caveat emptor" or "buyer

beware." Buyers also have a responsibility to exercise due diligence and not solely rely on the
representations made by sellers. This places a higher obligation on the buyer to verify the
information provided before making a purchase.

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Another important principle related to misrepresentation is "uberrima fidei" or utmost good faith.
Insurance contracts, for example, fall under this category and require the insurer to disclose all
relevant information without being prompted. Failure to disclose such information can result in a
breach of contract through misrepresentation.

In addition to these concepts, the Sale of Goods Act of 1930 further categorizes representations
into conditions and warranties. Conditions are fundamental to the contract and their breach gives
the buyer the right to terminate the contract and seek a refund. Warranties, on the other hand, are
performance-related representations that do not render the contract voidable but can entitle the
buyer to claim damages for the misrepresentation.

It is important to note that while misrepresentation renders the contract voidable in both cases,
the remedies differ depending on whether the misrepresentation was a condition or a warranty.
The Sale of Goods Act also implies certain conditions and warranties by law, such as the seller's
title to the goods.

Misrepresentations can occur in various types of contracts, and understanding the distinctions
between innocent and negligent misrepresentation, as well as the principles of caveat emptor and
uberrima fidei, is crucial. The Sale of Goods Act provides further clarity on the remedies
available for misrepresentation based on whether the representation was a condition or a
warranty.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of law
National Law School of India University
Lecture 11: Formation of Contract – Free Consent Part 02

(Refer Slide Time: 00:16)

The essentials of a contract include aspects that may affect free consent. Free consent is a crucial
element, as the parties involved must agree on the same thing in the same sense, which is known
as the principle of consensus ad idem. Once this agreement is reached, a contract is formed. The
principle of consensus ad idem, or the meeting of the mind’s theory, is a fundamental principle in
contracts. Factors such as coercion, undue influence, and misrepresentation can affect the
formation of a contract by compromising free consent.

Fraud is an interesting aspect that commonly arises in contracts and is often associated with a
sense of being cheated or receiving an unfair deal. Fraud can occur in various types of contracts
and is prevalent in exploitative markets. It is important to note that fraud is also covered under
criminal law, with the Indian Penal Code addressing fraud, cheating, and related offenses that
can result in imprisonment or fines.

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Fraud is also addressed in personal laws, particularly in marriage laws. In cases where a person
misrepresents their age, status, caste, or other relevant factors in a marriage, fraud can serve as a
ground for annulment or divorce. It is worth noting that fraud is a form of misrepresentation,
which can be categorized as innocent, negligent, or fraudulent.

The state of mind is crucial in these categories. Fraud involves deliberate and mischievous
actions with the intention to deceive. The person making the fraudulent representation is fully
aware that it is untrue, yet chooses to deceive the other party to obtain their consent in the
contract. They possess knowledge of the market conditions and may have engaged in such
deceptive practices in the past.

Intentional misrepresentation, deliberate misrepresentation, or reckless misrepresentation that

jeopardizes the safety and rights of the other party can be considered as fraud. Fraud is a severe
offense that infringes upon the rights of the other contracting party. If fraud is committed in a
contract where your consent was sought, you have the right to challenge the contractual
obligation in court and potentially seek damages if you have suffered significant harm to yourself
or your property due to the fraudulent misrepresentation.

Courts treat fraud seriously, which underscores the importance of this aspect in contracts. It is
also important to note that fraud can occur in government contracts, where false documents may
be submitted during the tendering process. Companies and contractors sometimes attempt to
qualify for government contracts despite not fulfilling the specified criteria in the tender
documents. This can lead to the submission of false documents or errors, ultimately establishing
a case of fraud. Negligent misrepresentation, on the other hand, may arise when there is a general
misunderstanding of the documents to be submitted in a tender.

Overall, fraud is a significant concern in various contractual scenarios, and its detection and legal
repercussions are treated seriously by the courts.

The distinction between negligent and fraudulent misrepresentation can be a gray area, but it is
important to note that negligence occurs when someone fails to exercise caution in submitting
tender documents, while fraud involves creating false documents or deliberately misrepresenting
information. Intentional and deliberate actions to gain unfair advantages in the market contribute
to the categorization of fraud as a distinct and serious offense.

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An interesting case that sheds light on the evolution of misrepresentation and fraud is the case of
Ward v. Hops, which revolves around the sale of pigs at a fair in a village. The seller advertised
the pigs as "pigs with all faults." The buyer, despite being aware of this representation, decided
to purchase the pigs, believing he could rectify any faults himself. However, the purchased pigs
carried typhoid fever, which then spread to the buyer's existing pigs, resulting in significant
damages.

The buyer, feeling aggrieved, sued the seller, claiming fraud and seeking to set aside the contract
while also claiming damages for the loss suffered. The seller, in his defense, argued that he had
clearly stated the pigs had faults and had not hidden any information. He asserted that the
principle of caveat emptor (let the buyer beware) applied, suggesting that the buyer, being a pig
farmer, should have verified the nature of the faults and taken appropriate precautions.

This case raises the question of whether the buyer can solely blame the seller and claim fraud. It
is essential to recognize that while consumer protection laws exist, placing a responsibility on the
seller, buyers also have their obligations. Pro-consumer legislation, such as the Sale of Goods
Act of 1930, the Competition Act of 2002, and the recent Consumer Protection Act of 2019
(replacing the 1986 Act), aim to safeguard innocent consumers from exploitation in the market.
However, it is not always appropriate to shift the entire burden onto the seller. Buyers also carry
a certain level of responsibility.

While fraud and misrepresentation have distinct characteristics, buyers and sellers both have
their roles and responsibilities in ensuring fair and transparent transactions.

The buyer could have potentially discovered the faults if they had been diligent and fulfilled their
obligations in the contract. The issue at hand is not solely about representation or
misrepresentation. The law acknowledges that if the buyer had the means to discover the truth
but failed to do so, they are deemed to have contributed to the fault. Consequently, the buyer
may not receive the remedies they seek from the court of law. In this case, the buyer did not
fulfill their obligations and approached the court with unclean hands. The seller, on the other
hand, fulfilled their obligation sufficiently to avoid liability, albeit cleverly or mischievously by
stating "with all faults" without specifying the faults.

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The court sided with the seller in this case, applying the principle of Caveat emptor, as the buyer
was negligent. Seeking equity requires coming to the court with clean hands and not contributing
to the breach. Therefore, the court upheld the principle of Caveat emptor.

It is important to note that Caveat emptor was prominent when consumer interests were not the
primary focus. From a consumer perspective, the approach may differ. In contracts, it is crucial
to distinguish between B2C contracts (business to consumer) and B2B contracts (business to
business). In B2C contracts, the principle of Caveat emptor may predominantly apply, placing
the burden on the seller. In B2B contracts, where both parties are presumed to have equal
bargaining capacity, Caveat emptor may also apply. Courts have recognized that there is nothing
inherently wrong with the principle of Caveat emptor in B2B contracts.

Furthermore, it is worth mentioning another relevant contract type for this course, which is B2G
contracts (business to government). In B2G contracts, it is important to acknowledge that the
government often holds a higher bargaining position. Therefore, it is inaccurate to solely
attribute fraud to the contractor as the government has greater bargaining power in such cases.

Nevertheless, the government should be aware that it cannot solely hold contractors responsible
when awarding contracts. The government also bears responsibility and must take note of these
circumstances. For instance, the government should have diligently verified the authenticity of
documents submitted, rather than claiming fraud without making any effort to discover the truth.
It is the government's duty to exercise due diligence in contract tendering, including thorough
verification and scrutiny. Failure to exercise this responsibility negates the possibility of fraud.
This principle is clearly established in contract law.

Additionally, the question of whether silence can amount to fraud is worth considering. While
representation typically involves positive statements, the act of remaining silent when one can
speak can constitute fraud or misrepresentation. This concept is exemplified in cases such as Shri
Krishna versus Kurukshetra University and Skies versus Rose.

In the Shri Krishna case, a student intentionally left a column regarding attendance requirements
blank on an examination form. The university later discovered the student's attendance shortage
and accused the student of fraud. However, the court noted that the university should have
verified the information provided by the student, as they possess the attendance records. If the

94
university had the opportunity to uncover the alleged fraud but failed to do so, the fault lies with
the university, not the student.

The Skies versus Rose case, an English case involving the sale of a house, further illustrates the
issue of silence amounting to fraud. The buyers, after almost finalizing the purchase, asked the
seller if there was any other information they should know about the property. The seller chose
to remain silent and disclosed nothing. Subsequently, the buyers discovered that a gruesome
murder had occurred in the house, information that significantly affected the value and
desirability of the property. The buyers sought to void the contract and sued the seller, claiming
that the seller's silence constituted fraud.

When the case reached the court, the principle of caveat emptor, or "let the buyer beware," was
considered. Should buyers be responsible for investigating and uncovering such information
before entering a contract? However, in this case, the buyers posed an extra question to the
seller, specifically asking if there was any other information they should know. The seller's
failure to disclose the murder in response to this question led the court to establish that silence
can indeed amount to fraud when there is a duty to speak.

Therefore, in cases where the law imposes a duty to speak, such as in the sale of property or
insurance contracts based on utmost good faith, non-disclosure or silence can constitute fraud.
Sellers and parties in fiduciary relationships have an obligation to disclose any information that
may adversely affect the buyer's rights or peaceful enjoyment of the property. Failure to do so
knowingly and deliberately constitutes active concealment and amounts to fraud. It is crucial to
evaluate the intention of the other party and the nature of the contractual relationship in
determining whether allegations of fraud are justified.

Fraud is a significant ground for voiding contracts based on defective consent, and modern-day
contracts often involve court intervention and examination of evidence to establish the presence
of fraud.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law School of India University
Formation of Contract - Free Consent III
Unconscionable and Standard Form of Contracts

(Refer Slide Time: 0:16)

The doctrine of unconscionability is an important aspect in both Indian contract law and UK
contract law, which falls under the common law framework. In common law, the concept of
unconscionability plays a significant role in rendering a contract voidable. Similarly, in
Indian law, Section 16(3) of the Indian Contract Act addresses unconscionability as a matter
that can be addressed by the courts. It is crucial to understand what constitutes an
unconscionable bargain or term in a contract. The term 'unconscionable' refers to something
that goes against the fairness and societal norms of a given society. It signifies something that
is unacceptable and challenges the moral conscience of the society. Consequently, if a
contract fails to meet the standards established by a human society, it may be set aside.

The objective test for unconscionability is particularly relevant in the context of modern
contracts, such as standard form contracts. To comprehend standard form contracts, it is
essential to consider the impact of the modern industrial revolution, where a market condition
arises with a dominant producer and numerous consumers. For instance, a notable example of
this modern-day industrial revolution market is McDonald's, which supplies standardized
food products across various cities, jurisdictions, countries, and continents, catering to many
consumers.

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The extensive production and provision of services in such scenarios have contributed to the
emergence of standard form contracts. These contracts aim to establish uniform terms and
conditions across most jurisdictions, unless specific laws require modifications to the
contractual provisions. McDonald's, for instance, prefers standardized terms and conditions
for selling burgers in the US and India. This concept of standard form contracts entails the
standardization of contractual terms and conditions.

Standard form contracts can be effectively understood through the example of insurance
contracts, such as those offered by the Life Insurance Corporation of India (LIC). Let us
consider the Jeevan Anand policy as an illustration of a life insurance policy.

In the case of insurance contracts, a standard form is developed for a specific policy, like the
Jeevan Anand policy. The terms and conditions of this policy are predetermined and
standardized for all prospective consumers interested in obtaining life insurance from LIC.
This means that multiple individuals enter the same contract, which exemplifies the essence
of a standard form contract.

Standardization offers several advantages, the first being time-saving. If individual contracts
were to be created for each life insurance consumer, a considerable amount of time would be
spent on contract preparation. By using a standard form, this time can be significantly
reduced.

Secondly, standardization also saves costs. Printing out separate documents, dedicating time,
and involving many executives in negotiations and redrafting would be a costly endeavour.
Standard form contracts mitigate these expenses.

Moreover, standardization brings about uniformity within a company like LIC. The company
has a clear understanding of the consistent terms and conditions that govern the contract. It
eliminates variations based on factors such as location, income, or age, providing the
company with peace of mind. With well-defined terms and conditions, LIC can effectively
draw up contracts and defend them, if necessary.

Standardization in contracts is increasingly becoming a preferred approach across various

industries, including business contracts. This trend is driven by the numerous advantages it
offers, such as promoting uniformity, consistency, and cost and time savings.

Standard form contracts are inevitable in today's business landscape. Even industries like
automobile manufacturing and the service sector, including hospitals, adopt standard form

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contracts. In hospitals, for example, a standard form is used for patient admissions in the
outpatient or inpatient departments. While specialized procedures or surgeries may require
specific contracts, the initial admission process typically follows a standardized template.
Different departments within the hospital may have their own templates for specialized
treatments.

Standard form contracts are also prevalent in government-related services. For instance, when
the government provides electricity through distribution companies, negotiating and creating
separate contracts for each consumer would be impractical. Hence, electricity distribution
companies rely on standard form contracts to streamline their operations.

Overall, standard form contracts exist across various industries, both in the product and
service sectors. They ensure efficiency, consistency, and clarity in contractual relationships,
benefiting businesses, service providers, and even government entities.

One crucial condition in such contracts is that if a consumer fails to pay their electricity bill
for three consecutive months, the electricity distribution company has the authority to
disconnect their electricity supply. This standard term serves as an advantage for the
government in addressing allegations of discrimination or unfair treatment. Standardization
helps challenge claims of unfair treatment because it establishes that the same rules,
contracts, and terms and conditions apply to everyone.

Standardization proves beneficial in various government services, including public sector

banks, where standard forms are used to communicate prepayment charges, processing fees,
and other contractual terms to consumers. These standardized terms ensure consistency and
mitigate the risk of discrimination.

Standardization is widely practiced and highly advantageous for businesses across industries.
However, it is crucial to acknowledge the challenges associated with standard form contracts.
One primary challenge is determining what constitutes fair and unfair terms, which can be
subjective and dependent on the specific contract and clauses involved.

It is important to recognize the power wielded by contract draftsmen when creating standard
form contracts. As a contract draftsman employed by McDonald's, for example, the contract
you create will be used worldwide, and every consumer will be required to agree to its terms.
It is your responsibility to protect the interests of your client and employer, demonstrating
loyalty and faithfulness.

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Undoubtedly, when creating a contract, the natural inclination is to draft terms and conditions
that are advantageous and favourable to one's own company or client. This power of contract
drafting is subject to scrutiny because, as the saying goes, "power corrupts, and absolute
power corrupts absolutely." The ability to shape the contract can potentially lead to the
inclusion of unfair terms, allowing the party to escape liability in case of legal disputes.

In the 1970s and 1980s, the UK recognized the exploitative nature of contracts and enacted
the Unfair Terms and Contracts Act in 1977. This legislation aimed to protect consumers
from unfair terms in contracts and extended beyond consumer contracts to address unfair
terms in a broader context. As a result, significant developments took place, with courts
becoming actively involved in scrutinizing and judging the fairness of terms in standard form
contracts.

Determining what constitutes fair and unfair terms requires consideration of societal norms
and values. Terms that shock the consciousness of society and are deemed unconscionable
are considered unfair. For example, let us consider the scenario of giving clothes to a dry
cleaner. While receiving a receipt is a standard practice, the terms and conditions specified on
the receipt become crucial. These terms serve as a risk assessment document, anticipating
potential disputes in case of deficient service. Similarly, when dining at a restaurant, if the
food is contaminated or of poor quality, the terms and conditions become relevant to address
any grievances.

In instances where a laundry person damages an expensive item like a Kancheepuram saree,
beyond raising objections and engaging in arguments, the terms and conditions of the
contract become vital. It is important to note that early court cases, such as Thornton v. Shoe
Lane Parking Limited, established a distinction between a contract and a receipt. A contract
encompasses all terms and conditions agreed upon by both parties, while a receipt merely
acknowledges the delivery of goods.

The power to create contract terms and conditions necessitates scrutiny to prevent the
inclusion of unfair terms. The enactment of legislation and the intervention of courts have
played crucial roles in ensuring fairness in standard form contracts, protecting consumers
from exploitative practices.

The court established that a receipt serves as evidence of a contract but is not the contract
itself. Contracts can be expressed or implied. For example, when giving clothes for dry

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cleaning, there is an implied contract. The receipt acts as evidence of that implied contract,
but it does not constitute the contract itself. It is important to distinguish between the two.

Moreover, courts recognized the responsibility of sellers or service providers to bring the
terms and conditions to the consumer's attention. If the terms and conditions are printed on
the back of the receipt, it is the seller's duty to indicate this by including "P T O" (please turn
over) on the first page. This ensures that the consumer is aware that there are terms and
conditions on the backside.

Furthermore, the courts addressed the issue of fine print and extensive terms and conditions.
In cases like insurance policies, where the standardized terms and conditions are printed in
small, fine words on a single sheet of paper, the courts intervened. They required sellers to
highlight and bold exclusionary terms or those terms that may adversely affect the buyer's
rights. By doing so, even if the rest of the terms and conditions are difficult to read, the buyer
can easily identify problematic or objectionable clauses.

When it comes to electronic contracts, such as opening an email account, users are typically
required to agree to the terms and conditions before proceeding. Dialog boxes with "I agree"
and "I do not agree" buttons are presented, and users must scroll down to click "I agree" to
access their email account or upload software or apps. Additionally, apps may request
specific permissions, such as accessing contacts or Gmail accounts, highlighting the
importance of certain factors.

The courts have emphasized the duty of sellers and service providers to make consumers
aware of the terms and conditions in standard form contracts. This includes indicating where
the terms and conditions are located and appropriately highlighting critical clauses to ensure
transparency and fairness in contractual agreements.

After obtaining our consent, service providers deliver their services based on standardized
terms and conditions. This applies to various electronic contracts, such as software
installations like MS Office or online marketplaces like Amazon and Flipkart. These
contracts are standardized and require agreement from the user before accessing the services.
However, the issue arises when determining whether a term is fair, acceptable, or
unconscionable, leading to possible court intervention.

Under the Indian Contract Act, unfair terms can render a contract voidable in two ways. First,
the entire contract can be held voidable if the unfair term is so fundamental that the entire

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contract becomes invalid. Second, the doctrine of severability can be applied, allowing the
court to remove the objectionable clause while upholding the rest of the contract. This
approach recognizes that contracts can be complex and extensive.

To evaluate unfair terms, courts may adopt the "blue pencil rule" akin to an editor's role.
They identify objectionable clauses or words and strike them out while allowing the
remaining contract to stand if it is deemed acceptable.

Unconscionability is subjective and can vary based on market conditions and societal values.
Judges rely on their moral consciousness and legal reasoning to determine whether a term is
unconscionable.

In India, there has been a longstanding need to moderate contracts, ensuring they align with
societal values and prevent unjust enrichment. While profiting from contracts is acceptable,
unjust enrichment is discouraged. Unfair terms in contracts have been subject to judicial
intervention and scrutiny, with various principles and doctrines developed over time.

In India, the 199th Law Commission Report specifically studied unfair terms in contracts,
dividing them into two categories: substantive unfairness and procedural unfairness. These
characteristics help identify and address unfair terms in contract law.

The Law Commission report serves as a standard for evaluating unfair terms in contracts.
However, despite the recommendations of the report, the Indian government did not take
immediate action to amend the Indian Contract Act or enact separate legislation, like the
approach taken in the UK. Nonetheless, the Consumer Protection Act of 2019 addresses
certain aspects of unfair terms in contracts and unfair trade practices.

There are two types of unfairness in contract formation. The first is procedural unfairness, as
identified by the Law Commission. Procedural unfairness occurs during the process of
contract formation, where the issue of consent becomes crucial. Examples of procedural
unfairness include "take it or leave it" contracts commonly seen in standard forms. In such
cases, an insurance company or a hospital presents a contract and insists on immediate
acceptance, leaving little or no opportunity for the consumer to thoroughly review the terms
before agreeing. For instance, hospitals may require patients to sign forms before
commencing treatment. This lack of time for review and absence of dissent options
constitutes procedural unfairness, which is prevalent in many situations.

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Procedural unfairness relates to the consumer or contractor not having sufficient time to
review the contract before agreeing to it and facing limitations on expressing dissent or
refusal.

Let us assume you have taken your car to a shopping mall and need to park it. As you enter
the parking area, there is an automated system where you press a button to obtain a parking
ticket. The procedural unfairness in this scenario arises from the fact that the contract is being
formed as soon as you press the button and receive the ticket, without being informed of the
terms and conditions that apply. Where can you find the terms and conditions of the shopping
mall? Often, they may display a phrase such as "parking at owner's risk," but the adequacy or
fairness of such a term is open to question.

Instances of procedural unfairness can be found in various situations, such as "take it or leave
it" contracts. For example, when you visit a hospital, they may ask you to fill out forms or
sign documents before providing treatment, leaving little opportunity to review the terms or
seek alternative options. The absence of choice or room for dissent in such cases constitutes
procedural unfairness.

Procedural unfairness is also evident in government contracts, where the contracting process
and execution often display elements of dominance and unequal bargaining power. The
courts have emphasized the importance of fairness in government contracts, not only in
substance but also in appearance. This means that the documentation and procedures
surrounding government contracts must reflect fairness to ensure a fair contracting system.

The second aspect, substantive unfairness, focuses on unfair terms within the contract itself.
Substantive unfairness occurs when a term in the contract heavily favours one party or
provides unilateral rights to terminate without any corresponding rights for the other party.
Unfair terms that unilaterally benefit one party at the expense of the other are considered
substantively unfair.

Societies seek to establish criteria and parameters to judge what is fair and just in contracts.
The goal is to prevent exploitation and exclusion of those who may not be well-versed in
their rights or contract negotiation. Unfair terms in contracts warrant intervention to ensure a
fair legal system. It is a sign of a robust legal system and contributes to the growth of a
society, economy, and market conditions. Fairness should be practiced not only by
government agencies but also in government and private contracts.

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One common form of substantive unfairness is the exclusion of liability clause. This clause
often forms the crux of unfair terms in contracts. For example, an airline like IndiGo, which
provides numerous passenger services, may have a standardized form of contract for all its
passengers. Within this contract, IndiGo may include an exclusion of liability clause, stating
that they will not provide refunds. The controversy surrounding refund clauses is relevant in
this context.

In summary, procedural unfairness relates to the process of contract formation, such as

limited time for review or lack of choice, while substantive unfairness pertains to terms
within the contract that heavily favour one party. Evaluating and addressing unfair terms in
contracts is crucial for maintaining fairness in a legal system and ensuring the well-being of
all parties involved.

When examining exclusionary clauses in standard forms of contracts, it is important to

understand that contracts often aim to reduce liability. The relationship between tort law
(which deals with civil wrongs, including negligence) and contract law is significant. If a
hospital commits medical negligence, under tort law, the hospital is legally responsible for
compensating the patient or consumer for the harm caused.

However, when we transition from tort law to contract law, the same hospitals may draft
standard forms of contracts that seek to achieve a different outcome. They may include
clauses that exclude their liability, stating that the hospital will not be held responsible for
any deaths or incidents that occur within their premises. These clauses are known as
exclusion of liability clauses.

The question arises: Can contracts waive or diminish the liability that stems from a public
element such as negligence? This issue is subject to public policy debates. On one hand, there
are exclusion of liability clauses, while on the other hand, there are limitations of liability
provisions to consider.

In summary, contracts drafted by hospitals and other entities may attempt to exclude or limit
their liability through contractual clauses. This raises discussions about the extent to which
contracts can diminish the liability associated with public elements like negligence, creating a
public policy debate.

An interesting distinction between contracts and tort law is that contracts offer advantages in
terms of evidentiary documentation and the ability to determine rights and liabilities. In tort

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law, judgments are based on the discretion of judges who determine the quantum of liability,
the principles of law, and whether liability exists in the first place. There is no specific statute
guiding judges in tort law, although some modern statutes like the Consumer Protection Act
have codified aspects of it.

When relationships are framed within a contract, the contract itself becomes the basis for
determining the parties' rights and liabilities. This provides a document that judges must
interpret, thereby limiting their discretion. This raises the question of whether limitation of
liability is possible in contracts, particularly in standard form contracts.

Regarding the "LOL" clause (Limitation of Liability clause), judicial verdicts indicate that
excluding liability is deemed unacceptable and against public policy. Contracts cannot be
misused or abused to exclude liability under tort law. However, the possibility of limiting
liability is recognized by judges in various jurisdictions, including India, the UK, and the US.
The courts have stated that limitation of liability is permissible if the quantum of limitation is
reasonable and fair. The test of reasonability becomes the test of fairness, ensuring that
parties have the freedom to contract while maintaining a reasonable and acceptable limit on
liability.

The advantage of limitation of liability in standard form contracts lies in providing certainty
and managing risk for companies and entities involved in numerous contracts. The sheer
volume of contracts can create challenges in determining liability for each individual case.
Limiting liability helps these entities assess and prepare for their potential liability structure.
However, it is important to note that limitations of liability must meet the requirements of
reasonableness and fairness.

The fairness rule plays a crucial role in determining liability. Consider the scenario of
purchasing Microsoft Office. If the contract states that Microsoft will not be liable if the
software fails to work, it would be unacceptable and contrary to societal norms. Companies
like Microsoft, being large entities, are expected to take responsibility for their products.
Exclusion of liability is generally considered unconscionable, while limitation of liability
may be acceptable if it is reasonable.

The acceptability of limitation of liability depends on the type of contract involved. In

business-to-business (B2B) contracts, limitation of liability is generally accepted as a fair
bargaining practice. In business-to-consumer (B2C) contracts, the reasonableness of

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limitation of liability is the determining factor. Business-to-government (B2G) contracts
often incorporate limitation of liability to ensure contract performance.

Standard form contracts often include challenging clauses, such as refund policies.
Transportation service providers, like airlines or bus companies, anticipate circumstances like
flight cancellations or delays due to technical issues. Standardized contracts specify the rights
and obligations in such situations, including whether refunds or partial refunds will be
provided. Excluding refunds entirely is considered highly unreasonable, but a partial refund
may be deemed fair, considering the incurred costs and efforts to accommodate the situation.

Similar considerations apply to other industries, such as cricket matches organized by the
Indian Premier League (IPL). Contracts governing fan attendance must be fair, preventing
exploitation of consumer interest. Judges and courts play a crucial role in moderating and
balancing the interests of all parties involved to avoid unconscionable contract terms.

The doctrine of fundamental breach is a fundamental principle in standard form contracts. It

implies that regardless of the terms and conditions, if a contract experiences a core breach, it
can be repudiated. For instance, if a bus fails to reach its destination or a product fails to
perform its basic function, the contract cannot evade liability. Fundamental breach is also
associated with safety concerns. In such cases, the terms and conditions of the contract are
deemed irrelevant, and the affected party has the right to repudiate the contract and claim
damages.

The rule of contra proferentem places the burden of proof on the drafter of the contract. The
drafter, such as Life Insurance Corporation of India (LIC), Indigo Airlines, or the
manufacturer of an iron box, must justify the fairness and validity of the contract in court.
Standard form contracts, often referred to as boilerplate contracts, are subject to this rule. The
burden lies with the drafter to demonstrate that the contract is conscionable and complies
with the principles of fairness. If the drafter fails to justify the contract, it may be deemed
unconscionable by the court.

These principles also apply to government contracts and the provision of government
services, such as those offered by Indian Oil in the form of LPG, electricity, or water supply.
The rule of contra proferentem is beneficial as it relieves the exploited party from the burden
of proving the unfairness of the contract. If the drafter fails to satisfy the court regarding the
reasonableness and enforceability of the contract, it may be invalidated or set aside.

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It is important to note that the statements made above reflect general principles and may vary
depending on the jurisdiction and specific circumstances involved.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhatt
Professor of Law
National Law School of India University
Formation of Contract- Free Consent IV: Voidable Contracts

(Refer Slide Time: 0:17)

The concept of free consent in relation to mistake is a significant aspect addressed by the
uniquely designed Indian Contract Act. According to this Act, if a contract is influenced by
coercion, undue influence, misrepresentation, or fraud, it becomes voidable at the discretion
of the party whose consent was affected by any of these factors.

As the petitioner seeking to invalidate the contract, one can approach the court to exercise the
option of voidability. This means that the contract can be declared null and void if coercion
or undue influence is proven, or if it is presumed based on your reference, in which case the
burden of proof shifts to the other party.

In the case of misrepresentation, you must be an aggrieved party and provide evidence to
support your claim. Once established, the court can determine the voidability of the contract
and outline the resulting consequences. It's important to note that simply setting aside the
contract may not suffice, especially if additional damages have been incurred by the affected
party. In such cases, the court may award damages to compensate for the losses suffered.

Fraud, as previously discussed, involves intentional deceit, and carries various legal
implications. Now, let us consider the aspect of mistake. Mistake renders a contract void,
meaning it has no legal recognition or existence from the very beginning. This is like the

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concept of "null and void" used in marriage law, where a marriage is deemed to have never
taken place in the eyes of the law.

In contract law, if the court concludes that any of the grounds we have discussed apply, the
contract is deemed to be as if it never existed from the outset. Consequently, the contract
lacks enforceability. However, it is worth mentioning that void agreements, which lack
essential ingredients right from the inception stage, differ from void agreements that are
discovered later. Let us delve into this aspect further.

Voidness can enter a contract at a later point in time, even though it was initially assumed to
be valid. The existence of certain assumptions is crucial for a contract to be considered valid.
If these assumptions are absent, the contract becomes void. However, certain aspects of
voidness can arise at a later stage. We will explore this topic in more detail.

In cases where a contract is discovered to be void, section 65 clearly states that the principle
of unjust enrichment applies. Despite lacking legal recognition, if the parties have gained
unfair advantages or received unjust enrichment, they are legally obligated to return the value
acquired. This principle ensures fairness and rectification of any undeserved benefits gained
by either party. This is how the law operates in such situations.

Void contracts can have remedies before a court of law, with the final judgment on whether a
contract is void or voidable depending on the proven grounds. Mistake is a category that
makes an agreement void, and it can be divided into two types: mistake of law and mistake of
fact.

Mistake of law occurs when one is unaware of the legal provisions applicable to the contract.
However, in a democratic country like ours, ignorance of the law is not considered a valid
excuse. The principle of "ignorance of law is no excuse" applies across criminal and civil
law. Allowing ignorance as an excuse would set a precedent for others to plead the same,
which is why it is not permitted.

Mistake of fact, on the other hand, refers to a misunderstanding or error in judgment. While
not everyone is expected to possess perfect knowledge of the law, individuals should be
aware of the laws that apply to their business, domain, or contracts. For instance, when
driving a car, knowledge of traffic regulations and the requirement of a driving license is
necessary. Claiming ignorance of such laws would not be considered a valid excuse.

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In the domestic context, mistake of law is not a permissible ground to set aside a contract.
The law assumes that individuals should be aware of the laws governing their actions before
entering into a contract. However, there is some leniency provided for foreign law or the laws
of foreign countries. In cases where a contract involves foreign law, an individual can plead
mistake of foreign law. If they can convince the court that there was a genuine
misunderstanding of the law, the contract may be set aside as void.

It is not reasonable to expect individuals to have comprehensive knowledge of the laws of

every jurisdiction or country. The Indian Contract Act acknowledges this by allowing parties
to plead mistake of foreign law when relevant. However, it is crucial for at least one party to
have knowledge of the applicable law in their respective jurisdiction. This ensures that both
parties have a shared understanding of the legal framework under which the contract is
formed.

It is important to note that in India, unlike in common law jurisdictions, mistake of law by
only one party is not recognized as a valid ground for setting aside a contract. The
requirement is that both parties must have a mutual mistake of foreign law for it to be
considered.

"It is not voidability, but rather void. In cases where both parties are under a mutual mistake,
particularly a mistake related to foreign law, the court may declare the contract void. This
exception applies to mistakes of fact, such as the subject matter of the contract, the identity of
the contracting party, quality of goods, quantity, title, or price. However, it's important to
note that unilateral mistakes are not recognized as grounds for voiding a contract under
Indian law. The Indian Contract Act of 1872 explicitly states that only bilateral mistakes,
where both parties are mistaken, can render a contract void.

Looking back at historical case laws, international trade existed even in the past when
communication was challenging. Despite the difficulties, trade took place between India and
London, and the Silk Route played a significant role as well. These circumstances often led to
mistakes of fact, including misunderstandings about the subject matter of the contract.
Consensus ad idem, or agreeing to the same thing in the same sense, was difficult to achieve
across jurisdictions. For instance, in the case of Ex-Peerless, a mistake arose regarding which
ship the goods should be sent on—one party referred to the October ship while the other
referred to the January ship.

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Let us consider an interesting Indian case, ITC versus Fernandez. ITC, a tobacco company,
sought to diversify its business into fishing and approached boat maker Fernandez to
construct boats for them. Fernandez began building the boats based on the contract. However,
when the boats were ready, it became apparent that they were trawlers and not suitable for
deep-sea fishing as ITC had expected. This discrepancy created a mismatch of expectations,
with ITC seeking to void the contract. However, the court ruled that the mistake in this case
was unilateral and not bilateral. Fernandez had fulfilled the contract according to his capacity
and understanding, and ITC's lack of proper order and market research contributed to the
mistake. Therefore, the court held that the contract could only be voidable, not void, and ITC
would need to prove undue influence, coercion, misrepresentation, or fraud for it to be set
aside.

While bilateral mistakes of fact can lead to voiding a contract, unilateral mistakes do not hold
the same weight under Indian law. Unilateral mistakes can only make a contract voidable,
and additional elements like undue influence or misrepresentation need to be proven for it to
be set aside. This highlights the challenges surrounding mistakes in contracts, as courts are
reluctant to declare a contract void unless both parties genuinely misunderstood the same
aspects of the contract.

In contract law, it is important for sellers to have a clear understanding of what they are
selling and delivering. If a mistake occurs, it is typically attributed to the workers and not the
seller. Unilateral mistakes are generally not accepted as grounds for voiding a contract under
Indian contract laws. Courts are usually involved when one party challenges the contract
while the other party denies the mistake.

The concept of mistake as to the identity of parties in contract law helps us understand how
the law evolved and established rules for acceptable contracts. Two notable cases to study are
Phillips v. Brooks Limited and Lewis v. Avery. In the Phillips v. Brooks Limited case, a
jeweler mistakenly sold a ring to an imposter who claimed to be a respected individual. The
imposter then pawned the ring and disappeared. When the jeweler discovered the fraud, they
demanded the ring back from the pawnbroker, arguing that there was a mistake as to the
identity of the parties, rendering the contract void.

However, the court ruled in favor of Brooks Limited (the pawnbroker) because they had
accepted the pledge in good faith and without knowledge of any defects. The court held that
the pledge was valid and enforceable, as it was made in good faith. The court also

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emphasized that the jeweler should have exercised more caution and verification before
accepting the imposter's claims.

In the Lewis v. Avery case, a person claimed to have a valid ticket and took possession of a
car based on that claim. Mistake as to the identity of parties was raised as a defense.
However, the court shifted its stance over time and started requiring mistakes on both sides of
the contract for it to be void. In these cases, the imposter knew the identity of the parties,
while the other party made the mistake. Unilateral mistakes were not considered sufficient
grounds for voiding the contract.

It is worth noting that the common law cases discussed here reflect the historical context and
lenient approach taken by judges at the time. However, Indian contract law has always been
clear that for a contract to be void due to a mistake, the error must be mutual, indicating a
lack of consensus ad idem (agreement on the same thing in the same sense) by both parties.

To conclude, understanding the concept of free consent in contracts involves recognizing the
various grounds that can vitiate consent. Mistake is one such ground, which can make a
contract void. However, in India, for a mistake to be recognized, it must be bilateral, and the
error of consent should be mutual. Mistakes that result from one party's failure to verify or
exercise due diligence are typically not accepted as grounds for voiding a contract.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Formation of Contract: Legality of Object & Public Policy - Part 01

We are now moving forward to understanding an important part of contract requirement, the
essential test of an agreement to be enforceable as a contract. The this is probably the final
test, apart from what we have seen so far that you have done an acceptance to the offer, there
has to be consideration, you have to have capacity, the content has to be free and but finally,
and most importantly, that the object and consideration of the contract should be legal. This is
the final test.

So, if the object of the contract is not legal, or if the consideration in the contract that flows
between or exchanged between the parties is not legal, then the contract will not be
enforceable, the agreement is not going to be enforceable. So, this is the final essential
element of making agreements as contracts.

(Refer Slide Time: 1:10)

Now, when there are possibilities that the legality will be tested in the contract. Now, we
should understand that contract law is the basic law, it is a foundational law. And it is not a
law that tells you which contracts are doable and which contracts are not doable. We
probably have to understand the same with the help of other legislations.

Let us take an instance of legislation called the Indian Penal Code. Now, Indian Penal Code,
1860 is the basic criminal law of the land, and it does prohibit certain kinds of activities and

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makes it punishable or makes it crime to probably attempt to commit to someone’s money.
Now, can there be a contract that is done, we say supari killing, can there be a contract which
says that if you go and kill A, I will pay you 1000 rupees.

Now these kinds of contracts are very, very important in terms of the legality of the object of
the contract, what is the object of the contract to cause injury or harm to another person or to
another property, this may be forbidden by law. There are so many legislations that are
complementarity, which say you can do this, you cannot do this. For example, dealing with
banned substances or narcotic substances or what we call as these bad drugs, as it were.

Now, you have a legislation which clearly says that dealing with the same, sale, transfer,
transaction in any of these substances is prohibited by law. It is illegal to deal with this kind
of stuffs in India. So, any transaction that can deal with narcotic substance is forbidden by
law. So, you cannot have a contract. So, the central object of the contract is something that is
prohibited by the statute. And because it is prohibited by the statutes, the legality of the object
test is not going to be fulfilled, and hence the agreement is not going to be enforceable at law.

What does this mean? This means that the parties cannot approach the court of law, the
remedies for breach of contract are not to be granted by the court of law. And the parties may
have to settle their rules course beyond the legal system or beyond the law. So, important for
us to understand what is permitted by law and what is forbidden by law. For example, we can
also say, can there be a contract for the purchase of a kidney, blood, or human organs for that
matter?

Now, again, we have legislations like the transportation of Human Organs Act and several
other legislations which have state that, there cannot be any transaction for the purchase or
sale of kidney or for blood, these are essential human organs that cannot be traded, they
cannot be commodified, they cannot be commercialized. And hence, no contract of that
character or nature is permissible. The legality of object, testing of the object of the contract,
whether the object is permissible by law, or whether the object is non-permissible by law.

We have to understand what is the subject matter of the contract. For example, let us assume
one more kind of example to test the object of a contract. Now very often than not we have
people trying to make several kinds of contracts. And it could be as normal as buying land. It
could be as normal of selling products, purchasing services. But again, if you focus on the
object of the contract friends, you will notice that a lot of times we have control orders on
certain kind of commodities.

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Like the sugarcane control order or the coffee control order or the milk control order, which
mainly control order which are there under the essential commodities act, all you will notice
that probably during a pandemic or a health emergency time, certain drugs were listed as
essential commodities, certainly vital, life saving drugs were listed as essential commodities.

Now, it is not that the law forbids you from dealing with it, but the law actually fixes the
price at which it should be transacted. So, there could be a law that clearly gives you a
prohibition from dealing with, there could be another law which says you can transact but at a
specified price, there could be another law which says that you should only sell it to the
government and nobody else.

Now, for example, we under the sugarcane control order, which was there prior to the LPG
era, and it existed even later on for some time, which is the liberalization, privatization and
globalization era, you would notice that the farmers or the cane growers had to sell their cane
to only a particular factory, and through government regulation and order. So, there is a
forbidden next to the freedom of contract, you do not have an absolute freedom, sometimes it
is illustrative. So, your object to the contract should not be against a given law.

So, whatever the law prescribes, you can only work within that you can make contracts
within that anything that is forbidden by any other statutes, apart from the Indian Contract
Act, if you attempt to do it, it will track Section 23 of the Indian Contract Act. And because it
violates Section 23 of the Indian Contract Act, the contract will be held to be void. Now,
there are two things that at this context, one must realize, and that is void versus illegal.

Now, void means it has only civil consequences or a civil action or sanction. That is, what is
illegal, friends, is something that is clearly forbidden by law, it would probably say like this
in the ITC, that any contract to kill someone is punishable with the offense of 6 months. It is
not only forbidden but it is also punishable by a given statute. If you decide to make a
contract, which is then attracting forbidden law with an additional amount of punishment that
is prescribed by that special statutes, then we will say that the contract is illegal.

So, illegal contracts interestingly have no remedy i.e. what we got in the Indian Contract Act.
Void agreements still have something but illegal contracts do not. So, illegal contracts are
treated far more stringently, they are prohibited, forbidden plus there is a punishment in case
you do anything that is in furtherance of the same through a contract that you do probably.

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Also, Section 23, very interestingly has what is known as the direct test and the indirect test.
Now the direct test is that look, if you make a contract that is forbidden by law, then
obviously sorry that is void however, there are so many legislations that will not give a clear
prescription that please do not make a contract regarding this, they may not say so. But what
you will make in your contract defeats the provisions of those law, the object of those law,
vision of those law. And then this is the indirect test.

So, if your contract attempts to defeat the provision of any given statute indirectly, even then,
please note that agreement is not going to be made enforceable, it would attract Section 23
and it will be declared as void. So, this is the first two is the one is the direct test. The second
is the indirect test. So, I think respecting parliamentary intention of the legislature, the Indian
Contract Law, though is foundational law is always balanced with the interest of legislations
that are made later on.

And any such legislations can actually make prescriptions of which kind of contract is
permissible, how it should be made. And if it is not made, aspect those special legislations
that it will attract Section 23. Section 23 of the Indian contract Act also insist on the fact that
contracts that are made between two private individuals cannot attempt to injure any other
third intuition to either himself or to the property of that person.

Now, contracts are supposed to benefit two parties, the seller or the buyer as the case may be
or maybe in case of government contracts, it is to benefit the larger public, as we say public
works contract. So, you do not expect contracts to in any attempt, so the object of the contract
must not result in making a kind of attempt to injure a person or a property. So, this is also an
interesting element under Section 23. It opens a kind of an area that is not necessarily to be
decided by any legislation, this is something that courts can also intervene to decide.

So, if two persons make a contract, wherein the element of this contract is promising or
attempting to promise, any kind of loss, injury to the person, or to the person or the property
of another division, then to that extent those contracts could be tend to be void. This very
clearly gives the direction that two brothers cannot fight amongst themselves so as to cause
injury to some third party or two brothers cannot enter into a contract when they decide to
share the property between themselves, but deny the property to their third brother.

So, injury here is not the injury in the sense of the physical term, it is injurious to the right,
interest of the third party that is where the element of injury definitely comes into place. So,
say in a government contractual sense this injury could be to a competitor where you want to

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exclude the competitors, and you include certain aspects. So, you actually have a tacit
understanding between the contractors and then say, look, we tried to exclude the
competitors, so that they do not get injurious to person, property, business. That, I think is a
very interesting way in which Section 23 has been drafted.

And that is why Section 23 is called as the heart and soul of contract law. It very clearly
expects contracts to be for public interest, public welfare, it can result in profit to the
contracting parties. But then, there is a public element, that public element is your contract
should not affect public interest, public rights. That is a very interesting part of the Indian
contract Act. It is an interesting scenario in the Indian Contract Act. And, also please note,
there is this concept of public policy that has been brought under Section 23.

Section 23 says that agreements that is injurious to public policy. The definition of public
policy does not exist. It is not there, it is for probably the judges to evolve and decide,
because, again, if you go back to my previous point, there are certain things that cannot be
static, it cannot be permanent, it has to evolve from time to time. Now, for example, why
there is no definition of a public policy, I think, because the drafters of the Indian Contract
Act wanted to keep this as an open question for application for evolution, every generation
would want to determine its own public policy.

Public policy in government contract can be something else. And in a private contract, it can
be something else, so you cannot have one precise definition of what it means. Some judges
have attempted to define it by saying public policy could mean injury to public interest. Yes,
it can be. Say public policy would mean avoiding paying the appropriate stamp duty or
registration charge in a contract that can also be public policy. So, if there is an agreement
between two parties, which is going to be injuries, please note it may not the injury may not
occur.

If the injury occurs, let me tell you it can amount to crime. So, injury to person, is not it a
crime? Yes, the Indian Penal Code says it is an injury to someone’s property, is not it a
crime? Yes, it is a crime. So, if you actually commit the act of doing that injury to person,
property or public policy or public property, then you will be punished under the criminal
law, that is a different issue. But an increment to that effect is not permitted. This is one.

Point two is that agreement is a consent to defeat the object of any legislation. And that is
where you will notice that these four points become a very critical factor in deciding whether

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agreements are going to be enforceable at law, or whether they are not going to be
enforceable as well.

In the next slide, we will deal more on public policy, especially in the current context, I will
give you some very recent and very classic examples of how and where this public policy
element has to be brought into place in terms of the discussion of contractual issues. The fifth
point that Section 23 deals and I think it is a very important way in which the Section 23
warns is contracts that are immoral, the object of the contract if it is immoral, or if the
consideration the contract that flows is immoral, then the contract is void as well.

So, I think Section 23 is so encompassing it has so many elements of determining the legality
of object immorality. Very interesting friends, what is moral and what is immoral? How does
one test it? There is nothing like a parameter of definition that the Indian Contract Law gives.
However, you will notice again that morals are some kinds of preachers, guides, the do’s, that
spiritual and religious institutions actually give in a given society.

Our parents, our teachers can actually guide us about what is moral and what is immoral.
Morals are I think high standards of human behavior, expected standards of human behavior.
And if you follow the natural statement is that probably you are demanding. Now the
expected standards of human behavior friends you will notice are generally lead down in our
day to day activities. Our elders tell us what to do, what not to do, religious leaders will tell
us our spiritual texts will tell us what is moral and what is immoral.

Now, this element in contract also says that look, what is there in society as high standards of
human behavior is also expected in your commercial transaction in a commercial contract.
So, being immoral is an element that is not permissible in contract. So, the object of the
contract cannot be sold. The immediate question for many of us should be, Sir, how can you
give us some illustration on examples of immorality, we can give you a lot of examples on
that. And please note these examples do exist from time immemorial.

Let us look at some traditional categorizations. Now, in traditional categorizations, you will
notice that there was this concept of a concubine in certain societies, in India, mistresses in
certain societies in India. Now, let us assume that I have a concubine or mistress. And my
society permits me to have the same, now you must be saying so which society really wdo
you live in. In today’s society, you will look as if you are a Hindu, you are bound by the
Hindu Marriage Act. If you are a Muslim, you are governed by the Muslim Marriage Act or
the Christian Marriage Act as the case may be, we have special legislations.

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However, India most legislations except the Muslim Ottoman legislation in insists that you
must practice monogamy. You must have only one spouse at a time, unless it is divorced and
so on, so forth. So, monogamous marriages are something that is facilitated by a given law.
Now, can I have a concubine, in or may be before 1955 the time I say about 1955 is because
that is the time the Hindu Marriage Act was put in place. And monogamy became a rule.

But before 1955 during British times, in West Bengal, in certain societies in India, these
kinds of polygamous marriages. The polygamy please note, is also something that the Indian
Penal Code speaks about. But polygamous marriages were some kind of permitted in certain
circumstances. And this concubine issue is a very important issue because it has some
customary traditional complications.

Suppose just imagine during those times concubine was permitted, the Devdasi system was
there, and so on and so forth. So, I can give you numerous examples, how the Indian society
had some of these practices and systems. Let us imagine that my concubine or my mistress
has to get maintenance. It is my duty to maintain my spouse, is not it? That is what the law
says, is not that what morality would want to say, moral high ground, I must maintain my
independence.

I make a promise to a concubine, please note, it is a promise it is an offer saying that look, if
you remain loyal to me, and you should do that, I will give you a house and I will give you a
maintenance of 5000 rupees every month. I made this promise, the concubine accepts his
promise. Now, this kind of a contract can be tested on Section 23, you know why, legality of
object morality of consideration.

So, society may permit me to have a concubine, can it allow a contractual promise to the
concubine? This is something that we will have to be testing because please note friends, the
fact that I have a moral obligation to maintain someone is fine. I may have a legal obligation
also to maintain my dependence is also fine. But the fact is can I make a contract that is
immoral.

Morality here very clearly means that you are actually giving consideration or payment to
something that society does not permit. Society thinks having a concubine is not moral. You
must be dedicated only to your wife. Momedian marriage should be respected. So, societies
will have to change will have to evolve. And hence, once you will notice, even morality is a
changing dimension. It is a changing perception. What was moral in the 1980s, probably may
not be moral today as we see right now.

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So, certain values may change, the younger generation may take morality as some kind of
absurd kind of a standard who is society to judge whether I am moral or no, why should the
society judge the same. Remember, the thin line of distinction is, I say this is moral but does
the law say it is illegal. If it is illegal, obviously, whether it is young generation or older
generation, you are not supposed to practice the same. So, any kind of a contract that is
illegal, obviously, is not to be permitted by law. But morality is one of the law prescribes the
legality. It is about your expectation of high standards.

And remember, when I see your expectation of high standards, it could be something that the
judges in a case may want to implement or judge. So, the judge may say, this is immoral. So,
the statutes in Section 23 says, if an agreement is immoral, it is void. Yes. So, the testing is
going to be by the judge on whether what is the object of this contract.

I will give you one more example. Let us say friends, that you are a landlord of a house. And
a gay couple or homosexual couple want to take rent of this house. They want to become
your tenants. Let us test this hypothetically, what do you think this is moral or immoral?
Now, you may saying sir, is being gay legal? I am not sure. The Supreme Court right now has
said as we speak today, it has said that being homosexual is not a crime. But it is not said
being homosexual is legal. This is one part of the story.

But do you think our society is yet to accept homosexuality as moral? This is for us to decide.
So, I tell you a precise kind of an example that I always kind of go for empirical evidence. If
you want to speak to elder generations, I am talking of the 60s and the 70 years old. They will
tell you homosexuality is definitely not moral, you will take a survey majority will tell you it
is moral. But the younger generation if you go and speak 20-25 year old, they will say this is
moral, there is a generational gap on the morality of homosexuality.

But the point is, let us talk about the contract of giving tenancy you are a landlord, will you
give on rent house to homosexual couples, you may say why not? What is the immortality
there, immortality is friends, probably the society like say in Haryana or in Uttar Pradesh,
where they are very conservative societies, they may think that you are promoting
homosexuality, indirectly. You are promoting such kind of behavior indirectly. Friends,
morality is an external element of what the society thinks you are. You will not care of the
society that is a different issue. But that is what the society as a majority would want to
impose upon you.

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Say for example, in so many societies today, we are still grappling with inter caste marriages.
There are so many societies that do not permit they think it is not moral. So, I think the issue
of morality is a very, very tricky issue. There are few cases in which it has already been
implemented or decided. For example, I will give you one very classic case in which morality
was judged a carriage. It is like giving the car on rent, let us imagine. The owner of the car or
the owner of the carriage gave it to a prostitute. He gave it on hire. He gave it to a prostitute.
And she took that carriage for her sex work, sex workers we call them.

So, she went in the evening in the same carriage she performed her work. And then she came
back and she returned the carriage. The issue is she refused to pay for them hire of that
carriage or the car. She was very clear. She said I would not pay, why because you have
given the same foreign immoral activity. The court had to judge whether this contract giving
the carriage to a prostitute or a sex worker to do her own trade. Is it moral or immoral? Now
you judge this. I would say most of you will say it is immoral. Prostitution is immoral. Sex
work is immoral.

Friends, you are judging someone else. You are judging that sex worker, the society is saying
that is immoral. And hence a contract of carriage for prostitution is going to be moral.
Similarly, can you give your house on rent to a prostitute or to prostitution or to a sex
worker? Can you, should you? See, please note there is a law which probably would regulate
these activities because that house could be used for the purpose of prostitution. So, you do
not expect seek prosecutions have the right to shelter, I do not deny that it is a contract. But
the contract of morality is something that we all have to guess and we all have to determine,
is not it?

And having it in law, it is kind of what the British’s thought 1872 is this law, the British’s
wanted to properly put in the aspects of morality. Now, I do not know when the British’s
brought this law, whether they were testing morality as per Christian standards and British
Standards because the judges were not British during that time.

And here are Indian, who are practicing certain very interesting aspects of what this contract
is what this customers. So the point is, you cannot discourage morality to other elements.
This is something luckily, the Supreme Court has restricted morality, they have said, we are
not testing morality on other aspects, for example, it could be animal cruelty. What could be
animal cruelty, we put a kind of a metal piece to the leg of cattle, so that when the cattle is
actually galloping and running on our roads, they can crippled.

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Suppose I give a contract to a person to put that half horseshoe shaped metal piece to the leg
of a cow or a bullock. You may say, sir, that is cruelty to animal it is immoral. But remember,
immorality on several other grounds cannot be done under contract law. The Supreme Court
has said let us only restrict modality to sexual morality. Yes, so morality is only on sexual
part. And that is the narrowing down of this definition under Section 23.

But remember, the examples that I gave you on homosexuality, on prostitution, on

concubines are all those aspects that determine sexual morality and any such contract could
be set aside by the court of law on the ground that the object of the contract is immoral.
Second, the consideration of the contract is moral, now you will be saying so how can
consideration of the contract be moral? Very simple, suppose I am going to build a house, the
money that I get to build this house, the consideration that is coming to me to build this
house, should it be legal or can it be illegal?

Now, what is illegal money? Let us assume that this money is coming to the hawala
transactions, illegal money, violation of federal regulations, Foreign Exchange Management
Act, it has been smuggled into India. The money is wrongly printed. In those circumstances,
would you say that consideration is legal? No, you will not say it is consideration.

Similarly, let us assume the money that is given to me to construct this house is coming from
say the earning that a prostitute or a sex worker has done, is that constitution legal? That
money has to be utilized, I completely agree with you. But can I make a living on what the
sex worker has contributed to me? Maybe the judges in this case would say that the
concentration is immoral, moral money, what is it?

You may do the hard work, you take the income from it, you construct your house, that is
moral that is what our spiritual leaders, advisors, gurus, our religious takes what is there a
society, society will say only utilize good money, white money, but black money, immoral,
illegal, both prostitution, who is earning her own income, is it immoral as well as illegal?

So, I think that it is immoral and illegal, it is very easy to decide, there is no problem because
the law actually put that restriction, but remove the legality part, just focus on the morality
part, then you start finding how difficult it is for judges to actually decide those cases in
which the consideration is considered to be moral.

And those I think aspects that want to get considered, for example, I just do the last instance
of immorality of concentration. Money that is coming from bribe, can it contribute to a

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contract? Should it contribute to contract? I am sure your answer will be definite, no. That is
a consideration that we can always say is an immoral. So, we will understand Section 23 with
various of its facets, in which, one or the other issue under what we would want to look at the
traditional categorization of trying to test the legality of object.

Now there are two categorizations. One is mordern categorization of testing legality, and one
is traditional categorization. Now in traditional categorization, you will notice that trading
with enemy is considered to be violating the aspects of public policy. Public policy means
public interest, public welfare country’s permanently, and hence, if the country is at war with
another state, it will be the neighboring states, or countries or any other state on which the
country imposes what we would want to say, as the enemy status, then, in those
circumstances, training with such kind of enemy, state or its citizen it considered against
public policy.

So, there are two things that you have to understand here is that the legality of the object can
creep into the contract at some point of time, maybe at the stage of performance, maybe at the
stage of delivery of the goods, maybe at the stage of receiving the goods, maybe at the stage
of paying the price, or of paying the consideration of the contract. It could be at the stage
when the contract is also entered into.

Now, you cannot probably go against a national security interest. So, contracts are expected
to adhere to those national security interests. And that is what public policy is, obviously, so
citizens who are making a contract cannot contract with an enemy state, and its citizens. And
this is very clearly prohibited, that is considered against public policy and hence, the legality
of the test of the object and concentration in such contracts is definitely tested on those
grounds.

Trafficking in public offices which means that you cannot use illegal, unethical, immoral
means to gain access to public offices, or famous grounds contracts for public offices. Now,
we know that in government contracting, there is a very interesting pact called the integrity
pact. This is something that both the government and the contractors have to enter into. The
integrity pact is generally the anti corruption kind of clause. Both the parties say that they
have approved the contract with clean hands without actually trafficking in public offices.
There is not offered any kind of unethical or immoral or illegal gratification to actually seek
the contract.

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And since trafficking public offices is a prohibited activity to punishable offense, further any
contract that actually tries to look at trafficking of public offices is attracting Section 23. And
such contracts will definitely be not only void, but I think it would be illegal as well. So, we
have to understand that we always use the statement all illegal contracts are void.

However, all void contracts need not be illegal. The illegality of contract comes into place,
especially if one evaluates the fact that the action that leads to the voidness is a punishable
activity, it has been held to be prohibited or punishable with sanctions, with imprisonment,
with fine and that is where you will notice that the illegality of contract is on a separate
footing. So, all illegal contracts are void. All void agreements may not be in legal
agreements.

Like we talked about trafficking in public offices, you should also look at interference with
administration of justice. Now, Justice Administration is the judicial system approaching the
judge trying to make contracts trying to do backdoor deals, to secure settlements and
judgments. All of these are prohibited activities, and they are something that the law does not
provide for.

And hence, it is a clear example of how the object of such contracts are not to be encouraged.
These contracts cannot come into existence. Anything that you do with justice and Justice
Administration, the contracts are going to be illegal, as well as void. So, you cannot get into
any of these actions. And these actions are considered to be clearly prohibited actions of
contract.

Finally, marriage brokerage agreements were considered to be immoral at one point of time.
Why, because marriage was considered to be a kind of a sacred activity. It was supposed to
be a noble religious activity for which contracts that actually try to make the boy and the girl
meet or try to brokerage the marriage were not considered to be moral they were considered
not to be enforceable at law. This was during early times.

But now, times have changed. As I told you, morality, marriage, things are in a different
dimension today altogether. And hence, I think the dimensions of early times need not be the
dimensions that we do it today. So, these are some traditional categorizations under Section
23. And they give us an idea about how at least not the interesting part of Section 23 is
somewhere, you will notice that the last line of this section as it is written by the British
lawyers, draftsman, they have given the right to the court to determine two things, the issues
on public policy and the issues of morality.

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This is something that is always dynamic, it is not static, it could change or the parties, what
is the subject matter of the contract, and hence, the courts will decide whether it is in favor of
public policy or is opposed to public policy. So, the role of the court in Section 23 is quite
void, very, very important.

And that is where you will notice that there are a lot of judicial verdicts over here. There are
interesting cases that come by over here and do not forget government contracts are also
tested on the ground of Section 23. So, if you just go by a very interesting case, and the case
name is Brojo Nath Ganguly v. Central Inland Transport Company, it is the case of precedent
under Section 23.

Central England Water Transport Company was a government company which had an
employment contract and the terms and conditions of the employment contract was
challenged as being opposed to public policy. Please note contracts are also between an
employer and employee it can be a temporary contract, it can be some other outsourcing
contract, so everything that is done by the government.

Interestingly, there are two legislations that actually converge. One is the Indian Contract
Act, other is the Indian Constitution. So, article 14 of the Indian Constitution very clearly
states that any action of the government which is arbitrary, unfair, unreasonable, is something
that the courts can strike it down and beat the contractual law.

Contracts can be challenged as being arbitrary as being unreasonable, as being unfair, as

being discriminatory of the policy of equality. And then Brojo Nath Ganguly v. Central
Inland Transport Company, you will notice that the Supreme Court states that anything that
is reasonable in an employment contract is liable to be struck out. It is liable to be moderated.
And governments do not have the discretion to make contracts that are unfair, and
exploitative.

And public policy very clearly means that the government contract has to be in favor of the
public spirit, in favor of public interest. And if the government fails to draft a contract in
public policy, then such contracts are liable to be struck down. So, that is the Supreme Court
decision that has always been cited to actually challenge government contracts on the ground
of public policy.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Formation of Contract: Legality of Object & Public Policy – Part 02

In this part, the aspect of modern categorization of public policy and how courts have
envisaged a right to intervene and decide whether a contract is to be enforceable or not would
be looked into. While the general categorizations including the traditional continue to be
there, under the modern categorization, one can view issues under the Competition Act of
2002. Prior to the Competition Act of 2002, India had a legislation called the Monopolistic
Restrictive Trade Practices (MRTP) Act, 1969. Judicial pronouncements underscored that
monopolies in a market and that definition of the market could be entire India, it could be one
state or it could be one kind of territory those actions are not in favor of public interest. public
policy clearly understands and says, if there is a monopoly player, it is going to exploit the
market. This can be through creation of artificial scarcity of the commodity or artificial
demand. The monopoly player can also rig the prices by determining the price, when to
release the goods and at what price to release the goods.

It is not good for any kind of market situations to actually promote and have monopoly
player. We did not understand this in India for a large number of years. In the years preceding
liberalization, privatization and globalization, a lot of services from the government were
actually the only services that are available to citizens. So, the government was a monopoly
player. However, the government is of the people, by the people and for the people and we
follow a socialistic pattern of governance where the government is not only going to govern,

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it is also going to provide you essential goods and services. We adopted socialism in the
Constitution, the government took over its role, or rather seriously viewed itself as not only a
government of governance, but a government of business and providing essential goods and
services to the citizens as well. This has probably changed post liberalization and
globalization. This was probably the reason that there was a need to replace the MRTP Act
with the Competition Act of 2002 which also replaced the MRTP Commission with the
Competition Commission.

Contracts that make monopoly or create monopolies are also a problem. So, when two
companies are given in the market, say with 55 percent and 45 per cent market share
respectively, there are only two players. In India, there are a lot of these sectors or areas
where there may be only just two players. If these two players decide to merge, amalgamate,
and they create one entity, that would be an absolute monopoly. That is a very dangerous
situation for not only the economy, but also consumer interest and national interest.

Therefore, you do not want monopoly contracts or contracts that create a monopoly. This is
the first aspect, going by the MRTP Act of 1969. Secondly, Article 19(1) (g) of the
Constitution of India says that every Indian citizen has a freedom of trade, occupation and
business. Any contract that restricts these kinds of freedom would be violative of the
Constitution principles. As the Constitution is a public document, any attempt to bring about
such restrictive practices into effect will also be considered as void.

Market strategists of those who try to create market share for a product or for a company or
for service come up with a lot of ideas of capturing the market. The higher the market share,
higher would be the profitability, dominance and restrictive trade practice. It is not necessary
that it should be 100 percent market share. It suffices if it is the dominant market share.

Section 3 of the Competition Act clearly states that anti-competitive agreements are void. It is
the Competition Commission of India that can declare certain kinds of elements as being void
because they violate the Competition Act of 2000. Section 3 one of the Competition Act says
no enterprise or association of enterprises shall enter into any anti-competitive agreement.
This is applicable for agreements in respect of production, supply, distribution, storage,
acquisition or control of goods or provision of any service, which may likely cause an
appreciable adverse effect on competition within India. If you enter into any such agreement,
that is likely to cause an adverse effect on competition in India, such agreement shall be void.

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What are these kinds of elements? How do they look like? Let us look at an example. There
is this concept under competition law called the tie in sale agreements or tie in sales which is
like this. Suppose you decide to buy MS Office. Many of these companies, do what is known
as bundling of software. For a fast moving product in the market there is a lot of demand. But
the company may also have another product, which is slow moving. The company may
bundle these two and gives it to the consumer forcefully to buy. So the consumer has to not
only buy MS Office, but he has to buy Internet Explorer as well. There is no choice you
cannot divide it. So, once MS Office is installed in the system, it is only Internet Explorer that
is possible to be installed along with it and any other option like Mozilla cannot be used
because it is all bundled and given as a single package. Neither is it nor is it priced
differently. This ensures that Mozilla will be out as it does not have a basic office software. It
will kill competition. In case MS Office decides to bundle the software and sell it to
customers, can such kinds of contracts be encouraged in the country? Does it defeat
competition? There are small companies which should also have a space in the market.
Everything in the software space cannot be dominated only by one or more companies like
Intel or Microsoft or Google. So, these can be considered as anti-competitive acts.

Another interesting concept is that of refusal to deal. Let us take the case of automobile
companies. For instance, Maruti comes up with Maruti genuine spare parts. There are
component manufacturers who support Maruti by making smaller components, which go into
a car following which it is assembled and given a deal. The component manufacturers would
be individual companies, making small components including batteries or other things.
Maruti interests into an agreement called exclusive supplier agreements with this component
manufacturers making them agree that they would not sell this component to the external
market. Manufacture, sale and purchase would be only for Maruti. This seems logical
especially when intellectual property is there as well. If it is Maruti's design and that is what
someone is manufacturing, they can give it back to Maruti and nobody else. This is the
justification of these companies to make this agreement, but what is the impact on the market
and the consumer?

The impact is, if one component in that Maruti car needs to be replaced, only Maruti will give
the genuine spare parts. Otherwise, maybe some spare parts which are not authentic might be
the only alternative which might affect the performance of the car. So, with this Maruti can
force consumers to come back to the it for all kinds of services. Notably, sale of a car is a
onetime contract. But servicing the car for 10 years or 15 years is a regular contract that is an

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income that is a positive contribution to the company's profits. Can this be considered to be
anti-competitive?

In the earlier days if an Ambassador car or Fiat car could be repaired with a local mechanic
also without going to their authorized service station. But today with this action of Maruti, a
Maruti car cannot be serviced by any other person. So, in the service of car industry, Maruti
has killed its competition. These kinds of agreement are susceptible to the challenge of public
policy and susceptible to the challenge of being anti-competitive.

This is where probably the Competition Act has a role to play. Competition gets the best
service because this enables comparison between services. If there are two service providers
it ensures better quality and better price. Competition gets the best from competitors in terms
of price, in terms of goods and in terms of services. Competition is good for the market,
consumer interests, citizens interests and national interest. So, it is India's public policy to
have competition in the market.

It is to be understood and appreciated that anti-competitive agreements are void for the
simple reason that they have an adverse effect on consumer choice. Consumers need choice,
and unless the choice exists, citizens and national interest is not going to be promoted. And
hence, such kinds of agreements are not to be increased, they have to be curbed. There are to
be intervened, and such contracts are to be held to be void. Did such kind of a principle exist?
If one evaluates Common Law cases, and some of the cases in India even before 1969, it is
very clear that anti-competitive agreements were not enforceable.

There is a component called predatory pricing. It is a market behavior and a contract in which
a commodity can be purchased below its cost price. Let us take one instance. Can an airline
sell you air tickets at 2 rupees or 200 rupees? Why would airlines give you tickets well below
cost price? Predatory pricing is a concept used typically by new entrants to the market to
capture market share. Let us look into an example. There were quite a few companies in the
telecom space, like Airtel, Vodafone, BSNL and Aircel before Jio entered into the market.
When Jio entered in the market, it started giving free connections for 3 months, 6 months etc.
and a free mobile handset. This is nothing but predatory behaviour. A company coming into a
new market, can support that pricing where it can say that for the first 6 months, it can give
services free of cost. After first 6 months once it gets all the consumers on board slowly it
starts increasing the price. What it lost in the first 6 months will be recovered in the next one
year, or two years.

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Is it not desirable under public policy that people are getting below cost price? It is important
to look into the intention and the long-term implications. This would reveal that it is not
healthy for any economy and such agreement and contracts should very clearly be regulated.

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 Advanced Contract, Tending and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Formation of Contract: Legality of Object & Public Policy – Part 03

(Refer Slide Time: 0:16)

The discussion and understanding section 23 of the Indian Contract Act is being continued
here which broadly emphasizes on the fact that certain agreements are considered void and
are not going to be enforceable simply because they are not in public interest or what is
referred to as opposed to public policy. The previous session dealt with the Competition Act
2002 and the background of how the Indian Contract Act is complemented with several other
special legislations to understand the direction of public policy in this country.

As was stated in the previous lecture, public policy is not defined in the Indian Contract Act.
It is left to judicial discretion to actually define public policy. It is judiciary that aligns the
direction of public policy from time to time. It is not the sole proprietary jurisdiction of the
judiciary as the legislature also has to play a very important role in laying term in the
direction of public policy, especially in contracts and agreements. This is where you will
notice that the legislature from time to time has provided several legislations that can give us
an idea of what agreements would not be enforceable.

The government is rather a huge contributor to the economy in India, because the government
is not only doing governance by providing amenities to the citizens, but also a lot of
businesses. We have a lot of public sector banks and public sector companies. One of the
mechanisms through which government agencies engage in contract is the rule of tendering.

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They have to follow by tender and they have to go by competitive quotations in government
contracts. What tender does is to actually lay down a transparent process of contracting. So,
tendering is the rule. There can be exceptions, which will be discussed a little while later.
When bids are called through tenders, contractors submit their bids and the government will
evaluate those bids. The government will actually give the contract to the most favorable bid.
There is the concept of L1 and H1, where L1 means lowest bidder number 1 and that he has
quoted the lowest price. When the government is buying, they go by the lowest price
mechanism, and if the government is selling, they follow H1, the highest price mechanism.

In such a scenario, what may happen is that contractors may actually enter into some kind of
a collusive secret understanding or an arrangement or an agreement. Bidders and contractors
can actually rig a tender whereby attempts are made to defeat the purpose of tendering. The
purpose of tendering is to actually ensure competition. Better competition means better price,
and better products, which makes competition a healthy aspect for the market conditions,
consumer interest and government interest.

Can bidders rig the tender so as to defeat competition? can they disclose their price
information or financial information? Can they divide the markets among themselves? Can
bidders create entry barriers for new contractors to come in? These are some of the strategic
behavior among contractors, which the law clearly prohibits. So, any kind of agreement that
tries to defeat the purpose of tender amounts to bid rigging which is prohibited under the
competition law. This is important because whenever the government goes by any kind of a
tender or even in a private contract, the manufacturers, the producers, the distributors, cannot
enter into any kind of secret understanding so as to defeat the purpose of competition or
tendering.

When Section 23 of the Indian Contract Act is read to understand the public policies
involved, the Competition Law is a great effort which clearly says these are agreements
opposed to public policy. Under the Competition Act, the Competition Commission of India
has been established which is both the regulator and adjudicator in the field of competition.
So, the Competition Commission of India can be complained to for any kind of anti-
competitive agreement activity that has come to the knowledge of any individual or any
businessman. The Competition Commission of India will investigate that complaint, they will
find out whether there is any truth in the complaint.

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And once they have finished their investigation, they will inquire. After inquiry, there are
various kinds of penalties that can be imposed on parties who actually engage in anti-
competitive behavior or have entered into anti-competitive agreements. The Competition
Commission of India is duty-bound to impose penalty and hold these agreements as void.

Please refer to Section 3(2), which says that anything that is in contravention of Section 3(1)
shall be void which means agreements will have no enforceability. Hence, once it has been
decided by the competition law, a regular court cannot provide any kind of remedy to hold
the agreement to be enforceable at law. This is a significant aspect of public policy in India.

Business leaders, managers and entrepreneurs must know what agreements are permissible
and what agreements are not permissible. For example, when you look at the competition
law, there could be an exclusive supply agreement. Now, exclusive supply agreement very
clearly says that someone who is to supply goods would supply it to one individual/entity and
to nobody else. Not all of these kinds of agreements are going to be illegal or going to be
void. There can be an exclusive supply agreement. The purpose, intention and motive of this
agreement will be the first criteria to intervene under the conditions. The second intervention
would be what is the impact of this agreement on the competitive market. This will be the
test.

Therefore, under the competition law, every agreement will be tested in terms of what kind of
effect it has on markets and competition. It is not that every agreement is going to be declared
to be void. The rule is what we call as the rule of reason. You will have to reason out the
impact of this agreement. And in case the agreement has an adverse impact of competition
only then the agreement shall be held to be void.

Against the rule of reason, you have another very interesting rule called the Rule of per se
illegal under the competition law. Now, the per se illegal rule applies to agreements such as
cartels. Interestingly, the term cartel has been existing in business and in markets for a long
period of time. The oldest cartel is among the oil producing nations called OPEC. These are
sovereign nations and are not business entrepreneurs. So, sovereign nations can have cartels,
but that is not the purpose of any competition law. Competition Law deals with entities inside
a country, they are not about what sovereign nations can do. So, OPEC is just an example of
cartel. It is not something that a competition law can actually deal with.

A cartel is about those kinds of engagements of manufacturers, producers, or association of

Manufacturers, who come together. The purpose of cartel or cartelization, as we call it, is to

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see that the producers of one commodity or one services, pool in together, they come
together. Coming together is not a problem. But once you come together, and you try to rig
the market, how do you rig the market? Maybe you rig the price. Now, how do you rig the
price? Maybe you create an artificial shortfall, you create artificial demand by reducing the
supply, so that you can maintain some kind of stability of price. Cartel is illegal in India, like
in most other jurisdictions. Cartel comes under the per se illegal rule and any kind of an
agreement that creates or attempts to create a cartel will be considered as illegal under the
competition law. So, agreements that create cartel have been declared to be illegal.

All void agreements are not necessarily illegal. But illegal agreements are definitely void. So,
cartel is illegal and void. Once it is illegal, there is no question of it being enforceable at law.
Competition law helps us understand an idea of what an illegal agreement can be. There
have been significant interventions by the Competition Commission of India. One of the most
famous case of cartelization was a case of cement industries or cement producers or
manufacturers of India. The Builders Association, which is also an entity of service
providers, found that the cement manufacturers had entered into a cartel through their cement
manufacturing association. The Competition Commission of India did find evidence of
cartelization and imposed a penalty on the cement manufacturers. To a larger extent, the
cement manufacturers cartelization case was an eye opener, saying that although you can be a
member of producers or manufacturers association and can do good work, they cannot form a
cartel, rig the price, create artificial demand and supply gaps, create conditions that will
adversely affect consumer interest, and most importantly, defeat the purpose of competition
in the market.

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One of the provisions of the competition law for our reference at this point of time is Section
4. Section 4 of the competition law very clearly talks about abuse of dominant position. It
says, if anybody tries to abuse their respective dominant position, then to that extent, that is a
prohibited restricted activity. And please note, abuse of dominant position can happen also
through a contract or through an agreement. Being a dominant position is not a problem for
the competition law. For public policy, you can be a dominant player and you can have
dominant positions in the market such as that occupied by market leaders. We have Indigo
airline as the market leader in aviation space and Airtel in the telecom space. They may be in
a dominant position. Now, dominant position is not necessarily 50 percent or more market
share, it can be 30 percent, it can be 20 percent as well. It is not necessarily dominance vis-a-
vis the Indian market, it can be dominant visa vie Karnataka or Bangalore or any other
jurisdiction. So, the market has to be defined to determine who the dominant player is, as it
can vary from market to market. The point is being a dominant player or being in a dominant
position can happen based on mergers with competitors. This is called the combinations of
competitors. So, under the competition law, you have a combination regulation as well that
deals with this practice.

To amalgamate or merge two companies, which may have an adverse effect on competition
law, the combination regulation says that you have to take the prior permission of the
Competition Commission of India. So, the Competition Commission of India can certify and
that merger of two companies is fine if they may not have adverse impact on the market and
competition. Hence, this is a kind of pre-emptory intervention of the Competition
Commission of India for mergers and amalgamations.

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Dominant position is fine, abusing the dominant position is not fine. So, abuse of dominant
position is regulated and restricted activity under the competition law. And you could
probably abuse dominant position by many such factors. For example, one of the factors is,
looking at predatory pricing of goods and commodities. The other factor would be imposing
unreasonable conditions on purchase of goods and services. Imposing conditions is usually
through contracts, limiting or restricting the supply of goods and services, indulging in
practices that deny market access.

There are various aspects about how a dominant position can be abused. Section 4 very
clearly speaks about all those kinds of activities that are important for the intervention of
public policy. Now, the most famous and under abuse of dominant position is the case of the
real estate sector. The real estate sector led by companies like DLF, were actually pulled up
by the Competition Commission of India. Now the real estate sector is a booming sector
because there is a great demand for housing in cities. New companies are coming into the
sector and there is a lot of demand and supply gap. Once the sector is new and has a lot of
demand, naturally there are companies that get into dominant positions. DLF happened to be
a dominant player in the Delhi NCR region. They entered into a lot of controversies because
of the kind of relationship they had with the politicians and state governments as well. Once
there is a nexus between the politicians and the contractors and the real estate builders, of
course, the market conditions are going to be exploited. DLF had unreasonable terms and
conditions, including a term and condition where they said we will not give a refund, if there
is cancellation of booking in their contracts, especially when they were actually making
buildings and selling it to allottees or consumers. The Courts found DLF’s extraordinary
contractual terms and conditions to be shocking and unconscionable. It is definitely not in
favor of public policy where the real estate companies engage in what is called as reservation
of rights clause.

In reservation of rights clause, most of these real estate companies would have the rights to
make the agreement and the content. The entire contract would have already been drafted by
the real estate company and the consumer would have to simply sign. They may negotiate
the price. But the substantive clauses in the contract would be already something that is
drafted by DLF. Then a consumer has no choice, he simply has to agree to it.

Would real estate company want to practice fairness? How many marketplaces actually
practice fairness through their contracts and agreements? Very few. This kind of attitudinal

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shift is something that the competition law and contract law attempts to make. This is also
what a legal system must have. You do not always need law to actually tell you what to do
and what not to do. cContracts must attend fairness. If they do not, regulator is needed in each
of these sectors to actually ensure that a fairness of contract, fairness of market and fairness
of bargain is maintained. DLF was not only the one notorious. The courts have looked at
making a demolition order for Supertech. We have seen groups like Amrapali, and others,
which have actually tried to rig the real estate market, get into abusive behaviors by trying to
use the dominant apposition to the adverse interest of consumers, nation and public policy as
well.

In the DLF case, what is interesting is how did the Courts intervene in a very unique
fashion? What they did was that they listed out the objectionable clauses in the agreement.
They said these are the objectionable clauses and they also suggested how, in the future, these
clauses must look like. This is to be really appreciated as the duty of the court is to say that
the agreement is entirely what need not be, but the doctrine of severability can be applied to
pick up those objectionable clauses in the contract, for moderation or refinement.

One of the remedial law that applies to Indian contract act is the Specific Relief Act of 1963.
Suppose there is a breach of contract, the remedy is that of damages. The second remedy is
known as the specific performance of a contract. The Specific Relief Act also has something
called rectification of an instrument. The courts can rectify an instrument if they feel that it is
rectifiable. And once it is rectified, the obligations between the parties can continue. So, it is
not that the instrument must be canceled or thrown into the dustbin or declared void. It is not
that damages is the only end result, the parties can continue with their obligations as well.
The allottee can continue living in DLF or the DLF can actually improve their attitude and
services towards the allottee. Both can coexist and the contract can still be enforceable at law
provided the court feels that the objectionable clauses can be rectified in such a manner that
both the parties can continue to have a subsisting contract and commercial relationship going
forward. So, these are also the remedies that are possible.

For example, in government contracts, once we go to arbitration, it is as if A has won and B

has lost. I do not see why in contracts only that kind of a conclusion should be there. I think it
is possible that arbitrators can rectify the instrument and make the contract a workable
contract. And that is something that probably the DLF case clearly highlights. So, I have just

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given you two or three examples, about how competition law becomes a very, very important
legislation in understanding the parameters of public policy in contracts.

Though the competition law application is far wider and broader, we have the Competition
Commission of India, being the market watchdog for ensuring fair competition in different
sectors. But again, you will notice that the Competition Commission of India is the general
competition regulator. Whereas, we have specific competition regulators in each of the
sectors like IRDA in the insurance sector, TRAI in the telecom sector and the Reserve Bank
of India, in the banking sector.

This is the kind of landscape that we have. Anti-competition is definitely against public
policy. Hence today, if you go to the courts, it would not only apply the provisions of
competition law, it may want to also refer to sections 23 in saying broadly this is what public
policy actually means.

Another interesting example that one can look into is a practice, technology, science and
innovation in the medical sector, called surrogacy. There have been a lot of inventions in
trying to help couples get a child.

The Western world has regulations on surrogacy. India has been struggling for more than a
decade right now. Initially, the ART Bill or the Assisted Reproductive Technologies Bill,
were proposed but could not be enacted. In 2021, the Parliament of India passed the
Surrogacy Act.

In the concept of a surrogacy there is an agreement for surrogacy. The basic relationship that
governs this kind of process is a commercial contract, though commercial surrogacy is not

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allowed. In surrogacy, even though there is nothing much commercial about it, is the
document some kind of an enforceable contract? One will have to appreciate the
enforceability of surrogacy agreement because the subject matter of surrogacy is a baby
which is a child to be born and handed over to the couples.

In surrogacy intending parents who are not unable to have a child, go to a clinic or medical
hospital and they express their desire to have a child. It is this hospital or the clinic that
actually identifies a surrogate mother or a lady who will actually agree to be a surrogate.
Interestingly, this is called of a renting of a womb. In India, you will notice that a lot of
foreign couples come for fertility tourism, as it is easier and cheaper. Most probably, those
who agree to be a surrogate mother, may be those from the economically weaker section of
the society. They expect some compensation or payment for agreeing to bear fetus in the
womb for 9 months and handing over to the intending parents.

There have been challenges to this kind of arrangement, agreement or contract for surrogacy
in India. One of the most famous challenges that one would want to look at is called the baby
M case, or Manji’s case. A couple from Japan come to India for surrogacy, constitute the
agreement, make the payment and the fetus starts developing in the womb of the mother. The
child is born in India, but the couple went back to Japan because they could not stay back for
a longer duration of time. There is nothing called a surrogacy visa at that point of time. Later
on, they decided to go separate ways. So, nobody came to take the child.

In the Japanese couple’s case, what happened was a newspaper report which highlighted how
India is becoming baby market. It means that babies are being born and there are no parents
to actually take care of baby. If you are born in India, to a Japanese parent, do you get Indian
citizenship, just because you are born in India? You will notice that the Citizenship Act has
also been amended. It says that just because you are born in India cannot be a citizen. One of
your parents also has to be an Indian. In that baby Manjis’s case, which is called the Japanese
couples case, the grandmother actually came and took the child from India.

In the German twins case, twins were born to German couple. At that point of time, Germany
did not permit surrogacy and they did not legalize it. But he came to India, he decided to have
a child. When he got twins, instead of writing his wife's name, in the birth certificate that
went to the Anand municipality, he writes the surrogate mother's name, so that he can get the
birth certificate, passports and visas ready, to take the children back to Germany. The case
was decided by the Gujarat High Court.

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The most important one for our reference is a case from the United States. This is a very
interesting case about the challenges to the surrogacy agreement itself. Can an agreement of
surrogacy be enforceable at law, was the question that was posed in the American case called
the baby M case. We had a baby M case in India and we had a baby M case in the United
States called Stern versus Whitehead. This was in the early 1990s and 1980s when there are
two forms of surrogacy. One is called traditional surrogacy. One is called the modern form of
surrogacy. In this case, there was an agreement that was entered into between Sterns, a couple
and Whitehead, a surrogate mother. They entered into an agreement thinking that they have
hired the services of Mrs. Whitehead.

When you hire the services of a person, it could be to help you domestically, it could be to
drive you somewhere etc. So, these are all service contracts. Womb happens to be a human
organ. Can you trade in human organ? can there be a commercial contract in human organ?
No, because that is also public policy. You can gift human organ, you can donate human
organs and that is why we say blood and kidney cannot be part of commercial contract and
commercial trade.

Surrogacy Act of 2021 also says commercialization is not acceptable. So, contract cannot be
applied in that sense. However, in this terms also in Whitehead case no such law in the
United States existed precisely. It is temporary renting meaning, temporary 9 months, and
after that you are to hand over the baby. But in the Sterm versus Whitehead case, what
happened was, once the baby was born, the surrogate mother started feeding the baby and she
got attached to the baby. And hence she ran away with the baby, she refused to hand over the

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baby to the Sterns. And that is when the Sterns went to the court and they wanted the
enforceability of the agreement because under that agreement, Mrs. Whitehead promised to
handover the baby to the Sterns. So, the Sterns sought enforceability of the agreement. They
sought specific performance, as damages was not going to be an equal remedy at all.

The Sterns wanted the only remedy of getting the child from Mrs. Whitehead. Mrs.
Whitehead actually ran away with the child. To a larger extent the court in this case did found
Mrs. Whitehead in violation of her obligation. But at the same time, the court said that it is
difficult to call this kind of contract as an enforceable contract. Because there is emotion
attached. The surrogate mother is attached to the child both genetically as well as
emotionally, and we cannot give Sterns the entire rights of enforcing the contract. This was
traditional surrogacy in which the Sterns and Mrs. Whitehead both had some genetic
connection to the child. And hence, there had to be balancing of interests and balancing of
rights. And you will notice that Mrs. Whitehead in this case was given visitation rights. She
could visit the baby because she had rights over the baby. It was not like the modern
surrogacy where surrogate mothers just provide the womb.

Taking all those due note and consideration of the courts in the United States had to evaluate
whether the agreement is enforceable at law. The major portion in this case did not look at it
from a contract or a commercial service. What we have to look at it right now is the best
interest of the child. In the baby Manji case as well in India, the Supreme Court also looked at
the best interest of the child. They ascertained that while handing over a child to a
grandmother, the physical, emotional and psychological strength of the grandmother to take
care of the child was to be evaluated. It was probably in the best interest of the child because
the child could not remain in India or in an orphanage or anyone else taking care of the child
may not be a feasible option. So, grandmother could exercise that best interest of child she
was able to convince the court and the court handed over the baby to the grandmother in the
Indian case.

So, surrogacy also posed challenges of public policy in general. And right now you will
notice that while we rule out commercial aspects of surrogacy it is an interesting dimension
about how surrogacy started from a contract. It started from consent. And right now, we
refuse to hold it as a commercial contract. Because we think this is not something that the law
and public policy would accept it as. So, commercializing of surrogacy is prohibited once
there is no commercializing of surrogacy, a contract of surrogacy is not a contract, it is now

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going to be governed under the law of 2021 in India, and that will be the basis of
determinations of rights between the parties in the contract as well.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Formation of Contract: Legality of Object & Public Policy – Part 04

The last aspect of the discussion under Section 23 of the Indian Contract Act is on
employment bonds. This would give an idea of the vastness and coverage of section 23, as it
covers every other aspect of public policy dimension. It gives the mandate of intervening in
unfair contracts or unreasonable contracts on the grounds of public policy.

Employment bond, or what many would see in the market as indemnity bond is a contract
between an employer and an employee, where the employee has to give an undertaking that
he will work for the employer for a minimum duration of a time. It could range between 1
year, 3 years, 5 years or even beyond that. This kind of a clause in a contract is quite
common. It is equally visible in private sector employment contracts and public sector
employment contracts. The issue of employment bond arises from the fact that an employer
tries to use his bargaining power, which is a higher bargaining capacity, to determine the
terms and conditions of employment.

One of the justifications for an employment bond is the high rate of attrition in employment
today. According to the Springboard Theory, an employee joins his first employer and he
uses it as a springboard. So, he makes a jump, he takes a leap and actually joins someone
else. First employment is just the first window of opportunity to open for a person. He can
‘Springboard’ from there and actually go on to join rivals or competitors. Hence, employers
feel aggrieved as they have spent so much of time in recruitment. For instance, in the public

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sector undertaking recruitments, a considerable amount of time is spent in the recruitment
process itself, in the form of examination and interview. More importantly, once the
recruitment process is completed, there is a training that is usually given to employee. A lot
of money is invested in training, which may range between one month to one year. Hence, if
the employee leaves and joins rival or competitor that will actually be disadvantageous to the
company or to the employer. Hence, employers feel the necessity to have this bond. They feel
that it is reasonable to have this bond so that in lieu of whatever they have done so far in
investing on the employee skill or in his enhancement of his knowledge and training, the
employee is duty bound to work with them for a minimum duration of 3 years or 5 years.
This is also based also on a justification that an employer and an employee share a fiduciary
relationship. It is a relationship of trust, confidence and loyalty.

Secondly, employment bond is also justified by employers on the ground that every employee
who joins an organization gets to know a lot of trade secrets. They get access to lots of price
sensitive material and information. They are privy to the marketing and business strategy. So,
a company's trade secret often gets compromised when key employees leave an organization.
This effects business and is advantageous to competitors. Hence, a lot of innovative clauses
have been designed today in employment contracts and this clearly is a public policy matter.

Why is this a public policy matter? Recall that during the Industrial Revolution, there were a
lot of labor strikes that took place because many of these companies and industries engaged
in unfair labour practices. Employers and industrialists exploited labor and that is why we
have seen, not only in India but world over thanks to the interventions of International Labor
Organizations, a lot of labor movement and enactment of labor laws. These legislations are
pro-labor legislations. All the labor legislations are a result of the fact that employers
tendency to abuse their bargaining capacity to have unfair trade and unfair contracts with
their employees is well-known.

One of the major challenges to employment bonds is reasonability. Should a company which
is very large enough and has thousands and lakhs of employees start making this employment
bond applicable for every category of employee be allowed to freely to exploit? Secondly,
who decides who gets to decide whether the employment bond should be for 1 year or for 6
years? Most often, the employers get to decide. However, shouldn’t any such tenure or term
be reasonable to the extent of protecting the employers’ interest, and also balancing the
interest of the employees.

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Employees feel concerned about employment bond as they feel that their freedom to gain
employment, freedom of livelihood, freedom of choice and freedom to change their
employer, gets adversely affected by an employment bond. In the Constitution of India, we
have article 19 (1) (g), which guarantees every citizen the freedom of trade, occupation and
business. While article 19 (2) in the Constitution definitely talks about reasonable restrictions,
and public policy is one of those reasonable restrictions, here your freedom is getting
restricted contractually. There should be an evaluation of whether the restriction is necessary,
to what extent it is necessary and to what extent it can be actually tempered down. Hence,
public policy in employment is a very critical factor and employment bond of the current
context are critical.

Till the Courts intervened, the employment bonds stipulated conditions such as an employee
has to mandatorily work for a minimum duration of 3 years and if he wishes to leave within
those 3 years, he has to pay 3 lakh rupees. This 3-lakh rupee as compensation to be paid in
case of the breach of the bond is kind of an exit clause. To escape the bond, he has to pay 3
lakhs. The employee ultimately ends up compensating the employer for his breach of
contract. This is like a weapon, a stick or a warning pill that employers keep with them, so
that they know how to enforce some kind of a loyalty from their employees.

Critics of employment bond have said that this is nothing but modern day bonded labor. In
the earlier form of bonded labor there used to be iron chain around employees and laborers
and they were forced to do bonded labor. In the modern type of bonded labor, the contract
still binds chain around the employees asking them to work with them for 3 years. If you read
contract law clearly this kind of 3 lakhs is supposed to be what we call as anticipated loss or
pre-estimated loss and it is not actual loss.

What you lose when an employee leaves before 3 years is based on foresight or calculation,
such as the amount that is spent on recruitment, training etc. and is a pre estimate. To a large
extent pre-estimations of losses or damages in contract are called as liquidated damages. This
is covered under Section 74 of the Indian Contract Act. If one applies liquidated damages to
employment bond, it ought to be reasonable. If it is not reasonable, what you have anticipated
or pre estimated will not be enforced by the courts.

The Courts have said that any kind of exit arrangement in which the employee has to pay to
the employer ought to be reasonable and proportionate. Proportionate, because there are
possibilities that employees may leave, say after 6 months have lapsed from the three-year

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bond time. How much should a person who was going to leave after 6 months pay as
compared to a person who serves 2 and half years of the bond time? Can it be said that both
have to pay 3 lakh rupees. Courts have been unequivocal in holding that unless the rule of
proportionality is applied in the contract, the amount that is just blanketly arbitrary and one
sided as mentioned in employment bond is not going to be enforced or recovered as damages
under contract law.

If it is regarded as liquidated damages, the rule under Section 74 applies which is why
companies have been very clever enough to design the contract in a manner where they call it
as the indemnity bond. Then it is a contract of indemnity, which gets covered under Section
124 of the Indian Contract Act. Indemnity is also kind of a promise to cover your loss. It
makes it incumbent upon an employee to cover the risks that may arise from his recruitment
and any such loss that may occur due to his early exit from the company. This is an assurance
that an employee ought to have given under an indemnity bond which gets covered under
Section 124. Once it is indemnity, it gives the employer a broader right to recover many
things that cannot probably be done under Section 74. Indemnity covers the right to recover
damages, costs and any other indirect loss that may be accrue due to the loss of the employee.
So, the employers prefer to call it an indemnity contract simply because of the fact that the
broader aspect of the right to recover in indemnity is advantageous to them.

In the law of damages, there is this rule of remoteness which lays down that you cannot
recover remote damages. In the law of damages there is this proportionality rule that has
come into place and hence there is disadvantages there. Even if you call it indemnity, cover it
under a different section of the Indian Contract Act so that you can get broader rights, you
can only get direct losses. This would rather make the employee far more accountable and
liable for any kind of a breach of the bond and the enforceability of the same becomes far
more effective. This is why companies and contract lawyers call the employment bond as an
indemnity bond.

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Under the Indian Contract Act, Section 26 says agreement in restraint of marriage is
considered to be void. Section 26 is lays down that contracts and agreements that will affect
the rights of people to get married cannot be made. Restraining someone's choice to get
married is void.

We do not have a modern contemporary case law to explain section 26. Consider that there is
a contract between two widows who have lost their husband that if either one of them gets
married, they will lose their rights over the deceased husband's property. If one of them
decides to get married she will lose her succession rights to her first husband's property. Such
kinds of agreements have been evaluated by the courts to see whether it attracts Section 26
because it is restraint to marriage. There is also a question that once you are going to marry
for the second time, you can inherit your second husband's property. So, is it fair, that the
continuing widows gets to keep the entire property of the first deceased husband? Or should
this agreement be treated as restraint of marriage? Restraint to marriage means that an
agreement probably restrains from getting married. It is a promise undertaken by someone
that they won’t get married. Hence, this is an agreement and a contract. The drafters of the
Indian Contract Act had to clearly state that marriage is a personal choice of parties and that
there cannot be any contract that restraints such personal choices. So, commercial agreements
and contracts have no business to enter into the choice of marriages. That is probably the
message that comes from Section 26.

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It would be appropriate to discuss the issue of pre-nupital agreements under two sections of
the Indian Contract Act. First is Section 23, which talks about agreements opposed to public
policy. Second is Section 26 which talks about agreements in restraint of marriage.

There are three aspects in a marriage; the marriage itself is a contract, there can be an offer
and an acceptance and there can be consent in marriage. Moreover, the definition of fraud
under the Indian Contract Act and the Hindu Marriage Act seems to be almost similar.
Marriage can probably look like a contract, but you will notice that once special legislations
were enacted like the Hindu Marriage Act, the Muslim Marriage Act and Christian and so on
and so far, then marriage is governed under those special laws and it may not be covered
under the contract law. So, divorce is not considered breach of contract. So, marriage is
outside the domain of contract.

Similarly, you will notice that if there is a divorce, then can there be some kind of a
settlement agreement between husband and wife for maintenance. Such kinds of
arrangements between a husband and wife for maintenance can be an agreement enforceable
at law. So, there can be a mediation and a settlement agreement and it can be made
enforceable at law. There are some elements of contracts that can be brought in to post
marriage arrangements.

Now, pre-nuptial agreement is before marriage. In the United States or even in the Europe
and in UK, it is quite a common practice among celebrities to have pre-nuptial agreements. In
the United Kingdom, there have been some very interesting cases of pre-nuptial agreements
and the challenges of its enforceability. Now, while pre-nuptial agreements exist in US, UK
and Europe, the question in India is, can we consider any of these as enforceable? Because,
there is a lot of sanctity that is involved with marriages. There are religious and customary
practices that govern marriages. Should it be governed to the Indian Contract Act?

Marriages are spiritual, they can be attached with religion or it can be under the Special
Marriage Act as well. You can go and register in marriage, but we think that it is a social life
or social circumstances. So before that, can the husband and wife or the parties and partners
to a marriage have something called a pre-nuptial agreement? This is possible. It is nothing
but a partnership, a kind of an arrangement that the parties would want to make before
marriage, because there are many advantages attached to pre-nupital agreements.

Pre-nuptial agreement anticipates breakdown of marriage. For many of us, it may look like
there is a distrust that is already created by making such an agreement. But it is the job of a

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contract to anticipate risk and that in case there is breach, these are the liabilities and these are
the obligations between the parties.

If there are two celebrities, who have their own property that they made before marriage and
their intention is very clear that they do not want to merge the assets and properties that they
made before marriage as matrimonial property. They do not want to merge it after marriage.
So, they want to keep it separate. Now, after marriage, whatever property and assets and cash
or whatever they flow, that will be considered as a matrimonial property to which both parties
have valid equal share. A pre-nuptial agreement works pretty well in those circumstances,
because breakdown of marriage is some kind of a purpose that people can definitely
anticipate as they go forward. You might have seen that with various celebrities, politicians
and others who have undergone divorce, the immediate rescue part has been the pre-nuptial
agreement that is in place.

A pre-nuptial agreement also restricts the discretion of the judges in deciding issues of
maintenance.

When maintenance cases are decided by the judiciary, they might be guided by principles
such as 50 percent of the salary 50 percent of assets, of whatever is earned by the earning
member in the partnership should be shared with the other partner. Pre-nuptial agreement can
actually look at it from a very interesting perspective of trying to cap that kind of
maintenance that the judges would want to decide. Maintenance may be agreed at, say 30
percent of the last drawn salary, or it could be a lump sum alimony that has to be granted.
Alimony is a lump sum amount and maintenance is probably a regular kind of payout. Even
the Indian courts today do not give maintenance because that is a continuous kind of a duty
and obligation that has to be monitored by the courts of law, sometimes it may be difficult to
even enforce it. So, one-time alimony payment is what is generally the courts insistence even
in India.

Pre-nuptial agreements also deal with issues of custody of children. When divorce occurs, it
is important that the best interest of the child be taken care. This is the principle in India and
usually it is considered that for a child of below five years it is in its best interest that it is
with the mother. After the five-year rule, it depends upon the economic and social conditions
of the partners, who the child should be with and who has the responsibility to take care of
the child's education and other expenses as well. A pre-nuptial agreement can actually bring
in clarity on those aspects as well.

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Finally, Pre-nuptial agreements are very clear on division of property and assets between the
partners. The agreement has been found to be quite useful that judges have just implemented
the provisions of the agreement, whenever divorce has taken place. And hence, divorce is
faster, it is easier, and it is far more clear when it happens, especially in Western countries.

Now, coming back to India there are so many things that are attached to pre-nuptial
agreement that may not be enforceable in India. The arguments are that in India, the situation
is such that the legislature has drafted key legislations to protect the rights of women in
marriages such as the legislation that grants and guarantees maintenance to women in
marriages. As discussed in Section 23, anything that is forbidden by law, anything that
defeats the provision of any maintenance law cannot be prescribed under the pre-nuptial
agreement. If it is done so, the pre-nuptial agreement will be opposed to public policy. So, if
the public policy guarantees women to have a statutory right to maintenance, pre-nuptial
agreements cannot abdicate, waive or diminish those rights. Similarly, in terms of divorce,
we have clear regulations as regards child custody, child maintenance, so on and so forth.
Again, pre-nuptial agreements have to be in tandem to the statute and to the provisions of
law.

So, anything that the law assures to a child or to women, a pre-nuptial agreement will have to
adhere to those kinds of statutes and law. In case it is not adhering to the same, the pre-
nuptial agreement will be opposed to public policy under Section 23. Pre-nuptial agreements
can be made enforceable in India by keeping the statutory rights and provisions in place. If
parties still desire to have one, such an agreement can be drawn, and it can be drawn so as to
not attract void agreements. It can be drawn to ensure that the parties can make this
agreement as an enforceable one, keeping the public policy public interest and statutory
provisions that exist in India.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Void Agreements – Part 01

Section 23 and Section 27 assumes great significance in understanding contract law in

modern times.

Section 27 of the Indian Contract Act clearly states that an agreement in restraint of trade is
void. Freedom of trade, be it of an individual or companies, cannot be restricted through any
kind of agreement or clauses. If one tries to look at the justification it clearly means that even
in 1872 and also after the Constitution of India was adopted, freedom of trade was very
paramount as a right both under common law as an equitable right and then as a
constitutional right.

Section 27 clearly states that any contract, be it of service or goods, should not restrain the
right of individuals to trade with others. Therefore, when two parties come together and make
an agreement it should not say that the other party cannot trade with a third person.

In modern times the best clause to understand, appreciate and evaluate Section 27 would be
clauses such as non-compete clause. A non-complete clause clearly states that an employee
must not work for a competitor or should not establish a competing interest to that of the
employer.

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These clauses are generally there in most modern-day contracts. It is there in a B2E contract
which is called business to employment contract and also exists largely in B2B contracts
which are called business to business contracts. We will talk about non-compete clause in a
little while. However, you will appreciate that there are other clauses that can be contentious
and may attract Section 27 and those clauses could be say a confidentiality clause.

Confidentiality clauses expect that the employee or the other party maintain absolute
confidentiality of trade information. So, restraint of trade or restraint of trade information can
also be extended. Trade information is also considered as the intellectual property of an
industry protected through Patent Act, Copyright Act or Trademark Act or even Industrial
Design as the case may be. When contracts are made generally these are trade secrets that
could be shared with an employee and he is expected to maintain that information
confidentially and not misuse that information either personally or by sharing it with a third
party, especially a competitor.

One of the earliest cases in which the Supreme Court of India had to evaluate the actions of
an employee in violation of a no-compete clause was Niranjan Shankar Golikari versus
Century Spinning and Manufacturing Company. In this case, Niranjan Shankar Golikari was
an employee in a textile mill. Textile mills often have to develop a lot of technology either
developed in-house or bought from outside so that they can actually deal with market
conditions. Niranjan Shankar Golikari was a shift supervisor who was poached by a rival
company. The rival company Two Century Spinning Mills was keen to develop business and
compete with Century and hence the only way they could do that was to poach some very
talented existing employees of Century Spinning and Manufacturing Company.

Poaching in employment is a normal practice. Every new competitor wants to compete but
not probably fairly, or by following ethical and legal norms, but by probably entering into
some kind of agreement in which they poach talented employees to come and join them by
giving them some additional incentive and additional salary. However Niranjan Shankar’s
contract had a non-compete clause. This clause very clearly expected Niranjan Shankar to be
100 percent loyal to his employer. Because he was a full-time employee, he was supposed to
only work for his employer and during this kind of employment not actually serve any other
employer or compete with the existing employer. However, Niranjan Shankar decided to
apply for leave and he did not mention his reasons for leave. He extended the leave but did
not inform his company. His company found out that Niranjan Shankar was actually

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negotiating and working for a competitor. In the guise of leave of absence, Niranjan Shankar
was working against the interest of his current employer and was establishing competing
interest to his current employer.

Century Milling and Manufacturing Company wanted to enforce the non-compete clause.
When non-compete clause is aligned with the confidentiality clause, it would clearly mean
that Niranjan Shankar had a duty and an obligation not to disclose confidential information
with the competitor. If he did so, the economic value that is attached to confidential
information can be the damages that Century Spinning and Manufacturing Company could
claim from Niranjan Shankar. However, this is difficult to prove and hence, the first kind of
remedy that Century Spinning and Manufacturing Company wanted in this case was an
injunction. When you read the Specific Relief Act of 1963, injunction is also a remedy for
breach of contract. There are three kinds of injunctions that are mentioned under the Specific
Relief Act, one of which is a temporary injunction which is granted at a very preliminary
stage in the dispute. It is to save salvage, abate any further loss that can be caused to the
petitioners. A temporary injunction in this case could refrain Niranjan Shankar from working
with the rival which will adversely affect his employer’s interest. Century company can also
convince the Court that Niranjan Shankar has breached the contract and hence a permanent
injunction should be granted against him which means he can never go and join anyone else.
The Specific Relief Act also talks about mandatory injunction. Mandatory injunctions are
injunctions in which whatever a positive obligation in a contract has to be done. Mandatory
injunction is an order of the court to actually perform certain obligations that are due that the
Court has recognized as a potential final remedy.

In this case, Niranjan Shankar was found violating his employment terms and conditions.
However, Niranjan Shankar unsuccessfully argued that a non-compete clause is not restraint
of trade. The court did not admit his argument for the simple reason is that when you are in
service as a full-time employee you must show loyalty and fidelity to your own employer.
You cannot compete with your existing employer when he's actually compensating you. So,
non-compete clauses are enforceable during the term of the contract and it can be enforced
against employees who are in service. They are supposed to be loyal to their employers and
such kinds of clauses will not be considered as restraint of trade.

At some point of time teachers were also asked not to take extra tuitions because they were
full-time employees of the government and hence this extra tuitions were in direct conflict of

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interest with their services so you will find such non-compete and confidentiality clauses as a
common agreement in most service and employment contract.

In understanding Section 27 another case of significance is Gujarat Bottling Company versus

Coca Cola, a Supreme Court judgment of 1995. While we see Niranjan Shankar Golikari as a
case of a B2E kind of a contract, the Gujarat Bottling Case is a B2B contract.

The courts have always taken a very strict view of any kind of restraint of trade on an
employee. Every employee, individual and citizen has to have the right for gainful
employment and the freedom of trade because he cannot show loyalty continuously to an
employer. Once he leaves employment it becomes viewed as ‘post termination of
employment.’ During the tenure, any kind of employment restraints have been considered to
be reasonable and enforceable. However, can any of these clauses, especially the non-
compete clause, operate post the termination of employment?

Post the termination of a contract, the courts have taken a very sympathetic view and a liberal
approach in saying that employees have the right to occupation, business and trade which
clearly means that he has to earn his own livelihood, if not with the current employer who has
already terminated the service the employee should have the freedom to join any competitor,
any other person because that is his right to livelihood. Hence, the courts have said that if any
clauses operate post the termination of a contract such clauses will be considered as in
restraint of trade. If the restraint is unreasonable, then the courts will actually read down that
clause and hold the agreement to be void or the clause to be unenforceable. If the restraint is
found to be reasonable and unnecessary, then the courts will actually uphold the clause and
make it operational.

How much of the restraint is necessary post termination of a contract? The rule that common
law developed was called the ‘time-space-locality’ rule. Can it be said that an employee
should refrain from work for 10 years or that he should not work in India or that he should
not work in the aviation sector? Here, time is the kind of restriction in the first case, locality
in the second and space in the third.

This time-space-locality rule can probably apply in a B2B contract. So, take the Gujarat
Bottling versus Coca-cola case which involved a franchisee contract. In India, we do not have
any kind of a law on franchisee and hence the Indian contract law applies to such kinds of
contracts. Franchisee contracts are common and upcoming in India where there are two
parties, a franchiser and a franchisee. What happens in a franchise contract is that an agent or

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someone who can actually make goods or represent is appointed. Most of the food chain
stores like McDonald's or Nilgiris stores may adopt a franchisee kind of a trade agreement.
This is a trade trade licensee agreement where they have a particular model of business where
they partner with the franchisee in local areas as they cannot open their own factory outlet or
own store everywhere else. The franchisee will represent the trademark. For instance, the
franchisee will be the person making KFC in that local area who would get the contract,
trademark license agreement and he represents the brand KFC. His employees will be trained
to probably make KFC products. KFC will probably have a standard design for that
restaurant. Every kind of machinery and raw material would be provided by KFC. Franchisee
agreements are seen even in the education sector especially with children’s education
especially in coaching centers.

This model creates a win-win situation for two parties. However, franchisee agreements can
run into rough weather where there can be disputes, disagreements and challenges. Every
franchiser has a concern regarding the trade secrets and the operational business and
marketing strategies that would be shared with the franchisee. If the franchisee terminates the
contract or the contract comes to a conclusion, the franchisee may approach another rival
which may adversely affect the franchisers right. Hence, it is quite obvious for the franchisers
to have clauses like the non-complete clause or non-solicitation clauses.

Non-solicitation clause means that an exiting partner to a contract will not solicit the other
partner’s clients, customers, trade, contacts and networks. While non-solicitation clause is
reasonable, the challenge lies in operationalizing it post the termination of a contract.
Suppose a partner exiting from a food processing business establishes his own business in the
food processing industry. Inevitably the customers are likely to be the same even if they have
not been solicited.

In Gujarat Bottling versus Coca-cola case, Coca-cola gave a franchise agreement with
Gujarat bottling company for three years. Coca-cola shared trade secrets, the recipe of
making these drinks, trained those employees, supervised the marketing strategy etc. They
were not happy with the quality of Gujarat bottling. Coca-cola served a notice of termination
post which Gujarat bottling started negotiating with Pepsi to transfer some of their shares to
Pepsi. They did so after the notice of termination was served but not after termination of the
contract which is an interim phase.

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In this case, the Supreme Court agreed that restraint of trade post-termination can attract
Section 27. What happened in this case was a clear breach of trust and that of contractual
duties and obligations. An unwarranted hurry was shown by Gujarat bottling where it tried to
talk and negotiate to an immediate rival during the term of the contract. Notice of termination
means the contract still is going on and one cannot establish competing business during the
term of the contract including the notice period of termination.

So, franchisee contracts being B2B contracts, have a lot of valuation, business strengths and
strategies and hence in a B2B contract some of these clauses may have validity.
Confidentiality clauses, especially in franchise agreements, have been held to be survival
clauses. They can survive post the termination of the contract imposing an obligation not to
disclose this information to any third party or misuse that information. So, the agreement in
restraint of trade is valid and hence, the courts will evaluate the kind of restraint through
these clauses. They will decide whether the restraint is necessary and reasonable and if it is
not, then the clause or the contract can be held to be void. Section 27 has been invoked in
many cases both before the High Courts and the Supreme Court in trying to understand how
can contracts be made and what is the rule of acceptability of restraint and what is the
voidness that can come when restraint is imposed.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Void Agreements – Part 02

Section 27 has provided for certain exceptions which state that certain kinds of restraints on
trade is permissible. The right to freedom of trade under the Constitution of India is not
absolute and reasonable restrictions can be imposed on the ground of public order, morality
so on and so forth.

If you have sold your business, you can be imposed with a reasonable restraint of trade not to
carry out a similar trade or establishing a competing trade because you have not only sold the
business but also the goodwill of the business. This is necessary to protect the interest of the
new buyer and in those circumstances a non-compete clause can be held to be valid.

In the 1894 case of Nordenfelt versus Maxim Nordenfelt Guns and Ammunitions Company, a
gun manufacturer decided to sell his business. He named the business after him. It was
acquired by another entity. In this case, the courts said that the non-compete clauses ought to
be reasonable. The time-space-locality rule would be a critical element to test the
reasonability of a non-compete clause.

There are also statutes that agree that resident of trade is necessary. One of the statutes is the
Trade Union Act, where a member of a trade union cannot associate themselves with any
other trade union society or movement. So, an agreement in which a trade union member is
restrained from joining some other trade union is considered to be reasonable and permissible
as per the Trade Union Act and would not be considered as restraint of trade because it is

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necessary to protect collective bargaining. If there is a clause that restricts members from
taking membership in other unions such kind of restraint restriction is reasonable and will not
attract Section 27.

Similarly, under the Partnership Act, restraint can be imposed on an outgoing partner from
carrying on a similar business to that of the partnership firm. This seems obvious considering
the fact that if an outgoing partner decides to establish a competitive business to the existing
one, then the original partnership business will go down. Hence, to protect the interest of the
partnership any outgoing partner can be imposed with restrictions which are considered
necessary and reasonable.

These instances would not attract Section 27 to hold the contract void. The law on restraint of
marriage or restraint of trade is not an absolute kind of rule and exceptions are necessary. In
terms of subjectivity, Courts can, on a case-to-case basis, judge whether a restraint is
necessary or unreasonable.

In most of these cases, especially in the Nordenfelt case, the courts relied on the Blue Pencil
rule. The Blue Pencil rule is the rule of an editor who tries to strike out whatever is
unreasonable. An agreement can be allowed to be valid provided some of the objectionable
terms, years, conditions is removed by using a Blue Pencil rule. Just like an editor's
judgment, the judges can exercise discretion and rule that severing the terms that are in
restraint of trade, the remainder of the agreement or the contract can be held to be
enforceable.

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Section 28 says that agreements in restraint of legal proceedings are void. Section 28 has a lot
of significance as it underlies that invoking legal proceeding is the fundamental legal right of
every citizen.

Contracts and agreements cannot restrain or restrict such a right of access to legal
proceedings as legal proceedings are a matter of public law. If there is any such clause which
stops the rights of employees or any other contracting party from approaching the court, from
exercising their legal rights and legal proceedings including the remedies that are there for
breach of contract, then those kinds of clauses or agreements can be held to be contravening
Section 28 and hence can be declared void.

One of the clauses that has been so evaluated is called the Ouster clause. In the United States
the Ouster Clause is inserted to state that neither of the parties shall have the right to
approach to the courts of law. The jurisdiction of the courts is ousted. In the United States,
freedom of contract is kind of absolutely respected if the parties are not in an unequal
bargaining position. Courts have held that ouster clause is acceptable if the parties intend the
contract to be binding. Therefore, the intention of the parties is very relevant for the contract
to be made enforceable. Similarly, if it is expressed that the courts must not exercise any
jurisdiction, then the courts will not exercise that jurisdiction because that is what the
intention of the parties is. Private parties can determine whether to subject it to the court’s
jurisdiction or whether they would want to seek other forms of remedies. So, the courts are
not going to exercise forceful jurisdiction and in some of the states such a clause has been
held to be valid.

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Any kind of an ouster clause will be considered as a restraint of legal proceedings in India as
section 28 does not allow parties to oust the jurisdiction of the courts. The courts have been
bestowed with the inherent jurisdiction to try matters relating to contracts possibly due to the
kind of legal system that we have adopted. Freedom of contract in India is definitely not
absolute it is not something supreme that shall be respected always. The courts will exercise
jurisdiction and hold such Ouster clauses as directly contravening section 28 and this would
definitely amount to making an agreement or attempting to restrain the exercise of legal
proceedings by the court of law.

In modern day contracts, parties generally decide which law will apply to their contract by
exercising freedom of choice and freedom of contract. When the Indian Contract Act 1872
states that it extends throughout the territory of India, it refers to the fact that when a contract
is made in the Indian territory, the applicable law would not have to be chosen as Indian
Contract Act would e automatically applicable. In this backdrop, it is pertinent to understand
what a choice of law clause is. It may come into place when one of the parties to the contract
is not in India or the subject matter of the contract is to be executed beyond the territories of
India. When international contracts are made, there are three choices: either Indian law can be
chosen because one of the parties is India or the law of the country to which other [arty
belongs to can be chosen or the law of a third country can be chosen. These are three
different possibilities that can exist and hence in such kinds of international contracts the
parties have the freedom to choose the law applicable to the contract.

Would choice of law clause amount to restraint of legal proceeding? Indian courts or the
Indian legal proceedings will only apply Indian law and would not apply or interpret foreign
law or foreign contract. The choice of law will depend upon where the contract will be
finally adjudicated in terms of legal proceedings. So, choice of law directly does not attract
Section 28. The parties have the freedom to do so and in certain cases this is exercised
inevitably in international contracts which is a valid act.

The term restraint under section 28 can take two forms: if the restraint is absolute, giving no
choice whatsoever then it will attract section 28 and it will be held to be void. If the restraint
is partial, depending upon its necessity and reasonability such kinds of restraints are
permissible.

In modern-day contracts, be it government or private, choosing the forum for adjudication of

disputes which is referred to in contract management programs as the choice of forum clubs,

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can be for the convenience of the parties. For instance, the Life Insurance Corporation of
India, makes a contract they may wanted to choose one city court as the forum for
adjudication of disputes. They might have a clause which says that the city civil court of
Mumbai shall have jurisdiction to try all disputes arising from this contract and this will be
uniform across all Life Insurance Corporation of India contracts.

What are the advantages of choosing a forum? Here, what is being said is not that the courts
will not have jurisdiction but that the Mumbai court alone should have the jurisdiction to
decide disputes. Such an exercise of choice by selecting one city and its court to decide
disputes arising from the contract is permissible. However, there are some challenges arising
from the Civil Procedure Code and various other legislations by which default jurisdiction
over certain disputes is given to the courts within whose jurisdiction those disputes arise. For
example, let us take immobile property disputes, the courts in that territory can only exercise
jurisdiction over those kinds of disputes because the property is situated there.

If an Indian is entering into a contract with a French company or a French national or with
some entity in France, the parties would have three kind of forums to choose from. No French
national would accept the jurisdiction of the Indian courts due to inconvenience. Similarly, it
is definitely not comfortable for an Indian to accept the French courts as France is still a civil
law country and India is a common law country. The courts can either exercise jurisdiction
based on the nationality of the parties or it can exercise jurisdiction based on where the cause
of action has arisen or where the breaches have occurred.

Thus, the choice of forum is available but only in certain kind of contracts. If there are two
Indian parties and the subject matter of the dispute is in India, it could be against public
policy for the parties to choose law and forum outside India. This is because it would amount
to an ouster of the Indian courts’ jurisdiction. In the TDM Infrastructure Limited case, the
Supreme Court has observed that choosing law and forum outside India will not be
considered in favor of public policy.

Choosing the forum can be a tricky affair if the two parties, say India and France, choose to
go to a third country which is a neutral party. However, courts of every jurisdiction are bound
to apply the law of that land alone. So, Switzerland cannot be approached to decide the matter
in accordance with the Indian contract law or French national contract law. Choice of forum
has to be made after considering the nature of the contract and the parties, the legal system to
which the forum belongs to and whether there can be a vesting of jurisdiction.

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Arbitration is an exception to Section 28. Arbitration is accepted as an alternate dispute
forum and is akin to a legal proceeding. It is a process of dispute resolution which is outside
the court, by a panel of arbitrators. The number of arbitrators could be 1, 3, 5 or any other
odd number.

In modern day contracts an arbitration clause is there as taking a proper legal recourse is quite
time consuming. The average time in the Indian court for any commercial disputes ranges
between 2 years to 4 years in the trial stage itself. This is a long time for businesses and they
cannot afford to lose the opportunity of business, and the opportunity to make profits and
money. The courts are already burdened with the number of cases and commercial disputes
can actually add to the burden of pending cases before the judiciary. Hence, arbitration is a
viable alternate option. Arbitration has already existed in this country right from 1940. Now,
there is the Arbitration and Conciliation Act, 1996 which has been amended from time to
time.

In an arbitration, the arbitration panel is likely to devote more time which would lead to faster
resolution of disputes as it has been constituted exclusively for the contract and the dispute
arising therefrom. A specialized arbitrator can also be appointed as commercial or contractual
disputes friends need not necessarily be legal disputes and could be related to matters like
construction, engineering, design, financial etc. There are many kinds of challenges that arise
in contracts and every kind of dispute cannot be decided by a lawyer. Therefore, arbitration
provides an option of having a specialized person as the arbitrator. For example, in a dispute
that arose between Government of India and Reliance regarding pricing of natural gas, an
expert arbitrator who has actually worked in natural gas sector is desirable for ascertaining
the price at which it can be sold. considering the extraction-exploration costs and the
percentage of profit that needs to be reserved for the company. Even though arbitration does
not require advocates, most of the arbitrations are conducted by advocates as the procedures
resemble that of a court system.

Because of the recent amendments, arbitration has to be completed within 12 months. The
cost of arbitration has also been increasing because of the number of sittings and the time
taken. While the law says that the cost of arbitration should be borne by both the parties,
there are instances of change of arbitrators whenever they charge an unreasonable fee. Today,
arbitration is done mostly through institutional arbitrations, and is not adhoc. The Indian
Council of Arbitration is one such institution. The institution constitutes the arbitration panel

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and notifies a fixed fee. Hence the cost of arbitration can be reduced if institutional
arbitrations are resorted to. If the parties cannot agree on the arbitrator, the courts can help
them and appoint the arbitrator as well.

An arbitration clause is a valid exception and will not be considered as a restraint of trade. If
there is an arbitration clause in an agreement, the courts cannot intervene and it would be the
duty of the court to refer to the matter back to arbitration. Courts have to show restraint and
this makes it a viable approach to resolve disputes in an alternate forum in a more efficient
manner. Hence, the law helps resolution of disputes in a faster and more meaningful manner.

Amendments have been introduced in the Indian Contract Act which has brought about the
challenge of prescriptive clauses. These are clauses that look at the time to exercise the legal
proceeding. The right to go to the court has to be invoked within 3 years of the cause of
action or within 3 years from when the breach has arisen. Though this is the normal limitation
period for general contracts, it can vary for special contracts. For example, in government
contracts, the limitation time is 30 years.

This is how the Limitation Act of 1963 applies to what is call as the doctrine of laches or the
doctrine of delay. If anyone delays in exercising their right, then courts would not entertain
the suit as there ought to be some reasonable time that has to be fixed for parties to exercise
their right to go to the court and file cases and suits. It cannot be an unlimited time as it
would result in a public legal system disorder. Therefore, the limitation law has to be adhered
to. Even in the Consumer Protection Act, the consumer has to approach the concerned forum
within two years from the time he comes to know of a defect or deficiency in service. One of
the exceptions is that delay in approaching the courts can be condoned according to the
discretion of the court. It is usually permitted if the petitioner has suffered some physical or
mental injury.

How does prescriptive clause work? In a prescriptive clause, the time within which courts
have to be approached is reduced contractually. But this would clearly violate section 28
because it restrains your right to legal proceeding by reducing the time within which you can
exercise your right of legal proceeding. A contract cannot reduce a higher time prescription
laid down by law, failing which it would be considered as violative of public policy.

However, prescriptive clauses can be resorted to in an alternative scenario. It can be

contractually stipulated that any claim should be notified to the other party within a fixed
time. This is a common clause in insurance contracts, where, say for instance, it can be laid

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down that claim regarding a motor vehicle accident should be submitted within 2-3 months
from cause of action. If this claim is not made within the stipulated time period, the insurance
company will not be able to verify the claim and the corresponding records.

To bring about efficiency in the contract prescriptive clauses can be used. Clauses which
provide that if an employee has any claim over the employer, say, due to some injury at a
workplace he must make this claim within three months, failing which claim will be
extinguished, are permissible and would not considered in the restraint of legal proceeding.
However, the time that is fixed, say, in the insurance case is unilaterally or one-sidedly
imposed by the insurance company. This can be tested on the ground of public policy saying
is whether it is reasonable or not. This could be something that the IRDA can determine the
same and might not warrant court intervention.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 20
Void Agreements - Part 03

Two provisions that are critical for concluding the understanding of the fundamentals of
contracts are Section 29 and Section 30.

Section 29 among other things says that uncertain agreements are void. What amounts to
uncertain agreements needs to be understood. Certainty of the parties, subject matter of the
contract and the role and obligations of each of the parties is critical for enforcement of
contract.

Uncertain agreements are generally left to the discretion of the judges. Generally, such
contracts are void. Uncertain agreements are uncertain in terms of understanding what are the
obligations between the parties. Unless you understand what are the obligations between the
parties, the court does not have a role to enforce it.

For example, if A agrees to sell B 100 tons of oil, generally, we would say this is okay. So,
what is the nature of this agreement? Why should it be held to be void? If the 100 tons of
what type of oil is something that cannot be made out, it would amount to an uncertain
agreement. On the other hand, if suppose, A the seller is only dealing with one particular kind
of an oil, then selling or agreeing to sell 100 tons of oil is quite certain, because he only
trades with that oil. But if A is trading with different 10 sets of oil and there is no agreement
about which type of oil, it makes it an uncertain agreement.

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In some of these circumstances, a certainty is not arrived at between the parties. Courts may
not be in a position to help the parties to arrive at one that could be declared void. Suppose A
who is a dealer of coconut oil agrees to sell 100 tons of oil. This is quite certain as he can
only sell coconut oil and the agreement is quite certain. As there is certainty in the agreement,
it can be enforced. However, if A agrees to sell all the grains at his warehouse at Ram Nagar,
there may not be certainty about the phrase ‘all grains.’ It could be packed or unpacked, it
could mean rice, wheat, jowar or any other grain. Moreover, ‘all grains’ does not give a clear
picture about the quantity of grains either. This is why contract law under Section 29 clearly
states that it is important that the parties agree on the terms and conditions of the contract.
Courts cannot come to rescue and make a contract for the parties if they haven’t made a
proper one for themselves.

The courts do not have a role to add things in the contract for creating certainty in the
agreements as well. If A agrees to sell B his only white horse for either 5000 rupees or 10,000
rupees, there is an uncertainty on the consideration which would probably make it an
uncertain promises and cannot be enforceable under Section 29.

To consider another example, if A wants to buy a horse, which would be lucky for her and
agrees to pay 5 pounds more if it proves to be so, there is an uncertainty surrounding why
horses would be lucky for A, in which circumstances it would be lucky for her, what does
luck actually mean, whether luck is to be ascertained with reference to A’s professional life
or personal life, etc. So, promises like these are definitely not enforceable because of the
uncertainty of the variables.

Section 29 has certain important implications in both traditional and contemporary contexts.
If there is agreement to have an agreement in the future, that in itself will create a lot of
uncertainty. There cannot be a contract to make a contract. Such kinds of agreements cannot
be enforced because the certainty of the same has not been established at present.

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One of the aspects of certain or uncertain agreements which has contemporary significance is
the lock in and lock out agreements. Though these two agreements look identical, they are
not necessarily the same.

In a lock in agreement, parties essentially agree to keep on trying to negotiate until it is

complete. This is generally done in good faith out of parties’ desire to ensure that the
negotiation does not fail. Therefore, the parties lock themselves in to not give up until they
succeed in the negotiation. In lock in agreements and lock out agreements, parties have to
clearly state the purpose behind the agreement at the preliminary stage of negotiation which
ensures that till the purpose is accomplished, there is no option of going out. It might appear
as if it restrains the parties or attracts Section 27 as the freedom of trade is being infringed.

Moreover, negotiations have so many details that have to be agreed upon. At this point of
time, a lock in agreement may show that there is no complete agreement between the parties
and that they probably are not going to be enforced. How much time can be fixed as the lock
in period? If no such time is fixed, can the parties be expected to endlessly keep on
negotiating and not venturing out for doing something else? These challenges still continue to
remain. In the UK, it is established that incomplete agreements are not going to be
enforceable. A lock in agreement that does not have a time stipulation to lock in can be
considered to be an incomplete element, because time is the essence of every contract. The
duration of time for which the parties have to be locked in has to be mentioned and should be
a reasonable time if there is no such stipulation. If no reasonable time has been fixed, it
amounts to incompleteness or uncertainty about the purpose behind such locking agreements
and can be held to be challenging Section 29 of the Contract Act.

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Lock in is only for negotiation, a kind of a bargain and is not for a contract or for delivery.
So, a deadlock provision cannot probably resolve the issues that may emerge. The purpose of
the lock in agreement has to be determined and arrived at through a specific clause, failing
which the court may not be able to enforce it.

Lock out agreements or exclusive agreements on the other hand, are agreements where the
parties agree to deal exclusively with each other and lock out any third party who may
intervene in the contract.

Because of the nature of these contracts, it may seem that it restrains the freedom of contract
and may lead to them being challenged before courts. As a follow up to lock in and lock out
agreements, the parties can give or issue a letter of intent. This can be done so as to have
negotiations in the future as well. If those agreements do not work at this point of time, a
second opportunity may be given.

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In the common law, these two kinds of agreements have been already tested. In the Walford
versus Miles case of 1992, Miles owned a company which carried on the business of
photography. In 1986, they decided to sell his business, and received a 1.9-million-pound
offer from a third party. In the meantime, Walford also entered into negotiations with Miles.
While Walford negotiated, he expressed his interest to buy by offering a higher price of 2
million pounds. In a telephonic conversation between the parties, it was decided that Walford
would provide a letter of comfort from his bank for a specific day confirming that the bank
had offered them a loan facility to enable to meet this transaction, which would terminate the
negotiation with a third party. Unfortunately, Miles went back on his word and he sold the
business and the premise to a third party who was giving him only 1.9 million pounds. The
offer from Walford to Miles of providing a comfort letter so that he would not negotiate with
a third party is kind of a lock out agreement.

In the absence of stipulations regarding consideration and time, such an agreement is not
going to be enforceable. In this case, Miles’s sale to a third party is valid because what
Walford did was not supported by consideration, or a time constraint within which the letter
of comfort would be provided. Therefore, if negotiations are to have some legally binding
effect, then there ought to be consideration and a fixed time frame within which the restraint
in dealing with third parties would have effect.

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In an Indian case, a franchisee agreement was entered into by Dilip Chhabria’s DC Design
and Swift Initiative Private Limited in 2015, with a five-year lock in period. Such kinds of
exclusive franchise agreements are considered valid. DC design awarded the franchisee
contract to Swift Initiative for five territories namely Lucknow, Noida, Gurgaon, Ludhiana,
and Chandigarh. So, DC design was the franchisor and Swift Initiative was the franchisee
which was given this exclusive right to operate in these five territories. It was a lock in
agreement for five years for five territorial areas. It could be terminated only by serving a
notice. The Swift Initiative did not honor the franchisee contract as they could not open
further showrooms and some of the showrooms which were opened got shut down. So, Dilip
Chhabria decided that he will open his own showroom in one of these territories but Shift
Initiative went to the court for an injunction claiming an exclusive right to open the show
rooms. The Court examined whether the exclusivity granted to a franchisee would bind the
franchisor as well. The court ruled that it does not bind the franchisor and is applicable
against other franchisees alone.

So, exclusivity does not mean that the franchisor cannot do his own business in those
territories. It only meant that in these territories, the franchisor will not have any other entity
apart from the one that was given this franchise and that only Swift Initiative will have that
exclusivity. However, the court noticed that in this case that Swift Initiatives were yet to
operate or open shops. Hence, they were actually in default of the contract could not object to
the showroom that was being opened by DC designs. So, this kind of a lock in period of five
years is not entirely going to be enforceable if the franchisee does not work out his own way
of dealing with this contract.

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The last case on Section 29 is that of Imperial Tobacco Limited versus Oberoi Mall Private
Limited. This case dealt with an ordinary lease agreement and lease plus amenities agreement
that was to be granted to ITC Limited in Oberoi Mall. ITC had its own hotel business and
took the premises of Oberoi Mall on lease.They entered into a lease agreement and an
amenity agreement because amenities agreement is about the use of common space in the
mall. A hotel inside a mall expects the hotel guests to use the mall facilities as well. When
they entered into this contract, there was a lock in period of 60 months, or five years, as was
seen in the previous case.

The petitioners did not establish their business as they had second thoughts over it. Oberoi
Mall forfeited the security amount and sought to recover unpaid rent for the period of 60
months as a lessee has to pay the rent for the property that he uses. The unpaid rent and
amenities charges were to be levied for the lock in period.

The principle or rule of unjust enrichment applies to every kind of contract where one party is
prohibited from profiteering from any kind of a breach from the other party. Although
damages can be claimed, it is always subject to the test of reasonability and one cannot claim
more than what it is due to him.

In this case, Oberoi Mall could always find a new lessee. If ITC does not establish itself in
the property of Oberoi mall, they can lease it to someone else. If an old tenant leaves, he will
be replaced by a new tenant. Here, Oberoi Mall intended to claim rent in addition to forfeiture

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of security deposit while a new tenant was already paying them rent. This amounted to
recovery of damages in a penal character.

The Supreme Court had to decide whether this could also amount to unjust enrichment. In
this case, the lock in period was of 60 months, which meant that the contract had a minimum
duration of 60 months during which the parties had an obligation towards each other for that
the locking time. If the locking time is not respected, honored or breached, the parties cannot
claim that there was a minimum duration of time for which the rent or the lease amount has to
be paid. Unjust enrichment is prohibited in India. It is a rule which decides to permit what is
agreeable as damages and what is not agreeable as damages.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 21
Void Agreements - Part 04

Section 30 of the Indian Contract Act states that wagering agreements are unenforceable in
India. This provision says that a person who has entered into a wagering requirement cannot
bring suit or cannot sue in the courts of law in India.

Wagering agreements refers to agreements which can be considered to be uncertain, based on

the kind of chance that people place on outcomes in a contract. Betting, horse racing and
gambling can all be considered to be wagering agreements. It can be said that wagering
agreements can touch the post position of illegality. Illegality holds that certain kinds of
activities are not only prohibited but also are punished which finds mention in statutes like
the Indian Penal Code, the State Police Legislations or the Public Gambling Act, which

However, in the Indian Contract Act, there is no clear mention about whether wagering
agreements are considered to be illegal, because that is not what Section 30 attempts to do.
The contract law merely states that no suit can be filed for enforcement of these illegal
activities.

Section 30 also enumerates certain exceptions. It is to be appreciated that the Indian Contract
Act was drafted by Britishers and was enacted during British era. Therefore, horse racing was
categorized as an exemption and would not be considered as a wager. So, if any subscription
of 500 rupees is promised towards the price of horse racing, it can be enforced.

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Even after independence, Courts have held that if a game involves any skill, or is a
combination of skill and chance, any kind of promises or exchange of promises or
agreements in relation to that game can be enforced and will not be covered under Section
30.Section 30 does not prohibit promises to pay the price of games of chance. However, the
courts cannot enforce such promises.

In this context, it is pertinent to note that the courts in India have adjudicated on whether a
game of chess, carom or cards can be considered to be wager. The courts have held that in
games like chess, carom and rummy, an element of skill is involved. They are not to be
considered as gambling, betting or wagering.

Nowadays, there are a lot of online gaming platforms in the market. Matters involving
gaming and gambling, fall within the ambit of State List and not that of the Union List.
Online games may be prohibited in States which find it problematic whereas other States may
not have such policies.

Betting has been perceived to be against public policy because it encourages people to waste
their money, gamble their money, invest their money into something that they may lose over
a period of time. It has been considered social evil. However, it is also a cultural and
customary practice in this country in certain communities where gambling is permitted during
certain days. States like Goa and Sikkim have made an exception for casinos as it promotes
tourism and is good for their economy. These are permitted vis-à-vis police statutes or some
special laws. However, the enforceability of the same in a court may pose problems, because
if it is considered as amounting to wagering, a promise or an agreement with the casinos may
not be enforceable at courts. The courts in Goa maybe inclined to interpret it because it has
been legalized. But the legalizing of the same, again, will open up challenges in other states
where such kind of gambling is not permitted.

At one point of time, lotteries were a common factor in India, again, bringing social issues
and issues of public order. The lotteries that existed in most states where governmental
lotteries and was perceived to benefit social welfare. A lot of States have now done away
with the system of lotteries.

The jurisprudence on wagering agreement is not uniform in India. It varies from State to
State, from game to game and from skill to skill. Therefore, the courts also grapple with
issues surrounding what is permissible and impermissible from time to time.

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In derivatives, share market, stock exchanges or in commodity trading, the money that is
offered may amount to wagering. In a wager, people come together to put money or
something equivalent to money into something which is not sure or certain or into something
that is in the future and is not within the control of both the parties or predictable. In the
backdrop of this definition, stock market is also one form of gambling. However, this has
been legitimized through State action. Therefore, legitimizing of wagers through state action
is one of the mechanisms to bring in enforceability of these kinds of contracts.

Today, a similar debate is going on with crypto currency or crypto assets. Here also, there is
nothing of a physical tangible asset and is again a gamble. Cryptocurrencies and crypto
trading are all matters that the government would be keen to regulate, especially because of
the challenges to law and order that are there from a cross border or a trans-border
perspective. In the digital age, the real challenge is to look at regulation of entities that are
beyond the territories of India and to look at regulation vis-a-vis trading partners. The State is
also duty bound to protect innocent citizens or investors who may actually lose money over a
period of time. The craze behind cryptocurrency and crypto trading reminds one of the
popularity enjoyed by chit funds in 1980s. They were promoted as small savings. However,
many of these companies defrauded participants and were eventually closed down. Citizens
must be therefore, cautious to look into government regulations before entering into any kind
of wager. What is to be borne in mind is that contracts and agreements of wager are not
encouraged by the Indian Contract Act, unless they are permitted by the special legislation as
the case may be.

Sections 31-36 of the Indian Contract Act deal with contingent contracts, i.e., contracts that
are contingent of some event. If the event happens, then the contract can be enforced. Its
significance can be understood from the recent pronouncements of the Supreme Court of
India, which has dealt with force majeure clauses in a contract. Force majeure clauses are
those clauses that include the grounds of frustration that may creep in to a contract. It could
be because of an Act of God such as an earthquake, tsunami, cyclone, unprecedented rainfall,
etc. Or it could be due to act of men or act of nature, both combined together, which
necessitates the distinction between this majeure and force majeure. Majeure is an act of God
whereas Force majeure involves acts beyond the control of parties.

The Supreme Court has said that in Force majeure scenarios, an event which may impact the
contractual promise happens. So, it is something that is contingent, where promise may not

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continue on the happening of an event. If the event does not occur, the promise has to
continue. The Supreme Court's holding that the force majeure clause is a contingent kind of
an event has assumed great amount of significance.

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The Indian Contract Act is essentially based on the law of obligations. The perfect law of
obligation that the Indian Contract Act states and puts forward are in a Chapter quite later in
the Indian Contract Act from Sections 68-72, which are called as quasi contracts. They have
enabled judges to impose obligations even in the absence of an agreement.

We have seen that as per Sections 64 and 65 of the Indian Contract Act, courts can intervene
irrespective of whether it finds an agreement to be void or voidable. If the contract is
voidable, damages can be claimed and the court can set aside the contract. The principle of
unjust enrichment and restitution applies in both voidable, and void agreements. So, no
person can actually unjustly enrich from void agreements.

There can be cases where there is no contract but the relationship between the parties
resembles a contractual one even though there is no contract. It is pertinent to look into
Section 68 which states that in case an incapacitated person, and that incapacitated person
such as a minor, a person of unsound mind, or any other individual has been supplied with
goods, they have an obligation to pay for it irrespective of whether the contract that is entered
into is valid or void. Although incapacitated persons cannot make a contract, goods would
have to be supplied to them as they have to live and they have the right to food, clothing and
shelter. The goods that are supplied to an incapacitated persons are the necessities of his life.
They would have to pay for those goods that are supplied. So, incapacitated persons have an
obligation irrespective of the contract being valid, existing or voidable, to actually pay for
those goods that are supplied to them and the goods that they have utilized. This is where the
law of obligation comes in and law of obligation is quite higher to the contractual obligation.

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Even an incapacitated person cannot unjustly enrich or make use of the goods while the
contract by virtue of which the goods were given has been held to be void. They are not
personally liable to pay and their estate or property is going to be held accountable for
payment.

These are called quasi contracts for the simple reason that since the term quasi means semi,
partial, half, it refers to a semi contract and not a full contract. So, it looks to be like a
contract because look, giving goods to a minor is nothing but a contract. But because he is
minor because he is about less than 18 years of age, the courts and the law does not recognize
that kind of a contract. Therefore, it resembles a contract and has obligations that the law
enforces.

The Indian Contract Law is supposed to be a law of private obligations and private remedies.
It is supposed to be a law based on agreements and obligations accepted between the two
parties. Therefore, it is not externally imposed obligations and largely deals with private
obligations and voluntarily accepted obligations. However, as far as quasi contracts are
concerned, the obligations under Section 68 are externally, legally or statutorily imposed and
has to be complied with irrespective of whether one accepts it or not. Therefore, Section 68
enables incapacitated persons to be held accountable for the goods that are supplied to them
as necessities of life. They would have to reimburse the person who was supplied. The Indian
Contract Act uses the terminology ‘reimbursement’ and does not state that price or damages
have to be paid. Reimbursement clearly involves just the cost of those goods and nothing
more than that.

The second provision under quasi contracts puts an obligation on a finder of lost goods.
Section 71 says that if anyone finds lost goods, they have an obligation to find the true owner
of these lost goods and return the goods back to that person, irrespective of whether the true
owner has claimed the goods or not. This finder comes across the goods on his own, without
deriving any instruction or authority from the true owner.

According to law, nobody has an authority to keep someone else's product. In civil law, there
is an obligation to find who the actual owner is and return it back.

The finder can incur a maximum of two-thirds of the cost of the goods found as the expenses
in finding the true owner, for that is all that he can recover. He has the right to be reimbursed
up to two-thirds the economic value of that lost goods, in case he has incurred expenses in

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finding the true owner which is a limitation imposed under Section 169 of the Indian Contract
Act.

In other words, if a person is in possession of someone else's property, he has an obligation of

a bailee. This is an involuntary contract of bailment. Obligations for taking care of the goods
and incurring expenses to take care to find the true owner can be imposed according to the
contract of bailment subject to the ceiling of two-thirds of the economic value of the goods.

If the true owner cannot be found, the bailee is entitled to exercise right to sell the goods.
This is only exercisable when the true owner cannot be found out. For instance, in railways,
ports and airports, there can be lots of unclaimed goods. Here, the Port authority, the Airport
authority or the Railway, as the case may be, has an obligation under Section 71 as the finder
of lost goods. The contract would have been to make the goods reach from place A to place
B. If in the final destination b, no one has arrived to pick it up, the one who has the custody of
the goods would be the fighter of lost goods.

The next provision that needs to be looked into in quasi contracts is Section 72. This has been
probably widely used in recovering tax that has been overpaid to the Income Tax
Department. Section 72 provides that if any money has been paid by mistake or
miscalculation, in excess of what was stipulated under the contract, then there is an obligation
to pay back the additional money that has been paid. The law of unjust enrichment applies in
such situations. There are several judgments where the Income Tax department and the
government were asked to return the money back under Section 72. Tax is not paid
necessarily through a contract or an agreement. Therefore, Section 72 applies to even those
relationships that are not contractual but resembles a contract. The government has been
asked to give the refund under Section 72 so as to ensure that it does not unjustly enrich from
taxpayer’s money.

Under quasi-contracts, if someone’s services are being enjoyed, which is a non-gratuitous act,
there would be an obligation to render payment. For instance, if an elderly person is being
visited by someone regularly to take care of him, feed him and provide medicines, this can be
a non-gratuitous act, and there would be an obligation to pay. Regardless of whether a
specific promise was made to him or not, whether a contract existed between the elderly
person and him or not, if he is visiting and looking after the elderly person regularly, he
would be entitled to recover the expenses incurred vis-à-vis Section 72.

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The purpose behind the Sections in this chapter of quasi-contracts are to bring in obligations
in those kinds of relationships in which no specific promises were made and there is no
enforceable contract. When principles such as justice, equity and good consciousness,
principle of unjust enrichment and the law of restitution are considered, the courts, as courts
of equity, may expect the party which has benefited from the supply of goods or the party
who has someone else's product or the party who has the extra money to give it back.

In quasi contracts, cases related to employment can also be filed. For example, the Indu
Mehta case, or the P.C Bagla case are instances where the court has ruled that government
cannot recover the salaries of employees whose employment has been subsequently declared
as illegal. Here, the government has enjoyed the services of the employees for the time period
during which they have worked. The employees worked non-gratuitously during the course
of the employment. Having benefited from the non-gratuitous work of the employees,
government cannot recover the money that has been paid to them in exchange for their work.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr). Sairam Bhat
Professor of Law
National Law School of India University
Lecture 22
Discharge of contracts – Part 01

Discharge of a contract refers to the fact that the contract has been concluded and the
obligations between the parties have been discharged. Today the parties themselves decide
what the effectuation date of a contract would be, i.e., when the obligations will commence.
Obligations need not commence as soon as the parties to a contract have signed the contract
or have agreed to the contract. They can actually fix a date which is different from the date of
the signature of the contract. Each contract also has an expiry date say, 2 years, 3 years or 5
years which means that the obligation between the parties will come to an end by 2, 3 or 5
years.

The Indian Contract Act, 1872, deals with termination of obligations in a contract. The term
vinculum juris means a legal bond. Contract creates a legal bond which can conclude at some
point of time. So that is what we refer to discharge of contract as conclusion of the contract.
When does the obligation terminate? In a sale of a property, it comes to an end when the
buyer has received the house and the seller has received his price.

There are various modes by which a discharge of a contract can take place. The first and
foremost among them is by performance of a contract. For example, a seller has an obligation
to perform sale by transferring the possession and ownership of the house. When the seller

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performs this obligation, he would be discharged from any further obligations. Similarly, the
buyer can be discharged only when he has paid the entire price to the seller.

Second form of discharge from further obligations is breach of contractual obigations. If

performance does not happen or if the parties do not fulfil their obligation, the contract would
be breached. In other words, breach of a contract is the non-performance of a contract or the
non-fulfilment of the promise by the contracting parties. When either of the parties have
committed breach, they have contributed to the fault following which the courts are less
likely to protect the party’s interest or right because a party who has committed breach or
fault is not to be entitled to the protection of the courts or the protection of law and equity.
This is in accordance with the doctrine of unclean hands.

Third ground of discharge is that of impossibility of performance. Section 56 of the Indian

Contract Act states if it is impossible for the contractual obligations to be performed and
there can be no such expectation of performance of a promise, the parties must be assumed to
have been discharged from their obligation. In India, this is called rule of impossibility
whereas in common law, this is broadly brought under the doctrine of frustration. The
doctrine of frustration is considered broad and the rule of impossibility is considered narrow.

Fourth form of discharge is by agreement. Parties can lower the extent of performance or the
obligation which is expected from the other party. A good example would be parties agreeing
to go for settlement outside of the court without suing each other. Another example could be
the settlement that is offered by banks when loans are defaulted where they agree to waive off
further obligations to pay interest if the principal amount is paid. Discharge by agreement can
be any agreement whereby the parties express their wish to not extend or continue with their
obligation. It is also sometimes referred to as discharge by alteration. This is because the
actual performance which was expected is altered by creating a new scenario because of
change of technology, change of expectations, lowering of quantity or the quality expected
etc., the fulfilment of which enables the party to claim discharge of the contract.

Contracts are not sacrosanct in the sense that once it is entered into, the same contract has to
be existent at the stage of performance of the contract. The parties on their mutual agreement
can make adjustments. A typical example of this is the price adjustment clause. A new kind
price adjustment can be agreed upon and the parties can claim discharge of contract.

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Discharge of contract can also happen by novation. If A and B agree to make a contract and
later on B wants C to perform the obligations in the contract to which A agrees, this is a case
of novation. B is discharged from the contract as it has been mutually agreed that A is ready
to accept the performance from C as well.

Lastly, discharge of a contract can happen by operation of law. This usually happens in the
case of insolvency, bankruptcy of companies or death or unsoundness of individuals. For
example, if a doctor who has agreed to perform a surgery dies before it, the contract is
terminated by operation of law as it is a contract of personal service. When a doctor, artist, or
a lawyer, who have agreed to offer services which are based on their skill, labour and
qualification, their death would operate as a discharge from personal liability to perform the
contractual obligation.

Soundness of mind is an important prerequisite to enter into a contract. It could also be that
the person who has agreed to perform a service has intervals where he is unsound. Now, the
Mental Health Care Act of 2016, perceives depression as a mental illness. A doctor who
suffers from bouts of depression may be discharged from the contract to perform surgeries.

These are circumstances where there can be a discharge of a contract without liability.
Discharge can have two consequences, either there is a complete exemption from performing
obligations or even after discharge, some obligations have to be performed. For instance, if
the doctor has already accepted an advance money for the surgery, even after discharge of
contract, he would have to pay the money back to the patient. The consequence of discharge
is that the legal relationship between the parties ceases to be in place and nothing more is to
be done between both the parties; In other words, it is the termination of the rights and
obligation that arises between the parties.

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The law has divided performance of a contract in terms of the challenges of performance that
usually are visualized, which can be foreseen or which are in reality. Performance of a
contract should lead to satisfaction. This becomes challenging due to mismatch of
expectations. In product contracts, performance happens when the product is sold. Yet, from
a consumer perspective, might not be any satisfaction which could lead to the performance
being not up to the expectation. In service contracts, performance is on a day-to-day basis and
is based on certain kinds of expectations from the other party.

In case of performance in contracts with educational coaching centres or educational

software, defining performance of the kind of services that have been procured is difficult.
Can it be based on the marks that has been scored as this is also dependent upon learning
abilities and the student’s performance in the examination? On the other hand, the coaching
institute may promise that they assure certain results and would have performed its
obligations in a substantial manner. This might not be up to the expectations of the parents,
who are parties to the contract. This is a typical defence against non-performance or lack of
performance or deficient performance. The word deficient performance assumes significance
as it is based on that kind of mismatch of expectations.

This brings us to the question of whether there can be discharge of contract if performance
has been done but it is not as per the expectations. Section 37 of the Indian Contract Act is a
allows parties to claim discharge of contract based on substantial performance as per industry
standards.

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In 2018 the Specific Relief Act was amended to introduce a different kind of performance
called substitute tip or substitute performance. This can be used to substitute the services of a
party to the contract if the other party fails to have faith in the performance of the contract by
the former. In government contracts, this is called the risk and cost purchase clause. If a
contractor has agreed to make a project or an infrastructure work and is unable to or delays
performance, then the government reserves the right to replace or substitute him with some
other party. Before this was brought under Specific Relief Act, this used to be a typical clause
in government contracts.

While remedies are claimed, more often than not the performance of the contract is
postponed. Damages or monetary compensation may be received, but the work may get
stalled, which affects the citizens ultimately. Substitute performance is a good way to ensure
that work gets completed while the dispute gets resolved. This is a remedy that can be sought
by anyone under Section 20 of the Specific Relief Act

Performance is important but time is the essence of every contract. Therefore, performance
has to be within a reasonable time, failing which discharge of contract cannot be claimed.
Delayed performance is no performance. The other party has a right to either reject your
performance or affirm that delayed performance. There can also be no displaced
performance; the performance must be at a place where the other party expects the
performance to be done.

A breach occurs when the time of performance has come and no performance has been done.

It is an actual breach if the party either communicates his inability or fails to perform his
obligations in the contract at the time and place where it was expected to be performed. It is
an anticipatory breach when there is reason to believe that the party would not be able to
perform his obligations on the stipulated time or place.

A suit can be filed for anticipatory breach which is recognised under the Code of Civil
Procedure as well as in the Indian Contract Act. The party need not wait for the actual breach
to happen and can approach the court as and when he is anticipating the breach. One of the
important remedies given in anticipatory breach is an injunction, where a seller can be
stopped from dealing with a third party or offering the house for sale to some third party or
even accepting any consideration from that third party.

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Under Section 36 of the Specific Relief Act, there are three types of injunctions; temporary
injunction, a permanent injunction and mandatory injunction. Temporary injunction helps
you to obtain a stay order at a preliminary stage when the party does not want things to go
worse. Once the case has been heard on merits, it can be converted into a permanent
injunction. Mandatory injunction is a direction of the court to a party to do something. It is
like an order of specific performance. Earlier it was a discretion of the court to grant specific
performance, but now under the 2018 amendment to the Specific Relief Act, specific
performance has become a rule. If parties have agreed to do a particular obligation it must be
performed. No other remedy is going to be equivalent or is going to be adequate enough. This
enables law to compel a party to complete his obligations in the contract. He cannot be
allowed to escape by merely paying the monetary compensation or loss.

Even though specific performance is the rule, there would be exceptions to it as a reluctant
party cannot be forced to commit the performance of the contract. In the first place, a breach
has been committed which indicates that it is a reluctant party Secondly, a suit in the court of
law, may create animosity between the parties. so there is no point in forcing him to perform
the contract. This is a challenge while ordering for specific performance. There may be issues
with the quality of performance that is being given and the courts may not be able to
constantly monitor and supervise the performance.

It is also important to ask who can seek specific performance of a contract. Generally, only
the other party to the contract can seek specific performance of a contract in a court of law.
People who succeed to contractual rights also can seek specific performance of contract.
Promoters of a company can seek specific performance of a contract. Because he is a person
who has some interest in the contract, he is a beneficiary of the contract in some sense and
can claim specific performance.

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Section 37 of the Indian Contract Act says that the parties to the contract must either perform,
or offer to perform, their respective promises at the time when the performance of the
promise is expected, unless such performance is dispensed with, dispensed means the other
party does not wish to take a performance or is excused under the provisions of this Act.
Notably, in Section 56 it is stated that a party may be excused from performance of a
contractual promise or of any other law. There could also be special legislations due to which
the performance of the contract has become illegal or is restricted or prohibited.

For a party to claim discharge, it is important that he tenders his part of the performance. If
after the performance is tendered, the other party does not accept the tender or does not
provide a place for performance or has dispensed or excused that performance then to that
extent discharge of contract can be claimed.

When contracts are made and promises are exchanged between the parties, they bind the
representatives of the contracting parties, i.e., the promisor and the promisee. In certain
instances, the legal heirs or the next of kin of the family members of those who have actually
made contracts may be responsible for performance of a contract unless there is a contrary
intention that appears either from the contract or from the kind and type of contract.

As was discussed earlier, a contract of personal service will not bind the representatives of
the promisor at all. But in other contracts performance may be expected from the legal heirs,
and hence, they may be responsible to tender performance or perform unless it is dispensed or
excused with.

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If a party to a contract has to do something, the other person may have to pay the
consideration or the price for the same. So performance is mutual and the parties in normal
circumstances can expect mutual performance. Therefore, readiness and willingness to
perform is critical. This is important for the court to judge whether the party has come with
clean hands and whether he can be given the remedies for breach in case breach happens at
later point of time.

Most contractual performance will depend upon the skill of the parties. Unless the skill can
be acceptable from any other individual, the party who has agreed for the performance must
perform and he cannot delegate the performance to anybody else. So, delegation of
performance is not possible. However, the Indian Contract Act, stipulates that a ccompetent
person can be employed to perform the contract. It should also be convincing for the other
party that the delegation has been to a competent person and that it will not compromise the
expectations of performance from the contract.

The law says that performance should be unconditional. No new condition or pre-conditions
can be imposed for performance. If this is done, it would be conditional performance subject
to the acceptance of the other party. So, performance has to be unconditional, it must be as it
was agreed in the contract and nothing new can be added at some point of time. Conditional
performances or any additional conditional performances or imposition of pre-conditional
performances may amount to a breach if the other party does not accept the same.

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As has been discussed earlier, the promisor himself may perform or expect some of his
representatives to complete the performance. Moreover, performance must be made at the
proper time and the proper place. No law can stipulate the proper place or time. Proper place
usually means the place of the buyer. It is the duty of the seller to see that the goods are in a
deliverable state and it has to be placed at the buyer’s disposal. It should be delivered at a
time when the buyer requires those goods. Therefore, when it comes to proper time and
proper place it is viewed from a buyer's perspective, which the seller has to meet. This is an
implied rule unless there is anything contrary expressed in the contract.

It is also important is that the promisee must have a reasonable opportunity to ascertain the
thing that is offered and whether performance is of a whole or a part. This means that the
buyer or the promisee should have a reasonable opportunity to inspect the goods.

Performance is not going to be completed unless the person is able to open the packaging
material, see the product, test it and view whether it is as per the performance as promised or
not. Mere delivery of a packed material or the delivery of things where the promisee does not
have a reasonable opportunity to inspect or ascertain whether the performance is completed
or not, will not discharge the obligations under the contract.

In Startup versus MacDonald’s case, the seller Startup agreed to supply 10 tons of Linseed oil
to McDonald. It was stated that the delivery must be done within the last 14 days of the
month of March. Startup delivered these 10 tons of Linseed oil on the 14th day of the March
month at 9 o'clock in the night. 9 o'clock is still falling within the 14th day as the day would
end only at 12 o'clock in the night. McDonald's refused to accept it owing to the lateness of
hour. The Court was confronted with whether 9 o'clock was an appropriate time for
performance or tendering of performance. Court took note of the fact that Startup knew that
McDonald operates his warehouse quite late in the night and that he was always there in his
warehouse even at those late hours. However, despite the warehouse being open, it was found
that McDonald's did not have the opportunity to take in the goods, weigh, ascertain and then
certify whether the performance is done or not. Hence, it was held that Startup did not
actually perform at the appropriate time though it was at the appropriate place.

Afovos Shipping versus Paganan is another interesting case in which a ship Afovos was
supposed to be chartered by the defendants and the due date for payment was 14th June 1978.
The defendants who had taken this ship instructed their bank to make payment by telex to the

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appellants because they had hired the ship. The payment instruction was given to the bank
and on 13th June it sent the telex. Unfortunately, it was accidentally sent to a wrong address
which was discovered only by 19th June. On 14th June itself the ship owners issued the
notice of default to the defendants. The Court observed that sending of notice on 14th June
was not appropriate as there was time to tender the payment till midnight of 14th June. Time
is the essence of a contract.

In Navin Chandra versus Yogendra Nath Bhargava, Navin had rented a premises from
Yogendra Nath Bhargava. Navin sent two cheques to pay his recent which was rejected by
Yogendra Nath on the grounds that he would not accept cheques. Although, ordinarily
cheque is a good medium of payment, in this case the parties had clearly agreed that payment
through cheque was not acceptable and that only cash would be acceptable. Hence, the tenant
had actually defaulted by not making the payment as per the agreed mode, though he was
ready to make the payment. The court agreed with the landlord because that was the terms of
the conditions of the contract and once a mode of payment has been agreed within the parties
any other mode cannot be used. A conditional performance is subject to rejection or
acceptance as the case may be and that is the basis on which the court said that the defendant
was entitled to refuse acceptance of the payment of the check. Therefore, parties must
perform at the proper place, time, unconditionally and they must tender the performance
failing which they shall be liable for breach of contract.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr). Sairam Bhat
Professor of Law
National Law School of India University
Lecture 23
Discharge of contracts – Part 02

Performance can be actual or complete performance when all the obligations under the
contract has been fulfilled and every duty that was expected in the contract has been
performed. Generally, when such a contract has been completed in its performance, the
contract ceases to exist and a party who completes the performance of the contract can expect
the simultaneous or mutual performance from the other party. This is the kind of performance
that concludes the contract.

As against this, there is partial performance where for some reason the party may be
unwilling to perform due to certain factors, misunderstandings, circumstances. Rule of
Quantum Meruit is important in cases of partial performance. Suppose, if in a works contract
30 percent has already been performed and 70 percent is remaining, it would amount to a
breach. However, according to the rule of quantum meruit since 30 percent has already been
performed, the contractor would have to pay to that extent. In such cases, the doctrine of
severability applies so that 30 percent can be severed and it can be separately valued in terms
of the merit and the quantum of work that is already being done. If that 30 percent cannot be
separated in terms of what has been done and the severability doctrine cannot be applied, then
partial performance will not amount to discharge of contract and will amount to breach of
contract.

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Substantial performance is considered as complete performance. A claim of substantial
performance from one party is much better than the claim of breach from the other party. The
justification behind doctrine of substantial performance is to avoid the possibility of one party
omitting his liability by claiming that the contract has not been completely performed. It is
applicable only if the contact is not an entire contract and is severable. It is decided according
to the fact and circumstance of each case and does not mostly apply to sale of goods. It can
apply to construction or employment contracts, where substantial performance can be
claimed. The opposite of substantial performance is called strict compliance, which means
only 100 percent of compliance with the contractual obligations would ensure discharge.
Strict rule of performance can be expected in certain types of contracts and substantial
performance is not a plea that can be accepted in most circumstances.

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In Dakin v. Lee, a contractor was hired for the repair of a house. The requirement was for a 5-
inch diameter of a concrete underpinning. But the contractor only constructed 4-inch
diameter solid, concrete wall. One of the referees of the dispute review board found that the
contractor had not performed the contract as he constructed 4-inch diameter where he was
supposed to do 5 inch. Hence, it was held that he could not claim the payment at all.
However, the court also observed that there was a distinction between failing to complete and
completing it badly. Bad completion definitely does affect the structure and safety of the
house and cannot be considered as performance. However, it can be considered performance
in terms of quantifying the meruit of the performance and in the quantifying the work that has
already been completed, the contractor has to be paid.

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In FW Moore and Company v. Landauer & Co., an order was placed for 3100 tins of peaches
from FW Moore and Company. The contract between the parties stipulated that the
consignment is required to be packed in cases of 30 tins each. When the goods were
delivered, in each of the packed cases there were only 24 tins. However, the total number of
3100 tins was met with this arrangement. The buyer refused to take delivery. The question in
this case was whether the buyer was entitled to reject the delivery.

Strict compliance is usually a requirement in sale of goods, especially when sale of goods by
description is made. The court said that this was a typical sale of goods by description and if
the goods that the delivery do not correspond to the description, then the sellers who has
delivered these goods in a different description will have to face rejection. Is this harsh on the
seller because 3100 tins were delivered irrespective of whether it was delivered in case of 30
tins or 24 tins? Notably, in many of these instances, the buyers may actually have planned to
receive the consignment as 30 tins in one case and not 24 tins because it consumes lesser
storage space. Moreover, every description that has been stated by the seller becomes
material fact in the sale of goods and hence a strict compliance is required. In this case the
plea of substantial performance was not accepted by the court.

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(Refer Slide Time: 14:17)

In Bolton v. Mahadeva, the owner of a house contracted Mahadeva to install a central heating
system for 560 pounds. When the system was turned on, the owner found that the rooms were
not hot and were very uncomfortable. Although there was heating, it was uneven, though it
which was giving rise to fumes. The owner of the house refused to be pay as the central
heating system had completely failed. The court evaluated this performance; a central heating
system when it is installed should heat the house adequately and fumes would make living in
the house uncomfortable. This was held to be not amounting to substantial performance. If
the contract does not fulfil the material objective of the contract, then to that extent the
substantial performance will not be accepted and the breach would definitely be established.

Let us test whether the following is substantial performance. In a contract wherein one party
must supply 100 pumps, only 95 were delivered. Can this be considered substantial
performance for which payment needs to be done? If the party starts using the 95 pumps, rule
of unjust enrichment would mandate him to pay for it. If the number 100 was material and
important and without 100 pumps the party cannot go forward, based on the facts
circumstances and subjective character of the contract, the number or the figure in a sale of
goods can be considered to be under the strict rule and there can be a right to reject the
consignment.

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It has already been discussed that time is the essence of performance. When time stipulated, it
is expected that the performance of the contract be done either before the time or at the time
when it is expected. So, time is critical because that is the basis on which the expectation of
contract and commercial matters take place. It can be inferred from the intention of the
parties whether time has been specified to be the essence of the contract. How do you look at
the intention of the parties? Words used in the contract, the nature of the contract, the nature
of property and the surrounding circumstances needs to be looked into. These are four critical
factors through which time is judged by the courts of law.

Nature of property is to be looked into because normally under the Transfer of Property Act
there is a presumption in case of sale of immoveable property that time is not the essence of
contract unless the contrary intention appears from the contract itself. Time is not considered
critical here because sale of immovable property involves a lot of documentation and due
diligence. Hence, the intention of the parties would matter if the parties have clearly
mentioned that it is of essence.

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In Govind Prasad Chaturvedi v. Union of India, Govind Prasad entered into an agreement
with Hari Dutt on March 24, 1964. Govind Prasad was a tenant who wanted to purchase the
property from Hari Dutt his landlord. Govind Prasad handed over 4000 rupees as earnest
money, and the terms of the agreement stipulated that Govind Prasad would get the sale deal
executed within two months. He was given two months’ time and it was fixed on May 24,
1964. In case he fails to do so, the earnest money paid by him to Hari Dutt would stand
forfeited. This is usual in most immovable property transactions. Unfortunately, Govind
Prasad could not conclude the sale deal within that given time. When Govind Prasad filed a
suit against Hari Dutt for breach of contract, the trial court granted the relief of specific
performance of the contract. Hari Dutt appealed to the High Court which agreed with the
order of the trial court on the ground that time was of the essence of the contract and
therefore relief of specific performance cannot be granted.

The Supreme Court in this case came to the conclusion that in a sale of immovable property,
time is usually not the essence of the contract and hence, in such kinds of contracts, it will
normally be assumed that the parties should try and close the agreement as soon as possible
considering time being important, but it is not very critical.

(Refer Slide Time: 28:20)

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In RK Saxena versus DDA, was a case of a plot auction and the deposit of EMD. RK Saxena
was the highest bidder for the purchase of this site or plot in the auction sale. RK Saxena won
this auction and as per the terms of auction he was supposed to deposit 6,54,500. He
deposited the money on the same day and the balance 75 percent of the amount of that
auction price that was bided was agreed to be given within 60 days. One of the clauses in the
auction advertisement by the DDA was that in certain extraordinary circumstances if
sufficient cause was shown, the chairman of the DDA could extend the time from 60 days to
180 days. However, the extension of time would have a penalty of interest of 18 percent.

Saxena sought the extension of time and he was reminded to pay the interest. After the
extension was granted, he sought another extension of time to which the DDA chairperson
did not respond to. It was argued in this case that once an extension has been given, it shows
that time was not intended to be the essence of the contract. DDA had cancelled the letter of
allotment and they forfeited the earnest money. Saxena was was willing to perform the
contract and these guys have unilaterally forfeited the earnest money and they had actually
cancelled his allotment as well. The Supreme Court accepted the argument that once a
provision for extension of 180 days has been provided with interest, it clearly shows that the
DDA was amenable to request for extension of time. Moreover, in spite of the fact that the
second request for extension was not formally granted, RK Saxena continued to pay the
remaining amount of 75 percent of the site which was accepted by the DDA. An acceptance
of payment beyond the stipulated time is an affirmation or ratification of the fact that the
delay has been condoned.

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Thus, if time is to be treated as the essence of the contract, there should be no affirmation,
ratification or condonement of delay in time in any manner, failing which, there would be a
waiver of their right to treat time as the essence of a contract.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Breach of Contracts – Part 1
(Refer Slide Time: 0:16)

The topic for discussion today is going to be Breach of Contracts. When a contract is made it
is often trusted that the contract will be performed by the parties to the expectations of the
other. Obviously, obligations between the parties must be fulfilled and completed, which is
termed as the discharge of a contract and one of the mechanisms of discharge is discharge by
performance.

Substantial performance is also a mode of discharge of contract but if performance does not
happen then a breach occurs. Interestingly, when a breach of contract occurs you will notice
that it is one party who either fails to perform his duty under the contract or where it becomes
impossible for him to perform but that impossibility is probably beyond Section 56 (doctrine
of frustration), or he has very clearly communicated that he has no intention to perform.

So, the contract is made but he has communicated that he does not intend to perform. This is
when we say that there has been a breach of contract. When a contract has been broken by
one party, the other party is often called the aggrieved party. What must be discussed now is
what happens when a party is aggrieved due to breach and what kind of remedies can he seek
from the court of law.

The basic remedy that comes to anyone's mind is the remedy for damages. Damages is
considered as one of the key remedies for breach of contract apart from other remedies that

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we can always seek and you will notice that the law on damages is specifically mentioned in
the Indian Contract Act 1872.

Sections 73 and 74 speak on the law of damages, whereas the Specific Relief Act talks about
other kinds of reliefs that can be sought in case there is a breach of obligation. The Indian
Contract Act seems to be quite a complete legislation. It talks about the rules for the
formation of a contract, the rules at the time of performance, when performance can be
excused, and the defenses available. Finally, it also specifies the remedies in case a breach
occurs.

Interestingly while the Indian Contract law spoke on damages, it was concluded later that
damages are not necessarily the only remedies that should be given in case of a breach. There
can be other remedies that should also be applicable and hence a law called the Specific
Relief Act was enacted and later it became a 1963 law as amended in 2018 currently as we
speak today.

So, there are other remedies that are defined under the Specific Relief Act in addition to the
remedies that are provided by the Indian Contract Act. You will notice that there is something
called a specific performance of a contract. Here, you can claim specific performance
because you do not want damages.

Specific performance of a contract is available when you think money in damages is not
something that will compensate for your injury due to the breach. And as an aggrieved party,
you do not want damages, you want the specific performance of the duty or the obligation
that is agreed to in that particular contract. So, specific performance is a special plea under
Section 20 of the Specific Relief Act as amended in 2018.

It can become a mandatory duty of the court to grant specific performance of the contract.
Earlier, before the 2018 amendment, the term used was ‘may’, and ‘may’ meant that the
courts may grant, and in most cases in India, unfortunately, the courts refused to grant
specific performance of the contract for multiple reasons and awarded damages instead.

The reason why damages were preferred is because it is easy to quantify the injury in terms
of loss, in the sense if you can prove damage then the monetary value of that damage is
termed as damages. So, you can prove damage to your business, damage to property, and
damage regarding contract value. So, you can provide some proof of that damage and then

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the equivalent monetary quantification of the same is the ‘damages’ that is generally awarded
to you.

However, the Specific Relief Act also mentions that in certain kinds of contracts, money
cannot be an adequate compensation in many cases and hence, what is agreed in the contract
must be performed and that is when specific performance is ordinarily granted. For example,
when you think that you want goods that have intellectual property, money cannot buy any
other patented commodity.

In cases of intellectual property goods, I think the specific performance of the contract can be
granted. Apart from that, the Specific Relief Act has other remedies that can be granted.
Quickly mentioning two of them, one is injunction which courts grant in contracts and the
second is what we call the rectification or cancellation of an instrument. These are
possibilities that can be taken in case a breach of contract occurs.

(Refer Slide Time: 6:00)

If you look at the types of breach of contract, essentially, I think it is very important to
understand that there are two kinds of breach, one is called actual or present breach the other
is called anticipatory breach. Now, an actual or present breach means that when the time to
perform the contract has come, i.e., the due date of performance has come, and the
performance is not done, that is when an actual breach of contract takes place. However, an
anticipatory breach is a very interesting provision in law, which gives an aggrieved party the
right to go to Court even before the due date of performance arrives. So, anticipating a breach
is a breach that has not occurred yet.

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It is not certain. But still, you are anticipating that a breach exists because there is a certain
expression of an intention by the other party that he has no intention to complete or perform
his contract on the due date. That is when you anticipate the breach. Now, the question is if
you can anticipate a breach, can you go to the court and seek remedies even before the due
date?

That is the real question. Can you file a suit of an anticipatory breach in court or can you only
file suits of an actual breach? It is important to note that if you talk of anticipatory breach,
most of the cases of anticipatory breach must be treated as actual breach and if they are
treated as actual breach then the remedies are the same between Specific Relief Act and the
Law of Damages.

So, Section 39 provides an idea about what can be anticipated in terms of performance of a
contract in cases where someone who tenders performance is good, i.e., he has the intention
to perform. But if he tenders non-performance or expresses his intention or doubt that he no
longer will be bound by the contractual obligation then a case of anticipatory breach can be
easily made out from his words or conduct.

And that would give the aggrieved party an immediate right to terminate the contract and
claim remedies instead of postponing his remedies at the time when the actual breach takes
place. What are the options for the parties in case of anticipatory breach; one is to rescind the
contract immediately and bring an action or one need not rescind the contract but they can
wait for the actual date of performance to occur because maybe there might be a change of
mind. So, this is an option parties can exercise in case of anticipatory breach.

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(Refer Slide Time: 8:37)

Now, to understand anticipatory breach, the De La Tour case is an interesting one, a very old
case of 1852, even before the Indian Contract Act was enacted in 1872. Here, a person was
supposed to accompany the tour on a ship to Europe and he was supposed to be paid 10
pounds for his services.

He had promised to join the same. However, before the tour could even commence, on 11th
May, this person informed the tour that he was no longer going to join them. So, the tour was
supposed to start only on the 22nd. So, can someone bring an action before 22nd May, which
is the due date of performance of the contract?

So, he was supposed to join only on the 22nd, but on the 11th of May, he communicates that
he is no longer interested and the issue here was whether someone can institute a suit before
the 22nd of May. In today's time, a suit instituted in Court probably takes a couple of months
before it can even be listed or heard for the first time or the court accepts your petition. But
this case occurred in 1852 and hence, the question was could that be done?

The court said, “Yes, it could be done.” This depends upon the option of whether one wants
to treat it as an actual breach. Actual breach means after 22 May, and anticipatory breach
means 11th May, when the communication that he would not be interested to perform the
contract or come to the tour, would be the date when a case of anticipatory breach can be
made.

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(Refer Slide Time: 10:25)

Coming to the remedies for breach of contract, be it in an anticipatory breach or actual

breach, the most common remedy is damages. Damages is a kind of compensation in terms of
money or its value for the injury or loss suffered by the parties in a contract. This means the
purpose of the contract law is to make promises as binding promises, as enforceable promises
and to impose a penalty if someone does not fulfill his commercial promise.

Imposing a responsibility or liability on the parties is something that the law on damages tries
to do. In India, there are different kinds of damages that we have seen in different statutes or
different kinds of obligations and further looking at the jurisprudence comparatively, the
types of damages are divided into the following.

First is nominal damage. This is the first type of damage and it is the most common damages
that are awarded in Indian contractual scenarios. Second is compensatory damage which is a
kind of over and above nominal damages as it tries to seek all kinds of proof about your
injury. It tries to compensate you, which means it gives you a kind of satisfactory monetary
value. Nominal damage is just basic money value, whereas compensation is satisfactory
money value.

The third most important type of damages is called punitive damages, sometimes it is called
also exemplary damage, and this is over and above nominal damage.

The word punitive clearly clarifies that it is damages in the form of a penalty or in the nature
of something that is imposing a fine in the name of damages. Here, it may be that the breach
is intentional, or the breach is deliberate, or the breach is mischievous, and if he is allowed to

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get away just by giving nominal or compensatory damage there will be a tendency to repeat
the same.

Hence the court in those circumstances would want to impose a fine or a penalty in the form
of damages and say, “Please do not repeat it again and that is the reason we are imposing
such punitive damages against you, and your actions are so grave and serious that the other
party has suffered irreparable damage and hence you have to pay this as punitive damages.”

Interestingly, punitive damages are very common in the United States of America. They are
common in some other jurisdictions, but very rare in terms of common law jurisdictions that
punitive damages are ordered, including in India because this kind of damage is not provided
for or not allowed vis-a-vis Sections 73 and 74.

Because you will notice that when you read these two sections, which are the law on damages
for breach of contract, these two sections use the word ‘reasonable’ and that clearly rules out
punitive damage. So, the concept of punitive damages is not statutorily backed in India.

What is statutorily provided is only nominal damage and not punitive damage. Unless the
damages are reasonable, they cannot be claimed is what the law clearly states.

The other type of damages that we will have to note is what is known as liquidated damages
and this is provided in Section 74. The distinction between Sections 73 and 74 is that 73 is
about unliquidated damages and 74 is about liquidated damages.

Liquidated means pre-estimated damages, liquidated means something that has been pre-
agreed, it is something that is written in the contract at the time the contract is made. So, a
liquidated damages clause is very common in government contracts and you will notice that
in every government contract LD clause or the Liquidated Damage clause does not cover
ordinary breach, it covers breach in terms of delay of performance.

That is how government contracts have been designed. So, whenever there is a delay in
performance, government contractual clauses on LD state something like this, ‘in case there
is a one-week delay then it is half percent of the contract value that will be imposed as LD. If
it is a second week it is 1 percent.’ So, every week half percent is what you will have to suffer
as LD, and the contract price will be directed to that half percent or 1 percent. Here, time is
made as the essence of performance of a contract and in case the contractor does not
complete it on time, the LD starts coming into effect.

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The clause also caps liquidated damages to 5 percent of the contract value which is the
maximum that is taken as a fine, penalty, or what is termed as LD, to ensure that there is
delivery on time, there is performance on time, and the 5 percent may be forfeited from his
final payment as an LD in case he delays the performance of the contract.

So, that is how liquidated damages are anticipated and pre-estimated to factor in time as the
essence of the contract in government tendering and public procurement purposes. Keeping
government processes aside, if you look at liquidated damages broadly under Section 74, you
will notice that liquidated damages can be anything that is pre-estimated or pre-anticipated.

In the past when employment bond was discussed, I told you that in case you breach the bond
you will have to give 3 lakh rupees as damages. Please note, something that has been pre-
estimated or written in the contract. Something that the other party says, “Look, if you
commit breach this is what you have to pay me.”

All the pre-estimated kind of damages that is written on the contract even before the breach
occurs are considered liquidated damages. Liquidated is pre-estimated, pre-calculated, pre-
determined damages.

The other form of damages is unliquidated, generally which is claimed before the courts of
law, before the arbitrator, etc. when the damage occurs.

And those are punitive, compensatory damage. An interesting facet in this aspect is that if
you talk about liquidated damages, should it be based on proof of damage? That is one
interesting factor that should be considered at this point in time and we will discuss the case
regarding the same as we go forward.

Now, the rule on damages is very important, because if you look at the rule on damages,
Section 74 is a type of damage, whereas Section 73 is the rule on damages. Section 73 very
clearly says that in India as we speak under the Indian Contract Act, please note, the law on
damages in India, if you look at it from a contractual perspective is defined into two
legislations, one is called the Sale of Goods Act, the other is called the Indian Contract Act.

In cases of the sale of goods, under the Sale of Goods Act, 1930, please note, which is also a
very comprehensive law, this Act talks about various remedies for the breach of sale of goods
contract, but there is something called a special damages that are different and hence, under
the Sale of Goods Act there is a possibility of granting special damages which I think is
beyond damages that are reasonable under Section 73.

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And one can claim what we call anticipated damage, communicated damage, or damages that
are known to the other party; that is something that the Sale of Goods Act, 1930, provides for.
Section 73 very clearly brings in the rule of ‘remoteness of damage’. It very clearly states that
damages that are not direct or what is called a consequential loss cannot be granted under
Section 73.

So, what is damage that is direct from the breach? Direct from what has happened in the
contract is something that you can claim. So, a direct loss can be claimed. Anything that is
indirect, anything that is remote, anything that is far-fetched, or anything that cannot be
foreseen is always remote damages. Remote damages cannot be awarded; that is something
that Section 73 as a rule clearly states.

So, we always say that in case you expect consequential losses to be covered you must
mention it in the contract. You must write it in the contract, you must define what the
consequential losses are, and unless they can fit within what is called the ‘special damage
rule’ under the Sale of Goods Act you cannot recover the same.

Finally, it is very important to understand that as per the rules of law on damages it is
important that you have a claim as an aggrieved party, but then when you have the right to
claim damages, the law immediately imposes a duty or an obligation. So, that is the design of
the contract law. Wherever it has stated rights, it has always communicated its duties.

Now, one of the duties of anyone who claims damages for breach of contract is that he has a
duty to mitigate the loss. This is a duty that is clearly visible in Section 73. Mitigation of loss
is a rule wherein you may have a claim, but you do not aggravate the claim unnecessarily.

You have a duty to mitigate the loss to the maximum extent possible. You must take steps
and measures to see that your loss is curtailed which means just because you have a right to
claim breach or the right to claim damages does not mean you can probably gain anything out
of it. So, one of the defenses for the contract breacher or breaker is that the other party
unnecessarily aggravated the losses and that he did not do his duty to mitigate the same.

And hence he should not be entitled to the claim is something that they can always come up
and do with. So, there are counter defenses on the other side and that is that the claim is
without the duty of mitigation of loss and that is a counter claim that can always be done in
case of breach of contract.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Breach of Contracts – Part 2

(Refer Slide Time: 0:15)

If one looks at Section 73 of the Indian Contract Act, it clearly states that in compensation for
loss or damage caused by the breach of contract, the party who has broken the contract is
entitled to give that compensation to the party who suffers such loss or damage due to the
broken contract.

However, Section 73 very clearly underlines the rule that the loss or damage that naturally
arises in the usual course of things is the only kind of damages that are available. This brings
you to the distinction between direct loss and indirect loss or what we call as direct damages
or consequential damages.

Now, in India, in ordinary contracts, only direct damages are awarded. However, in cases
regarding infringement of intellectual property rights, the courts may grant you some
consequential loss. So, depending upon the kind of breach of the contract there could be some
kind of variation.

But the ordinary rule which looks at the implementation of Section 73 of the Indian Contract
Act 1872 clearly states that the loss should have naturally arisen from the breach and it is
something that should occur in the usual course of things and that is all that is what entitles

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you to get damages. So interestingly, if I can give a simple illustration of what can be such
damages is let us assume that I have promised to sell something to you.

Say it could be a laptop, and the price of the laptop is around 60,000 rupees and I do not after
making a contract supply this laptop to you. Now, what should be the damages in case I
failed to supply this laptop to you? Now, it cannot be 60,000. Why? Because you must pay
me 60,000 if I deliver that laptop to you.

So, I have saved that 60,000 for you. You have not incurred any kind of loss even though I
have breached the promise and I have not delivered the laptop to you. Here, you cannot give
proof of damages and that is not something you can be entitled to, though it can be
considered as something that has naturally arisen but the loss is not naturally arisen.

What is the loss in the usual course of such a breach of contract if I do not supply the laptop?
Let us assume that you need this laptop. Obviously, I agreed to 60,000 for the same laptop,
but because of my breach, now you must go to the market and buy this laptop at 70,000
rupees.

Please note, this difference between the 60,000 that I promised and the actual price at which
you bought is 10,000 rupees, the difference is 10,000 rupees and this difference has naturally
arisen in the usual course of this contract and is a consequence of the breach that I committed.
Had I performed, you would have just spent 60,000.

Now that I did not perform, you must buy it at 70,000, and the difference of 10,000 between
what was agreed to, and how much you buy it for is the kind of loss or damage that is caused
to you, and that is all you will be entitled to as the direct consequences of my breach of not
selling that laptop.

So now, if you look at the laptop example, we could argue that there are other kinds of losses
that have occurred and why cannot we claim damages for that? For this, we must discuss the
other kind of losses that you may have suffered. Now, let us say that the contract was
supposed to be performed on the 1st of May and I did not perform and it took some time for
you to understand that there is a breach, and by the 30th of May, you went and bought this
laptop, though, at a difference of 10,000 rupees.

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Now, these 30 days that unfortunately occurred because of a delay due to my breach, you
lost, say, an opportunity to make a presentation and if you would have done that presentation
using this new laptop, you would have gotten a new contract, and if you got that contract, you
would have made profits. Now, can I, who had agreed to supply this laptop to you, be made
responsible for all these events?

For the kind of losses that might be anticipated sometimes, you may say sometimes not
known, something that was not foreseeable but something that you want to substantiate and
say, “Look. these are the kind of losses that I could have incurred or that have already
occurred to me.”

So, everyone who supplies laptops must know that time is important to the buyer, they will
use it, it is of business value and it can result in profits and anyone who fails to supply their
laptop must also be responsible for the same, is something that people can argue and bring
that discussion forward as well.

(Refer Slide Time: 5:22)

So, the principle of remoteness of damage clearly states that “Look, you are liable to pay
damage for the loss caused by you not for every loss that the other parties suffer. So, when he
was supposed to make a presentation, he was supposed to get a contract, and he was supposed
to make a profit, I am not sure whether I have contributed to that kind of a loss.

How can I be sure that one laptop will result either in profits or losses? Is it something that I
have contributed, is it due to a natural cause of my fault? This is something that people will

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have to answer before they claim damages. So, one is what is the natural course of things in
the usual contractual business? That is the pre-checker, and what is the realistic direct loss
that is caused to the other party?

Second, it is important that sometimes you will notice that the parties if they knew that the
consequence of the breach can be a, b, and c, and hence, I have already informed you that this
could be the loss that I incur.

Then there is a possibility and a chance that look that is not remote because the party knew it,
the party was told about it, and he was informed about it, very well in advance that this is
required for the presentation. The presentation of this value, the contract is due, and hence if
you do not give it this is the loss. So, if that is already known and the breach occurs then
because of that kind of knowledge it is not remote to the contract breaker.

And he may be responsible to compensate for those kinds of losses that were brought to his
knowledge that was brought to his information as well. So, though they may be
consequential, they were something that was already informed to the other party. The second
rule is that when you talk about additional losses, again when it comes to consequential or
additional losses that are known, you must notice that there must be a direct cause and effect
theory.

So, you cannot, even if I say something to you beyond what is the cause and effect, cause of
the contract to the effect of the breach, then the courts are not going to give it to you just
because you mentioned it. So, there must be a causation, there must be a link to the direct loss
and it must be a result of the breach. It should be a kind of a chain of events that has occurred
due to the breach and not beyond it most importantly the courts will apply the reasonable man
test and they will probably give damages that are just necessary enough to compensate you
that can in a reasonable man's expectation be something that can be awarded.

But again, the reason simply is that the principal rule of unjust enrichment applies to the law
of damages in India. So, while you talk about equity, you talk about contracts in various
stages, even in the stage of remedies the courts will apply unjust enrichment and say,” Look,
you cannot avoid damages that will make him rich unjustly, you must give damages that
should be adequate to compensate him but not make him rich otherwise.

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So, reasonability and unjust enrichment will tie the hands of the judge and make him do
equity and not unnecessarily create some kind of profit or profitability for the one who seeks
the same. And what is important is that this kind of foreseeability of the kind of losses that
can be anticipated for the other party must be such that is made at the time of the contract, not
at the time when the breach occurs.

So, when I made the contract, can I foresee that this is the loss that can happen to the other
party, if, yes, or if it is not foreseeable and it is communicated, then I shall be liable for it, not
otherwise.

(Refer Slide Time: 9:18)

Now, a couple of cases that one would want to look at is the Hadley versus Baxendale rule. In
this case, it was very clearly held and please note this was before the 1872 law. Illustration 1
of Section 73 says exactly what this case is about and this case very clearly says that “Look,
if a common carrier delays in the delivery of a crankshaft to an engineer. Did the common
carrier know that the delay will cause, losses apart from just being the delay of delivery?” So,
I think the court here very clearly said that you can be liable for those kinds of losses that can
be generally foreseeable by a reasonable man. So, if I am a carrier and I am delivering
something to you and if there is a delay, for that delay, whatever is the kind of pro rata loss, I
may be responsible.

But suppose you do not get this crankshaft into your engine and because of that, you lost
customers, profitability, and business, how will a common carrier or a delivery person ever

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knows what is this used for, how valuable it is, how many customers or profit you are
making, this is not something that people will know, especially if you are a common carrier.

So, yes, a delay is to be made actionable and accountable, but you cannot expect them to
foresee your business, and your loss and expect them to cover those kinds of losses as well.

(Refer Slide Time: 10:54)

The second case is the Victoria Laundry case, this is also a very interesting case that
mentions profits. Because what this case clearly says is that you can be made liable for loss of
profit, but in profit, it is the general and ordinary profits that are lost that can be covered, and
not extraordinary loss of profits.

So, when damages are awarded to you, you are not going to be lucratively rewarded for the
breach that is committed by the other party. If you decide that yes, profits must also be
granted or what we call interest must be granted, for example, under Section 74 we say
interest on damages can also be awarded as a penalty.

And the courts have consistently held that penalty in Indian Contract Law can also be given
over and above damages, but in the form of a penalty if it so required in that context. So,
profits, that too ordinary profits are an expected loss due to the kind of lucrative business that
you are running and because of the breach, or that lucrative business is no longer lucrative.

So, to that extent, what is the benefit that has been lost in the business can be covered, but it
is not extraordinary loss of profit that will be covered in the contract.

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(Refer Slide Time: 12:25)

This is also a similar case of whether the loss of profit was too remote. Again, it was a case of
cargo that was delayed by 9 days. It was sugar that had to be delivered between two
destinations. Interestingly because of the delay of 9 days the sugar market fell at Basra and
they had to sell the sugar at a loss.

If it had arrived on time, they would have made a lot of profit. So, for this, they asked the
carrier to compensate them. So, can a carrier that deliberately deviates on its voyage,
knowing that a delay may cost loss be held responsible or liable was the question in this case.

Now, interestingly, the ship owner, in this case, knew what he was carrying and he was aware
that it was an essential commodity, that it was meant to be sold at Basra on a particular date
and there was a high probability that had the ship arrived on that day it would have been sold
for some profit and the captain of the ship, and it was a chartered ship in any sense.

Charter ships cannot have deviation. This is one important rule and the entire ship had to only
serve one customer. So, deviations cannot be justified in any manner and if suppose the delay
was of 9 days due to some other events that were not within the control of parties, probably
the court would have taken a lenient view, but not otherwise.

So, in this case, I think because of the rule of probability, I think profits were also granted in
this case because that was something that can be easily anticipated and should have been
granted to the parties.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Breach of Contracts Part 03

(Refer Slide Time 00:16)

Today, we talk about damages under Section 74 and to conclude the law on damages per se,
you will notice that a genuine pre-estimate of the prospective damages is known as liquidated
damages. Please note, it must be a genuine pre-estimate. If it is not, it could not amount to
damages, it could amount to something excess of the same which probably would be
considered as a penalty.

Generally, a mention of a genuine pre-estimate is made just to discourage a breach of contract

and that is something that you want to mention in the contract outrightly which is why
sometimes, this is permitted by law and Section 74 also states that any interest on damages
can be treated as a penalty. This is something we will see through some of the case laws
entirely.

In English law and some other jurisdictions, you will notice that damages have their position
of law. However, in India, only reasonable compensation or what is mentioned in liquidated
damages, subject to their genuineness and reasonability is the kind of upper limit of
compensation that you can gain under the contract.

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(Refer Slide Time: 1:41)

If you look at the case laws that have come into place you will notice one case, Dunlop Tyre
company was a New Garage. This was a case of a resale price maintenance agreement.
Today, resale price maintenance agreements can be covered under competition law as well
and in this case, Dunlop Tyres had told its suppliers not to sell goods or tyres below the listed
price and in case they did so they would be imposed with a five-pound penalty.

This is called resale price maintenance. Now, when you mention something in the contract
that if you do or if you do not do, we will impose this kind of five-pound penalty, then you
will notice that this becomes a genuine pre-estimate of the kind of loss that may occur due to
the breach that is anticipated by the contract.

The court in this case had to decide whether the five pounds that has been mentioned amounts
to a penalty or liquidated damages because a penalty is usually like a fine or as interest on
damages. The court had to decide these terms and conditions and that is why you will notice
what the court has laid down as the test here becomes very relevant.

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(Refer Slide Time: 3:00)

It will be a penalty if the stipulated sum is extravagant and unconscionable in amount in

comparison to the greatest loss that would have followed the breach. Therefore, anything that
is over and above the kind of anticipated loss that you may put in a contract will be
considered a penalty. It would be a penalty if the breach consists not only of paying the sum
of money but the sum stipulated is greater than the sum which ought to have been paid.

The penalty may be presumed when a single lump sum amount is payable by way of
compensation on the occurrence of one or more several events, some of which may have
serious or other trifling damage. So, anything that is over and above what is a genuine
estimate of loss will amount to being called the penalty.

The court held that it is evident that the damage apprehended by the appellants owing to
breaking of the agreement was indirect, not direct damage because if you decide to state that
this is the price list and do not sell below it, you are controlling the price in the market; you
are not allowing competitive pricing. So, are you going to suffer a loss if he sells it to you for
less than that price?

You still mention it in the contract, but if you are not going to be able to substantiate that this
is a five-pound loss for every tyre that is sold below a particular price if you can display the
same, then it would be liquidated damages or else it could be held to be a penalty.
Accordingly, the agreement is headed as a price maintenance agreement. They were held
entitled to recover the same as damages.

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(Refer Slide Time 04:52)

Now the Fatehchand versus Balkishan Das case is also important from an Indian perspective.
This was about earnest money that was asked at the time of execution of an agreement.
Balkishan Das contracted to sell a leasehold right in a piece of land and the building
constructed thereon; so, he received 1000 rupees as earnest money deposit.

And as per the contractual terms he further received 24,000 upon their delivery of the
possession of the building and the land in his occupation to Fatehchand. The sale was not
completed before the expiry period stipulated in the agreement and for this default, each party
blamed the other.

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So, as per the term of the agreement, the contract stated that the executant shall be liable to
pay a further sum of rupees 25,000 as damages apart from the aforesaid sum of 25,000 to the
vendee. In pursuance thereof, Balkishan Das sought to forfeit the entire amount of 25,000 as
liquidated damages and further made a claim of 25,000 from Fatehchand.

Now when we say that this is the initial amount, liquidated damages and when you want to
claim another 25,000 because it is like the contract and it is kind of pre-estimated in the
contract, will you be entitled to the same and can you forfeit if the contract is breached or if
the contract has not been performed due to the fault of one of the parties or both the parties.
That is one kind of element in Fatehchand that had to be decided.

In terms of the right of forfeiture, especially when advances are given in an agreement to sell
or whenever contracts stipulate that the initial amount can be forfeited in case the contract
does not get concluded. Now if you look at the phrases or wordings of Section 74 it says
‘whether or not actual damage or loss is proved to have been caused thereby’, liquidated
damages may be recoverable.

The court held that if that merely dispenses with the requirement of proof of actual loss or
damage but the necessity that there is a legal injury of the other party is a prerequisite in
awarding the compensation under Section 74. Therefore, unless you can prove legal injury,
whatever has been mentioned in the contract is not going to be recovered.

You will not be entitled to forfeit the entire amount; you will be entitled to forfeit only 1000
rupees as earnest money because that is the very purpose of earnest money. Or, if you can
prove that your injury amounts to 25,000 and that is something that I should have a right to,
then you can always claim the same, is what the court had to say in that case.

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(Refer Slide Time 07:48)

There are other cases which are also very relevant and important. The Maula Bux case is
another very important case and the principle in this case also reiterates the question of
whether actual damage or proof of loss is required under Section 74 or not. So, the courts
have been very sure of what they intend to do, when they say that unless you expect the word
‘reasonable’ to be interpreted there, you cannot enforce liquidated damages.

So liquidated damages cannot be anything that is written unless you can prove the reason for
forfeiture of liquidated damages or exceeding liquidated damages, and if you fail to do so,
your right to the same cannot be established. So liquidated damages in India is also
compensatory, it is based on your reasonable right to claim that kind of money for the injury
or the loss that occurred to you and the party claiming compensation must prove the loss
suffered by him.

So, this has been laid down by the Supreme Court from time to time saying that under
Section 74 for liquidated damages proof of loss or proof of injury to claim compensation is
essential and unless that justification is made, a mere mention in the contract will not entitle
the party to recover the kind of damages that is there.

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(Refer Slide Time 09:21)

Finally, the ONGC versus Saw Pipes case is a landmark case in many aspects including
arbitration and public policy. The courts have said that you need to make a distinction
between penalties and liquidated damages because Section 74 does try to make that kind of
distinction. Anything that is stipulated for time as the essence of a contract.

Now, in this case, you will notice I explained earlier how liquidated damages are going to be
awarded; it is one per cent of the contract value for the whole unit per week for delay thereof.
This was agreed as a genuine pre-estimate of damages and the contract also stated that such
may be up to 10 per cent of the contract and it was fixed for that day.

Now, enforcing such a liquidated damages clause in the ONGC case was very important that
was challenged in this case. The Supreme Court laid down the following principle which I
think is very important for us to understand. Now, the Supreme Court said if the parties knew
that when they made the contract, a particular loss is likely to result from such a breach, they
can agree to payment of such compensation.

In such a situation, the necessity of leading evidence is discretionary, and it may not be
required in situations unless the court concludes that no loss is likely to occur because of the
event which triggered the liquidated damage clause. So, the point is that even if you mention
any kind of liquidated damages, the courts are not entirely dispensing off the fact that they
need evidence or proof that this is the likely cause that is going to be affected through the
delay.

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The delay itself is, if you prove saying that look this was the time and this was the delay, that
itself is a kind of a loss that you can probably claim in the court of law to claim any kind of
reasonable amount of liquidated damages. The court went on to further hold that when parties
have expressly agreed that recovery from the contractor for the breach of contract is pre-
estimated genuine liquidated damages and is not by way of penalty, it has been duly agreed
that it is not a penalty, it is just a genuine pre-estimate and that we are not imposing any fine
on you, then to that extent proving any further loss may not be required. So, it is most
importantly stated in situations where LD clauses are a pre-estimate, the burden would be on
the other party to lead evidence for proving that no loss is likely to occur by such a breach.

So, if there is an LD clause and I have already informed you about the time; if you do not
supply within the time, the proof is on the other party to justify why he caused the delay and
why you think his delay has not contributed to a loss to the other party. So, shift the burden
on the contract breaker or the one who has delayed the contract and in case he can justify that
the other party has not suffered any kind of loss then an LD will not be imposed. But the
burden is on the other party to show that even though he had agreed to a particular time of
delivery and he does not stick to that kind of delivery, the loss should be made recoverable
from the other party.

(Refer Slide Time 12:24)

Finally, you will notice that in Section 75, the parties have the right to compensation, so any
person who has rightfully rescinded a contract is entitled to compensation. So, if you have
suffered any kind of injury to yourself or your property then you should be entitled to

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compensation. One who has done equity can always do equity or claim equity under Section
75 for the non-fulfilment of the obligation by the other party.

This is something that is always a matter of right, and damages is a right to a party rescinding
the contract rightfully and this is finally concluded under Section 75 of the Indian Contract
Law. So, with this, we conclude the discussion on the law of damages, where we try and
understand the importance of the law of damages as a remedy, we have discussed the rule of
reasonableness, the rule of remoteness and the rule between direct and consequential losses.

We have looked at how liquidated damages can be awarded if it is liquidated damages and
not a penalty. We have also looked at whether proof is required where we have concluded
that it is quite discretionary for the court to decide on the proof or lead the evidence and the
ONGC case puts a burden on the other party who has broken the contract due to delay that he
has factored in because he knew that despite the Liquidated Damage Clause, he delays the
delivery or goes beyond the schedule of the delivery.

So, the burden is on him to rather say that there was no loss occurred and if he could prove
that, then LD may be on a prorated basis, and if not, whatever has been stipulated can be
recovered under the contract law. That is one thing that is very clear from the discussions that
we have had so far and the ONGC case rightfully decides the parameters of liquidated
damages.

And finally, I think a very broad provision is the person who rescinds a contract is entitled to
compensation for the non-fulfilment of the contractual obligation. This is a matter of right
that you can always claim. You can be compensated and the term compensation here is quite
wide in the sense that there is a loss or injury to you or your property and you should be
entitled to the same as damages under the law of contract.

So, if you make a claim, I think it is for the courts to use the discretionary power to grant you
any kind of nominal damage that may amount to compensation from the other party breaking
the contract.

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 Advanced Contracts, Tendering and Public Procurement
Anuja Shah
Centre for Environmental law, Education, Research and Advocacy
National Law School of India University
Part 01
Liquidated Damages in Government Contracts

This presentation will take you through the enforcement of liquidated damages and some of
the landmark judgments precluded by the Supreme Court of India with special reference to
government contracts.

(Refer Slide Time 00:50)

Before understanding the enforcement of liquidated damages, it is cardinal to understand the

formula applied by courts for awarding damages. So here. the question is - is there any
statutory general formula for calculating and awarding damages?

The answer to this question is an absolute no because even courts rely on the general
principles set by case laws and precedents while awarding damages and it ultimately leads to
a lengthy litigation process. So, this session explores the possibility and desirability of
deriving a general formula for calculating and awarding damages.

Sections 73 to 75 of the Indian Contract Act 1872, deal with the law of damages, which is
dealt with under Chapter 6. Specifically, section 73 and 74 of the Indian Contract Act deals
with unliquidated and liquidated damages. What are liquidated damages? When the

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agreement between the parties stipulates the sum payable for non-performance of the
contract, damages are said to be liquidated damages. And what are unliquidated damages?

Unliquidated damages are awarded by courts or arbitral tribunals on assessment of the loss or
injury caused to the party who is suffering from the breach of contract. So, if you want to
claim damages under section 73, that is, if you want to claim unliquidated damages there
needs to be a contract, its breach and loss or damage following such breach, and is of such a
nature that it is anticipated by the parties at the end of entering into the contract.

On the other hand, if you want to claim damages under section 74 that is if you want to claim
liquidated damages, there needs to be a contract containing provisions for compensation or
penalty in case of its breach by either of the parties to the contract. This is how you can claim
damages under sections 73 and 74 of the Indian Contract Act 1872, but other essentials need
to be followed for claiming damages.

The prima facie essential is there must be a breach of contract, and unless there is a breach of
contract no damage can be awarded. The second essential is proof of loss for claiming
liquidated damages. You must provide proof of loss, and you must provide evidence of loss
in a court of law for claiming liquidated damages. An aggrieved party will not be awarded
liquidated damages unless and until evidence has been submitted in a court of law.

The third most important requirement is causation, which means there must be a link between
the loss suffered by the aggrieved party and the breach of contract. So, if there is a breach of
contract there must be a loss, otherwise, damages will not be provided. The fourth essential is
mitigation, which means every party who is breaching the contract should mitigate the loss
suffered by the aggrieved party.

He must cover the loss that has been incurred by the aggrieved party in such a way that no
contract has been performed had the contract not been performed, the aggrieved party would
not have been in that situation. Therefore, these are the four essentials that need to be
performed if you are claiming liquidated or unliquidated damages.

Once it has been ascertained as to what kind of damages are to be awarded, one must begin
evaluating the same in monetary terms. Have you ever wondered why are we emphasizing
coming up with a general formula for calculating and awarding damages? The primary idea
behind coming up with a general formula to calculate and ascertain the damages is to ensure

225
that the value expected by the plaintiff or the aggrieved party from the breach of contract is
made good to them.

But you must always consider an important point that the damages awarded should not
exceed the actual loss or injury suffered by the plaintiff or aggrieved party. Section 73 of the
Indian Contract Act 1872 does not provide for any manner to calculate the damages or
compensation following which the Supreme Court of India has laid down the damages are to
be calculated based on facts and circumstances of the case.

However, if you look at section 73, there is a flavor of a general formula for awarding
damages. You will find that essence upon considering section 73, damages would mean total
loss minus mitigation of loss minus remote loss. Please consider section 73, and please
consider the formula that is available on-screen and you will easily understand the
importance of ascertainment of market price to calculate the damages in case of breach.

In the majority of illustrations, case laws, and precedents market price is considered as a base
price for calculating the amount of damages to be awarded in case of breach of contract. If
this is applied to a parallel study of Hadley versus Baxendale, a very important judgment, one
can conclude that section 73 provides for recovery of damages, which are arising in the usual
course of business resulting from the breach.

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(Refer Slide Time 09:13)

Have you ever wondered where the idea of garbing down a general formula for calculating
and awarding damages comes from? The first feature in the legal environment regarding the
formula to calculate and award damages can be found in the law of merchant also referred to
as Lex Mercatoria. It is nothing but a commercial body of rules and principles laid down by
the merchants to regulate their dealings back in 1303.

Principle 7.3.2 of Lex Mercatoria is on the calculation of damages and it states that the party
who suffers a loss from the failure of the other party to deliver is entitled to damages and they
are typically measured by the market value of the benefit of which the aggrieved party has
been deprived through the breach of contract. It also says that the aggrieved party can
calculate the loss based on the difference between the contract price and the price of a
replacement transaction concluded within a reasonable time and in a reasonable manner.

The principle is primarily built on the preposition to fully compensate the aggrieved party and
to compensate the losses which are sustained by the aggrieved party by specifying two
important formulae. The first formula is; damages is equal to the amount to have been
received in case of performance of contract minus the amount received from the party
breaching the contract plus the cost of measures undertaken to keep the aggrieved party in a
position it would be, had the contract been properly performed.

If you look at this formula carefully you will understand that Indian courts have religiously
followed this formula; in a majority of case laws and precedents, this formula has been

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applied. The second important formula is damages are equal to the replacement transaction
concluded by the aggrieved party within a reasonable time and manner. This is based upon
Articles 75 and 76 of the United Nations Convention on Contracts for the International Sales
of Goods; it is also referred to as CISG. When you look at these two formulas have you ever
wondered whether it has been reinstated in any of the commercial codes or international
conventions? The answer is yes. This formula has been reinstated in principles of European
contract law, in unidroid principles of international commercial contracts 2016, and in the
UK Sales of goods act chapter 4.

However, due to the development of national commercial codes, the principles of Lex
Mercatoria or the law of merchants have declined to have an independent existence, but its
principles were the basis of several national codes and still find relevance to date because
many national courts have implemented the principles that were laid down in Lex Mercatoria.

(Refer Slide Time 13:47)

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Before slurping up the discourse on liquidated damages, please note that it is extremely
significant to understand the general formula for calculating and awarding damages before
heading towards enforcement of liquidated damages. Moving towards infrastructure project
contracts and building contracts, in most of the infrastructural projects, the Supreme Court
has suggested the use of the Hudson formula to calculate and award damages.

We will be discussing the Hudson formula in detail as it is extremely important, but given the
enormity and dynamic nature of infrastructural projects and the quantum of risk and stake
involved in it, it is extremely important that the rights and obligations of the stakeholders
involved need to be precisely laid out to promptly estimate and calculate the value of the
project.

This is to facilitate the disputing parties to ascertain mathematically, the relevant amount of
damages duly supported by the documents and evidence. In an infrastructural project
contractual dispute, the claims for compensation apart from the value of variations based on
rates and prices in the bill or scheduled rates and the contract can be referred to as head office
overheads.

This is a very important term as certain formulae will be discussed based on this, and in every
formula, this term has been used. This can further be divided into two categories; one is
dedicated overheads and the other is unabsorbed overheads. When you talk about dedicated
overheads, it is specific to the delay caused by an employer, so whenever any delay is caused
by the employer it is known as dedicated overhead and when you talk about unabsorbed
overhead it is usual contractor expenses like rents, salaries, etc.

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These are the subheads of head office overheads. Now, the Supreme Court of India has noted
the observations made in Hudson's Building and Engineering Contracts, that contracts which
are about competitive tendering at the national level, and considering the evidence given on
many such occasions suggest that the head office overheads and profit would come up to 3 to
7 percent of the total price of the cost that is added to the tender.

Therefore, courts on many occasions have allowed for compensation under the head of loss
of profits in addition to and over and above the actual claims. So, this excerpt is taken from
one of the landmark judgments which is Mcdermott International Inc versus Burn Standard
Company Limited and others. In this case, Supreme Court had observed Hudson's building
and engineering contracts and it had followed the formula of success.

Three formulas will be discussed. Here, the Supreme Court followed the formula of success
that has evolved for the computation of a claim for increased overhead and loss of profit due
to the prolongation of work. Quickly looking at the Hudson's formula; this formula was given
by the United Kingdom and is acclaimed to assess delay damages in an infrastructural
project.

The formula is O and P into contract sum into period of delay divided by 100 into contract
period. Now, O and P refer to head office overheads and profit percentages in the tender or
the contract. While applying this formula, head office overheads or you would say O and P,
are considered as per the contractual agreement. They are usually taken into consideration as
per the contractual agreement.

Although this formula has been used in several judgments it has been overlooked because it
depends on the tender in dispute and because the calculation is dependent on the number
which itself would contain an element of head office overheads and profits which would
amount to double calculating; that is why this formula is usually not regarded and has been
not completely but to some extent, has been overlooked because of this element of double
counting or double calculating.

The complexity involved in understanding these formulae is understandable, especially

because it has been applied in the United Kingdom, and then Indian courts have also followed
it, hence it will take some time to understand these formulae and the elements that are
involved in it.

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But it is requested to look at the formula and then read the context, to cope with what has
been laid down. So, we were talking about the Hudson formula and I would still say in my
opinion this formula is used by many lawyers in a variety of arbitration proceedings,
especially in contractual disputes regarding infrastructural projects and this Hudson formula
has led to two other important formulae.

So let us discuss the second formula which is the Emden formula which is again very similar
to the Hudson formula, as it resonates Hudson formula to quite an extent. This formula also
originated in the United Kingdom and it calculates the head office overheads and profits that
could have been achieved on a different job elsewhere and it applies to the whole
reimbursable period of delay. So, this formula is quite like the Hudson formula.

It is O and P into contract sum into period of delay divided by 100 into contract period, so
here again, O and P refer to heads office overheads and profit percentage. Although, the
Hudson formula and Emden formula both resemble each other the major difference is that in
the Hudson formula, the head office overheads and profit percentage are calculated based on
the tender numbers.

Whatever numbers are available in the tender will be taken into consideration on those bases,
head office overheads and percentages are calculated, whereas when you talk about the
Emden formula the same is calculated based on actual numbers. The actual number is taken
into consideration which makes this formula even more reliable and a lot of courts, not just in
India, but even abroad have applied the Emden formula to calculate the damages.

Heading towards the last formula of this segment and indeed the most complicated one is
Eichleay’s formula which originated in the United States of America. While calculating
damages, this formula does not consider the loss of opportunity. It is requested that the
formula is taken down for your clarity and understanding.

We will be analyzing this formula, so if you look at the complex calculation under this
formula it considers that if a significant proportion of final contractual valuation is made up
of the value of variations, say more than 10 percent, 20 percent, or whatever is the value of
variations, then an adjustment needs to be made to the formula to consider the fact that
variations themselves would be contributing to the head office overheads and profits.

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This formula is usually used when it is very difficult or almost impossible to give proof of
loss of opportunity and the claim is based on the actual cost. If you look at the formula, it
says that the total head office overhead during the contract period is first determined by
comparing the value of work carried out in the contract period for the project along with the
value of work carried out by the contractor.

Now that is allocated the same ratio and expressed as a lump sum to the particular contract.
Here the amount of head office overhead that is allocated to the particular contract is then
expressed as a weekly amount by dividing it by the contract period. The period of delay is
then multiplied by the weekly amount to give the total sum that is claimed.

This formula is widely used even in the United States; Eichleay’s formula is given a lot of
significance by the federal court circuit. The federal court circuit of America believes that
this formula is the best formula for compensating a contractor for overhead expenses. So
whenever there is a matter of compensating overhead expenses Eichleay’s formula is usually
used especially in the United States of America.

We will not delve much into the technicalities of these three formulas, but this was just to
give a brief overview of the fancy formulas that are laid out, especially for calculating the
overhead expenses.

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(Refer Slide Time 26:20)

Moving to the most interesting segment of this presentation is liquidated damages. We will
study the origin, evolution, and present situation of liquidated damages. If you talk about
origin, you will understand that liquidated damages can be extracted from common law, you
will find elaborate discussions in the judgment of the House of Lords and one such judgment
is Dunlop Pneumatic Tyre Company Limited versus New Garage Motor Company Limited.

In this judgment, it was held that the provision of liquidated damages will be enforceable
only at the time of making the contract, where it is very difficult to determine the damages
that would accrue if a contemplated breach occurred. So basically, it was held by the court
that when there is difficulty in assessing the damages that are to be provided in the event of
breach then liquidated damages will be provided.

Now keeping pace with the gradual commercial progression, the United Kingdom Supreme
Court recognized the necessity of liquidated damages in one another judgment, which is
called the Cavendish Judgment. The courts in this judgment had laid down the vintage law on
liquidated damages that was crystallized in the Dunlop case; the court said that whatever test
has been laid down in the Dunlop test is quite inadequate because of the complexities
involved in commercial contracts.

When you look at modern commercial contracts there are a lot of complexities involved and
the Dunlop test on liquidated damages is not at all adequate. The courts found that Dunlop
tests can be used merely for assessing ordinary damages. Please note that ordinary damages

233
are different from liquidated damages and that could no longer be considered sufficient to
deal with liquidated damages clauses of a more complex variety found in contemporary
standards.

I have already discussed liquidated damages under section 74 of the Indian Contract Act
1872. If you want to get clarity and understanding of liquidated damages it is better to look at
Black’s law dictionary definition, they have laid down in very simple language that an
amount contractually stipulated as a reasonable estimation of actual damages to be covered
by one party if the other party breaches is called liquidated damages.

If you look at this definition and try to understand it you will come down to the conclusion
that liquidated damages are nothing but pre-estimated damage which the parties agree to
while making a contract or entering the contract, as likely to arise at the time of a breach. So
whenever there is a breach such kind of damages will be awarded, and there will be a proper
liquidated damages clause in the contract.

They will jot down that clause and whenever there is a breach by one party the other party
will be liable to pay damages as per the written clause. Whenever the courts are dealing with
liquidated damages which are to be paid by one party to the contract to the other, they usually
consider section 73 and section 74 together, because it gives clarity and understanding on
providing damages. Why are damages awarded?

Damages are awarded to compensate the aggrieved party for whatever breach has occurred,
but at the same time it is very important to understand that the aggrieved party should not be
allowed to make unjust enrichment under the garb of claiming compensation out of the
breach, if some party had faced some loss, then that amount should only be paid.

You cannot give more money. If you are giving more money than the loss it would amount to
unjust enrichment, it should not happen that the party which breached should go into loss,
and the other party has a lot of money because that would amount to unjust enrichment. This
is a very important term and the Supreme Court had emphasized a lot on this term.

In the Indian Oil Corporation Limited case, the Supreme Court had come up with a policy
called the ‘no damages no loss’ policy, which means whenever there is a breach of contract
there must be some sort of loss. If there is no loss, no damages will be awarded to the
aggrieved party or the plaintiff. This is a primary rule and I think also in my first slide while I

234
was discussing essentials to claim damages, I had clearly said the prima facie pointers there
has to be a breach of contract and when there is a breach of contract there must be a loss
suffered by the aggrieved party. So, this is the requirement, a loss is essential and it is
mandatory.

(Refer Slide Time 32:56)

Now that we have understood that actual loss or damage is a prerequisite or sine qua non for
awarding liquidated damages, let us head towards understanding some of the examples of
liquidated damages. I want to clarify that damage and damages are different, damage is the
injury, and is the loss incurred by the aggrieved party. So whenever there is any sort of loss
that is damage; damages are compensation, an award that has been provided to the aggrieved
party.

The letter s makes a lot of difference so please do not confuse damage with damages. So,
before we head towards understanding the examples let me ask you another question; are
liquidated damages analogous to penalty clauses? For a layman, yes; penalty, damages, and
compensation everything is the same, but from a legal perspective, being a lawyer, you
should know the difference between every term, each, and every legal jargon that has been
used.

So yes, there is a thin line of difference between liquidated damages and penalty clauses.
Liquidated damages are a pre-assessed loss agreed to between the parties at the time of
entering the contract or making a contract. It is something that the parties jot down and they
presume that it is likely to arise at the time of breach.

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On the other hand, when you talk about penalty clauses, it is the stipulation to award an
imposition that is so unreasonable, which is so excessive, which is so disproportionate that no
prudent person would consider it a reasonable assessment of damages arising out of the
breach. So basically, we can say that liquidated damages represent a reasonable stipulation of
likely losses, whereas a penalty is far from reasonable and is usually intended to secure the
performance of the contract.

So intentionally, the amount will be so high that it will force the other party to not breach the
contract, securing the performance of the contract is very important, and for that penalty
clauses have been formulated. Intentionally, the amount is high so that the other party will
not breach the contract, so that is the thin line of difference between liquidated damages and
penalty clauses. So now my major question to you is when can liquidated damages be
enforceable?

Liquidated damages can be applicable only and only when there is an acceptance of
performance. I am sure by now you all might have understood acceptance, promise, and
offer; so, when there is acceptance of performance there is going to be a legit contract
between the two where they can jot down liquidated damages clause, and then proceed with
the entire process, but what if the contract is terminated after sending the notice for liquidated
damages, can they still be claimed?

The answer is yes, it can be claimed despite the termination but only till the date of
termination. In certain situations, whenever there is a delay, the contract automatically gets
terminated or it is terminated by the other party. So in such circumstances can the liquidated
damages be provided? The answer is yes, liquidated damages can be provided given that the
proof of loss or evidence of loss is presented in a court of law.

Now see this is the second essential while I was talking about essentials to claim damages the
first one was a breach of contract and loss the second was proof of loss and there, I had
mentioned that proof of loss or evidence of loss is extremely important when you are
claiming liquidated damages. So even if there is a delay and the contract is terminated you
can ask for liquidated damages, but for that, you will have to provide proof of loss.

Now the major question here is in construction projects, say if there is a project or contract
for the construction of a road or a bridge and if there is a delay in completing the construction
of a road or a bridge within a stipulated period of time, will it be possible to provide

236
liquidated damages because in such situations it is very difficult to prove the actual damage
or loss suffered by the party.

So what should be done in such circumstances, that is the prima facie question because courts
have mandated that yes if there is no proof if there is no evidence, we will not provide
liquidated damages but not provide evidence in case of construction projects is it reasonable,
should courts provide damages in such situations we will discuss this in the further slides
because there is a very interesting landmark judgment and that will give us a clear idea that
what should be done in case of construction projects.

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 Advanced Contracts, Tendering and Public Procurement
Anuja Shah
Centre for Environmental law, Education, Rresearch and Advocacy
National Law School of India University
Part 02
Liquidated Damages in Government Contracts

(Refer Slide Time 00:16)

We will now be discussing some of the landmark judgments on liquidated damages vis-a-vis
government contracts. Incorporation of liquidated damages and government contracts is by
way of forfeiture clauses. Proof of actual loss or damage is sin qua non or a pre-requisite. If
you submit the proof of loss, we will give you liquidated damages is something that the
Supreme Court follows.

So let us look at our first case Maula Bux versus Union of India, I will give you the brief
facts of this case. Maula Bux entered a contract with the Government of India in February
1947, where he was supposed to supply potatoes at military headquarters, UP. So malabux
deposited rupees ten thousand as security for the due performance of the contract.

Now, again in March 1947, he entered another contract with the Government of India where
he was supposed to supply poultry eggs and fish at the military headquarters, UP. Again, he
deposited rupees eight thousand five hundred as security for the new performance of the
contract. So, eighteen thousand five hundred rupees in total were deposited by Maula Bux as
security for due performance.

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However, he failed to supply potatoes, poultry eggs, and fish at the military headquarters at
UP, which is why the government had to rescind both contracts. The first contract was
rescinded in November 1947 and the other contract was rescinded in December 1947 and
ultimately government forfeited the deposited money of eighteen thousand five hundred
rupees.

Maula Bux filed a case against the government of India and the major issue was whether the
amount given up by the government of India comes under actual damage or loss. Supreme
Court gave a very interesting judgment; it held Maula Bux guilty of breach of contract. Of
course, there was a breach of contract and considerable inconvenience was caused to the
government of India because Maula Bux failed to supply food items that was a time of
emergency given that it was 1947, so a reasonable amount of inconvenience was caused in
this case.

However, Supreme Court had a different explanation; Supreme Court said where is the proof
of actual loss or damage. Can the government submit the proof or evidence of actual loss and
damage, if yes, we are ready to provide liquidated damages otherwise we cannot provide
liquidated damages. The government of India failed to provide proof of actual loss or damage
which is why liquidated damages were not provided in this case.

I told you proof of loss is extremely essential if you are claiming liquidated damages.
Precisely something that was followed by the Supreme Court of India. Now another question
that is constantly barging the minds of courts and arbitrators is whether the amount of
liquidated damages provided under the contract can be reduced proportionately depending on
the quantum of work till the date of occurrence of the breach.

If you look at it from a layman’s perspective, it is true, wherever it is possible to prove the
actual damages the parties claiming liquidated damages will have to prove the losses suffered
by it and confine its claim only to that limit and not the full amount of agreed liquidated
damages.

However, it would not be correct to state that the provisions of liquidated damages would get
proportionately reduced depending upon the quantum of performance achieved till the date of
the breach, because if such is the case then you will have to rewrite the entire contract and
rewriting the contract which has already been stipulated is not allowed under the Indian law.

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If the contract is formed you cannot rewrite that contract that is not allowed and even more
this concept goes contrary to the basic idea of providing liquidated damages. If you want
damages only for the loss that you have incurred then you can go for ordinary damages, what
is the purpose behind providing liquidated damages?

Multiple damages are provided and every damage has its essence; it has its significance,
which cannot be waived off, and should not be violated. So, the Supreme Court has said that
no matter what whatever pre-estimated damage has been jot down in your contract will be
awarded in case of breach of contract to the aggrieved party.

So, we have understood two major things, one is you have to stick to the liquidated damage
clause that is provided in your contract and the other is if you want to claim liquidated
damages you have to present the proof of actual loss and damage or evidence of actual loss
and damage. Now let us understand whether time is the essence of liquidated damages or not,
can it change the mindset of the Supreme Court in avoiding liquidated damages?

(Refer Slide Time 07:32)

Let us take a look at it. So, before we head towards Oil and Natural Gas Corporation Limited
versus Saw Pipes Limited, let me share a contemporary issue that was raised in a court of
law. We have discussed how liquidated damages are granted in case of delay and termination
of a contract, but a very interesting issue was raised in 2021 on whether liquidated damages
be granted in the circumstances where a contract has been terminated by the person who is
claiming for liquidated damages.

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Let me give you an example, say there are two parties A and B who have entered a contract,
where B has awarded a contract for the construction of a shopping mall to A. Now imagine if
the construction is substantially delayed by A, is there a fair chance that B might terminate
the contract, yes no. Let us go with yes. So, if B terminates the contract can B have a valid
claim for liquidated damages even though B has terminated the contract?

Now see in such situations there are usually three possibilities. The first is liquidated
damages will not be granted at all, the second possibility is liquidated damages are available
for the delay during the period before the termination of the contract and not after the
termination of the contract, and the third possibility is liquidated damages are available both
for the period before and after the termination of the contract, so these are the usual three
possibilities.

Now court was also in dilemma, it did not know what to do, how to avoid damages, or how to
calculate, so they thought of referring to the United Kingdom judgments. There are two
landmark judgments, one is the triple point and the other is PBS Inarco. Courts have laid
down two important things in these two judgments, the first point is the language of the
liquidated damages clause is extremely important.

Courts said it is very crucial to understand what has been written in the liquidated damages
clause to ascertain whether liquidated damages can be awarded to the aggrieved party or not;
courts usually emphasize a lot on language because the legal profession itself is about
language, it is about punctuation marks, so language is very crucial and from the language, it
can be extracted that whether liquidated damages clauses require the completion of a contract
or not.

Because usually liquidated damages are unlikely to be awarded whenever there is a delay, so
whether the liquidated damages clause is demanding the completion of the contract or not.
Now again it is dependent on the language so basically, it is about the words that are
mentioned in the clauses, the punctuation marks that are used in the clauses, and only after
that, it can be ascertained whether liquidated damages are to be awarded or not.

It is good, as we can see the progression because now courts have started passing their
judgments based on facts and circumstances of the case and they are not following any
traditional method that has been laid down, they are emphasizing a lot on the facts and

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language that has been penned down in that clause. Having said that let us move towards
ONGC versus Saw Pipes Limited.

I am sure in this case you will be able to witness an unforeseen change, unforeseen shift I
would say and I am sure that you may stimulate rethinking in the manner of operation of
liquidated damages clauses in most of the contracts. So, before we head toward the judgment
of the Supreme Court, let us quickly understand the facts of this case.

ONGC had floated a tender for the purchase of an aggregate quantity of 393297 meters of
seeming steel pipes. On completion of the tender process, 4 purchase orders for varying
quantities aggregating to 393297 meters were issued in favor of Saw Pipes Limited. In terms
of the purchase order delivery was to commence within 16 weeks and was to be completed in
40 weeks or earlier from the date of the purchase order.

This is very important. It had to commence within 16 weeks and had to be completed in 40
weeks. Now there was a very important clause I would say there were two important clauses
in the contract between ONGC and Saw Pipes Limited and the best part is these clauses
applied to all the four purchase orders which were issued in the name of Saw Pipes Limited.

Now in clause number nine also there were two sub-clauses. Clause 9A typically states that
the date and time of delivery is the essence of the supply and delivery must be completed not
later than the date stipulated or specified. It was laid down in clause 9A that date and time of
delivery is of utmost importance, it is the essence. Clause 9B stated that even when an
extension in the delivery period is granted such acceptance of extension would not mean that
the purchaser cannot claim liquidated damages.

Say, if ONGC is granting an extension of the delivery period that does not mean that ONGC
cannot claim for liquidated damages; it is possible only and only if ONGC decides to waive
off the liquidated damages clause it is the discretion of ONGC.

So, in a very intelligent way, this contract was drafted, these two clauses are very important.
On one hand, they are saying that date and time are of the essence but on the other hand they
are also saying that see we have the authority to grant an extension, but it does not mean that
you will not face the repercussions, you will have to face the repercussions and repercussion
is nothing but liquidated damages.

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Now this matter was taken to the arbitral tribunal; the arbitral tribunal said in our opinion,
time is not of the essence, why is it not of the essence is because in clause 9B you have
written that you will give an extension. If you have mentioned that an extension can, be
granted, hence, time is not of the essence, and if time is not of the essence there is no breach
of contract. If there is no breach of contract no liquidated damages can be awarded.

So, the arbitral tribunal held the judgment against ONGC and stated we cannot provide
liquidated damages. An appeal was made to the High Court, the High Court had a different
view altogether and it was quite surprising because the High Court held its judgment in favor
of ONGC and stated that ONGC did not prove the loss or damage suffered.

It stated that ONGC was not required to prove the losses suffered before recovering the
damages, which was essential for claiming damages that you must provide proof of actual
loss or damage was completely waived off by the High Court. The matter then went to the
Supreme Court and I would like to state the obiter dicta from the Supreme Court judgment;
Supreme Court upheld the judgment of the High Court and stated that proof of actual loss or
damage is not required at all.

It suggested that courts should read Section 73 and 74 of the Indian Contract Act 1872
together because if it is read together, it will give you a clear idea that whenever there is a
breach of contract the aggrieved party or the plaintiff is not required to prove the actual loss
or damage; he or she is not required to submit the evidence of actual loss or damage.

This is an interesting shift. If you look at Maula Bux’s judgment, the Supreme Court said we
agree that there is a breach of contract because he failed to supply potatoes and eggs, and
fish, but the Supreme Court asked the government of India where is the proof of actual loss or
damage, those were unprecedented times 1947, in those times also Supreme Court was asking
for proof.

In GAIL India limited case it was clearly stated that time is of the essence but Supreme Court
said where is the proof. So, in both cases, Supreme Court demanded evidence, but in this
case, suddenly, the Supreme Court stated that there is no need for evidence, if there is a
breach of contract, we will provide you liquidated damages.

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There is one more judgment it is the recent one from 2015. I think it is very important to
interpret that judgment and understand the opinion of the Supreme Court. Has Supreme Court
been on the same pace, has it gone up, or has it gone down?

(Refer Slide Time 20:33)

So let us head towards the last case of this presentation this is Kailash Nath Associates versus
Delhi Development Authority, judgment from 2015. In this case, Kailash Nath was declared
as a successful bidder by the Delhi Development Authority in one of the auction proceedings
that was undertaken for plot number 2, Bikaji Kama Place, District Center New Delhi.

After the proceedings were finished Kailash Nath Associates deposited 25 percent of money
as the earnest money. After some time, Delhi Development Authority changed its mind and

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without sending a prior notice to Kailash Nath Associates that they must pay 75 percent of
the remaining money within a stipulated period of time, canceled the allotment of Kailash
Nath Associates and forfeited 25 of the earnest money.

Now Supreme Court in this case had held that in sections 73 and 75 of the Indian Contract
Act 1872, compensation is awarded for the breach of contract under section 74 only when
damage or loss is caused under that breach. Again, Indian oil corporation limited judgment is
brought into this frame, Supreme Court laid down that damage or loss is sin qua non, very
essential for the applicability of damages.

So, if you look at the exact interpretation that was laid down by Supreme Court in this case
you will come up with 4 to 5 different points that were jotted down by the Supreme Court of
India. It says that a party is entitled to nothing beyond a reasonable compensation under the
liquidated damages clauses and the stipulated amount is merely the upper limit that can be
awarded. The Supreme Court was very firm that we will not provide anything beyond
reasonable compensation, so they were not in favor of unjust enrichment.

The second point is that the Supreme Court had laid down is liquidated damages can be
covered only in the cases where actual loss has been incurred or suffered and not otherwise.
The law here is guarding both the punishment and profit as the motivations for liquidated
damages. The third point that the court said is that in ordinary cases, the claimant must prove
such kinds of losses through evidence; in the previous judgment of Maula Bux also, it was
held that evidence is essential.

It is only in rare and exceptional circumstances when there are a lot of difficulties or where
there is an absolute impossibility to prove the damages, we were talking about construction
contracts, the construction of a bridge where it is extremely difficult or almost impossible to
prove the damages. In such cases, if there is no evidence that is not an issue, but otherwise
evidence must be provided no matter what, and the last point that Supreme Court had laid
down was reasonable compensation has to be determined as per the settled contract law.

What is settled contract law? Principles that are enshrined in section 73 have to be taken into
consideration. So here also the Supreme Court said that sections 73 and 74 are to be taken
into consideration together. If you look at Malaysian law, they are also following what India
has been following till now, I did mention the Cavendish approach.

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What did the Cavendish approach talk about? It simply talked about the reasonable
compensation within the meaning of section 74 of the Indian Contract Act and they also
believe that it is very essential because unjust enrichment just cannot be given to any of the
aggrieved party or a plaintiff. So, if you look at Malaysian law and Indian law, they are quite
in consonance with each other.

Moving forward I would like to show a table that will give you a brief idea as to what was
held in all these cases. So here we have Maula Bux’s case, we have Saw Pipes’s case and we
have Kailash Nath’s case. Here you can see the options whether the party who is required to
pay liquidated damages under the contract has breached the contract, yes.

In all three cases, it was held by the Supreme Court of India that we are agreeing that there is
a breach of contract, we are not denying the fact. The second question is whether the nature
of the breach is such that the party aggrieved can prove actual loss, was it possible for the
parties? So, if you talk about the Maula Bux case the Supreme Court stated yes parties could
show the actual loss somehow that was not submitted.

In the Saw Pipes case, the Supreme Court stated that it is impossible in such construction
contracts to prove the actual loss and therefore proof of law should not be made mandatory.
Again, in Kailash Nath’s case, it was held that yes, it is possible and it must be proved by the
government. The third question is whether the aggrieved party has proved the actual loss or
not.

So, in all three judgments, the actual loss was proved by the parties neither in Maula Bux nor
in Saw Pipes nor Kailash Nath’s case, and the last question is whether the court had awarded
liquidated damages or not. In Maula Bux, though there was a breach of contract, since the
liquidated damages proof was not awarded, liquidated damages were not awarded.

Again, in Saw Pipes, the proof was not given but the court said no there is no requirement of
proof and therefore liquidated damages were provided, in the Kailash Nath case again the
proof was not given and so liquidated damages were also not awarded to the parties. So even
if you have not understood the case laws and if you find some sort of complexity in those
case laws this table will give you a brief overview of what was held in the Supreme Court.

We have not discussed the Fateh Chand case but again the situation of this case is very
similar to what was laid down in Maula Bux and Kailash Nath case.

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(Refer Slide Time 28:49)

Now that we have gone through all four judgments of the Supreme Court, let us understand
the legal position of liquidated damages in terms of the interpretation of section 74 of the
Indian Contract Act. This interpretation is done by the Supreme Court of India, so the legal
position can be summarized as the Indian legislature has enacted a uniform principle
applicable to all the stipulations naming the amount to be paid in case of breach of contract.

Section 74 deals with the measure of damages only in two major situations. The first is where
the contract names a sum to be paid in case of breach of contract and the second is where the
contract contains any other stipulation by the way of penalty, but in both cases, one thing is

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for sure it must be a reasonable compensation. If it is not reasonable it will not be allowed by
the courts.

Usually, the jurisdiction of courts is limited; they have no right to interfere in between if the
liquidated damages clause or penalty clauses are already mentioned in the contract. However,
if the Supreme Court feels that it is not reasonable and that it has led to unjust enrichment of
the aggrieved party Supreme Court has a right to pitch in. So basically, that ceiling limit has
to be followed otherwise Supreme Court has a right to interfere.

Supreme Court has laid down as mentioned under section 74 that it is a duty not to enforce
penalty clause but only to award reasonable compensation, and it falls under the duty. So, in
all situations and cases where there is a stipulation in a penalty for forfeiture of an amount
deposited, under the terms of the contract which expressly provides for forfeiture, the court
has jurisdiction to award such sum as it considers reasonable.

It should not exceed the amount of reasonable compensation that the court has to decide.
Another thing that we have noticed in the ONGC case is sections 73 and 74 must be read
together. Supreme Court had laid down that damages will be awarded if there is a breach of
contract and if the damage has been incurred and there is no need for the aggrieved party to
provide proof of loss. This was laid down only in ONGC cases; this is nothing but the
interpretations that we have received so far so that we can understand the actual position of
liquidated damages and the current scenario. So, we are just jotting down the interpretations
that we have received in all these case laws. Moving further, reasonable compensation will be
fixed on the well-known principles that apply to the law of contract and it must align with
section 73 of the Indian Contract Act.

The most important thing that we have understood and that we have extracted from the
interpretation is whenever there is a breach of contract the party who commits the breach
does not have an instant pecuniary obligation, nor does the party who has suffered the breach
become entitled to damages or compensation or any sort of debt that he is supposed to receive
from the other party.

The only right which the party aggrieved by the breach of contract has is to sue for damages,
so before asking for compensation or damages the party must file a suit for damages and after
that decision has been taken, it cannot be taken in a very haphazard manner. The primary
thing that we have learned is that section 74 of the Indian Contract Act awards reasonable

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compensation for the loss or damage incurred by the breach of contract, loss or damage
incurred, as it clearly states that loss or damages are sine qua non for applicability of section
74 of the Indian Contract Act.

The plaintiffs, the aggrieved party must prove the actual loss or damage suffered by them.
Certain words of section 74 state whether actual loss or damage is proved to have been
incurred or caused thereby. This statement should not mislead us into thinking that actual loss
is not necessary, liquidated damages can be provided. The above-referred words in section 74
are limited to those cases where it is very difficult or almost impossible to prove the monetary
loss that has been incurred by the party.

So, if the party can prove the monetary loss, it is extremely important to prove the actual loss
or damage that has been incurred. In certain contracts there are certain situations or certain
contracts where it is almost impossible for the courts to assess the compensation arising out
of the breach and if the compensation contemplated is not by the way of penalty or if it is
unreasonable, the courts can award the same if it is a genuine pre-estimate by the parties as a
measure of reasonable compensation.

It means that at times courts might think that the penalty or whatever is written in the contract
is unreasonable, it is high and this should not be given to the aggrieved party, at the same
time, when it is getting very difficult for the courts to assess the amount of compensation that
needs to be given, then courts should award that penalty even if it feels that it is
unreasonable, because it has been decided between the parties.

It is a genuine pre-estimate that whenever there is a breach this amount should be given as
reasonable compensation and courts will have to follow that. The courts need to understand
that the terms of the contract and the same must be taken into consideration for determining
the award of compensation that is to be given to the parties, whatever is written down in the
clauses, sub-clauses, and terms of the contract that must be taken into consideration.

So, these are the certain outcomes or learnings that we have got from the interpretation of
section 74 of the Indian Contract Act. These were certain understandings that were applied by
Supreme Court in the four major landmark judgments and even in the other judgments. Now
we should head towards the concluding part and let us see the position of liquidated damages
right now and how can it be improved, and what measures should be taken to improve the
present condition of liquidated damages.

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(Refer Slide Time 37:08)

So let us head towards the last segment of this presentation, I am sure after a thorough
analysis of case laws, theoretical underpinnings, and comparative analysis of liquidated
damages you also have certain thoughts, certain suggestions that need to be incorporated for
strengthened contractual enforcement. In my opinion, I have certain points which I would
like to state. First and foremost, the legal position on liquidated damages needs to be shifted
from the common law approach to the civil law approach.

Right now, we are following a common law approach, so if we shift to civil law approach
there is going to be strengthened contractual enforcement and it will save a lot of time and
cost along with providing us stability and predictability of the legal proceedings because at
present how liquidated damages are being incorporated is manifestly unreasonable.

So, to make it more reasonable, and to save a lot of time and money we need to shift to the
civil law approach. If you look at the judicial interpretation of section 74 of the Indian
Contract Act there is a need to bring the Indian position of law at par with international
instruments. See, for example, UNIDROIT. UNIDROIT does not make it mandatory for the
aggrieved party to submit proof or evidence of loss or damage for receiving liquidated
damages.

This is one thing that we can adapt in our Indian position in our Indian law as well. For those
who do not know what UNIDROIT is; UNIDROIT was established in the year 1926 and it is
nothing but an independent intergovernmental body or organization that has its seat in Rome.
So, the purpose is basically to study the needs and methods for modernizing, harmonizing,

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and coordinating private and especially commercial laws between the states and groups of
states.

And, to formulate a lot of uniform laws, instruments rules, and other policies to attain the
objectives. So, this is the major task of UNIDROIT, so the only thing that we need to
incorporate and need to adapt in our system is to remove the mandate of submitting proof for
evidence of loss and damage. There are certain words in section 74 that needs to be changed
in such a way that it focuses more on genuine pre-estimated losses.

It focuses more on the clauses that are already mentioned in the contract or maybe a mandate
to mention liquidated clauses in the contract or something along the same line should be
added or modified in section 74 of the Indian Contract Act 1872. I would also suggest that
you read the Specific relief amendment act 2018.

So right now, if we look at the current position of liquidated damages and penalty clauses
certain modifications must be made in a way that resonates with the objectives and changes
which are already brought in Specific Relief Amendment Act 2018. Now I would like to ask
a very simple question to you, this is not a part of your examination or a part of your
assignment this is a simple question from my end and you must solve it say for example,
there is one cricketer from a country B.

Let us consider the name of that cricketer as A, he is from country B and he has entered into a
contract with India that wants A to play in team C. So A is the name of that cricketer, he is an
international cricketer, B is the country from where he belongs and C is the team where he is
going to play, it is Indian origin.

Now a contract is made for a period of three years they said this contract is for three years we
will be paying you five crores for being a part of the Indian Premier League that is team C.
Now there is a contractual provision in that contract which states that in the event of unjust
dismissal by the team, A will be awarded compensation of rupees 25 crores.

Now within six months, A was removed, there was unjust dismissal and he was removed. The
contract was for three years. In the meantime, A was hired by another company D that
offered 10 crore rupees to A, is A liable to receive rupees 25 crores or not? Can 25 crores be
awarded as compensation to A, even though A has already been hired by the company or
team D?

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This is my question; I would be glad if you could answer this question. I hope the session was
informative and I hope you have understood what I was trying to convey through this session.
If you have any doubts you can always reach out to us via our official email id. Thank you so
much for being patient and I wish nothing, but the best for each one of you. So, good luck
with your assignments and your exams and for everything that you are going to achieve in the
future. Thank you very much.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture No: 29
Special Contracts: Bailment – Part 01

Let us move on to understanding special contracts. These are contracts that are specifically
defined under the Indian Contract Act 1872. They are special for the simple reason that they
are categorized as kinds or types of contracts, and the Indian Contract Act 1872 in Part 2 talks
about contracts such as bailment, pledge, indemnity, guarantee, and agency.

And these are in terms of the fact that the statute defines who the parties to these contracts
are. The statute also talks about the rights and obligations between the parties and in some
cases, certain special rights and obligations are also defined in this chapter. You will notice
that time and again in the modern context when certain kinds of contracts are made, the
principles of these special contracts as stated in 1872 are applied.

I can give you one instance or example. For example, in India there is no law on joint
ventures, and hence very often than not when joint venture contracts are being made. The
question of whether the partners in a joint venture are agents of each other and will the
principle of agency will apply in such circumstances. Take another instance of franchise
contract.

Again, you will notice there is no law governing franchise contracts. These are modern
contemporary styles of contracting, outsourcing sometimes. So, different contracts are made
from time to time, and the Indian Contract Act has not been amended or there are too many
special laws on contracts that have defined various obligations. Some of these contracts may
fit into the old schemes of things or they may just look at a normal contractual relationship
upon which we have spoken so far.

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(Refer Slide Time: 02:24)

So, let us understand the first type of contract called bailment. This is defined under Section
148 of the Indian Contract Act. Bailment is a very important type of contract for the simple
reason that if you look at carriage, you would have a carrier of goods by air, sea, and road.
All these carriages carry goods and they are covered under a contract of bailment.

Carriage by road includes a truck that is carrying goods or it could include the Indian
railways as well which are recognized that it is obligated under the contract of bailment
though there is a specific statute called the Railway Act which defines the obligation between
the railways and its customers. Now, in a contract of bailment, what is important is that there
is the delivery of goods from one person to another, that is, from the ‘bailor’ who is supposed
to be the owner of the goods to the ‘bailee’ who is supposed to take these goods for certain
purposes.

Now those purposes could be transportation, it could be for redesigning or refurbishing

goods, for example, one of the ordinary examples of bailment is giving your automobile or
car for services. You give it for a temporary purpose and on the completion of that purpose
the goods are to be returned. So, this is a typical case of bailment where temporary possession
is handed over.

And once the purpose is accomplished it should be given back. Interestingly, safe keeping of
goods such as keeping goods in a warehouse or a cloakroom is also a contract of bailment.
So, we enter many of these contracts on a day-to-day basis where our goods are kept with

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someone else and he deals with the goods, and after payment for such goods, he returns it all
of these will be covered under the contract of bailment.

And you may notice that in a contract of bailment, it is only movable property that can be the
subject matter of bailment and when you talk about movable property, it implies goods per se
because that is how section 148 deals with goods. What constitutes ‘goods’ is also an
interesting characteristic that we must understand in these circumstances because if you talk
about goods, the definition of goods is not provided under contract law and hence we must
refer to the definition of goods under the Sale of Goods Act of 1930. Now, Section 2 Sub
Clause 7 of the Sale of Goods Act defines goods, and these kinds of goods could mean and
include cattle, crops, water, and other things which are movable property, but it does not
include cash.

So, there is a distinction between money and cash sometimes, and hence, when you deposit
cash in a bank for safety purposes, you want the bank to take care of it. Unfortunately, cash
cannot be considered as bailment. Further, when you deposit cash, the kind of numbers on the
notes that you deposit and the return that you get back are not the same number on the notes.

So, you get the money that you have deposited, but it is not the same notes. So, in bailment
what you have given, mostly the same goods along with increment is going to be returned.
So, cash in a bank is not considered bailment. However, an interesting question with bailment
is about a cloakroom or a locker facility in a bank. Now, a locker facility in a bank is a
contract that we often consider as a contract in which there is some kind of responsibility of a
banker.

But here, the contents of the locker are not delivered to the bank. The contents of the locker
are something that you keep on your own, though you are given the facility of the locker. So,
sometimes bailment is very close to something called hire. Now, we must understand that as
a customer you had hired the service of the bankers’ locker, but it is not bailment because
there is no delivery.

See, delivery can be of a couple of factors. One, we can say it is actual delivery where
physically the goods are handed over or second it can be constructive delivery as well.
Constructive delivery is when you deliver the goods with the title of the goods. You do not
have to give the physical possession. You can give control of the goods. For instance, it is
like giving the key to a warehouse. This is constructive bailment.

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And then there is delivery for attornment. Now, attornment means where someone else is
already in possession of the goods, and from there, you start bailment. So, someone who is
already in possession is then asked to continue the possession under a contract of bailment
and that would become delivery by attornment. So, if we magnify the contract of bailment
into several circumstances, you may notice that aircraft also must be serviced so they are also
under the contract of bailment. Ships may also have to be serviced so they are also contract of
bailment. So, these are various facets of bailment and the contract of bailment comes into
existence, and how the provisions of the India Contract will apply in defining the relationship
between the bailor who is the owner of the goods to the bailee to whom the goods have been
delivered temporarily.

Now, one of the interesting facets of special contracts is there could be special conditions to
these contracts. Now, the general rule is that without any consideration there would not be a
contract. However, in a special contract there can be an exception to the same rule and what
are these exceptions? The exceptions are in the contract of bailment because we say the
contract law is based on the law of obligation and not necessarily just based on consideration.
There is this introduction of provisions of the law on what we call ‘gratuitous bailment.’
Gratuitous bailment means it is not a bailment forever. It is not a bailment for consideration.
It is some kind of bailment between two parties out of say friendship, love, and relationship
out of any other persistent kind of relationship that is of a neighbor or family member.

Here, the goods are handed over to you without any expectation of compensation and you
will notice that because there is no expectation of compensation in such cases, it is gratuitous
in nature. Gratuitous means it is out of charity, it is out of gratitude, it is about not expecting
any reward, it is not some kind of professional service, it is out of consideration of love and
affection that such contract of bailment comes into existence.

One of the classic illustrations that I can share with you is that let us assume that you are my
neighbor and you want to borrow my car to go and pick up your mother from the railway
station or the airport. Now, in these circumstances, if I lend my car to you to go and pick up
your mother I am not doing so as a professional car lending agency. Now professional car
lending agency can also give you the car, but that is a contract of bailment for reward and not
gratuitous.

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Like you have Hertz rental car or Zoom rental car or Drivezy. So, these are professional
rental cars in which you are the bailee where you come to the car owner and you want the car
to be delivered. So, you pick up the car and you take the car for a particular purpose, say to
fulfill a journey, and then after fulfilling the journey you come and return the car. So, this is
how you could enter a contract of bailment with a professional car rental service.

At the same time, you should also know the difference that valet parking is a contract of
bailment because you are handing over the possession of the car and the keys are granted to
valet parking, but if you are parking in a place like a mall or a designated place in a hotel or a
parking area it is not bailment because you have not handed over the possession of the car it
is only just a license to park.

So, these are certain things that we must clearly understand. However, a gratuitous bailment
is where two neighbors are sharing the car for a particular purpose. Now the interesting
difference is that here, I am not expecting any direct reward. I do not have any conditions of
saying this is how much you should be looking. No such conditions are mentioned and I hand
over this car to you to go and pick up your mother from the railway station or airport.

Now, if I lend this car to you, the contract law stipulates that this is a gratuitous bailment, this
is not for any reward and it is not for any consideration and it also says that you who have
borrowed this car will have to take care of the car as if the car is your own. So, there is a
duty, there is an obligation cast upon you because this is a contract of bailment and bailment
can be beyond just the reward and consideration.

And hence if you fail to take care of the car if you fail to take care of the goods, then you
could be held liable for a breach of the contract of bailment. So, gratuitous bailment or
implied bailment, and voluntary bailment are also bailments for which the Indian Contract
Law recognizes those obligations and makes the other party entitled to get a remedy as well.
So, how do you define the aspect of taking care of the goods?

You will notice that you must take care of the goods as if the goods were your own it is
important that if you while driving this car were negligent and if I can prove the same then I
can hold you responsible or accountable as well. Secondly, please note in gratuitous bailment
we also say that as the owner of the car, I am also duty bound to lend that car which is safe
for your purpose.

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Just because it is gratuitous, I cannot put your life at risk. So, I must know whether the car is
responsible for the journey and whether it has any trial defects. So, I also have a duty to
disclose the faults in the goods and you have the duty not to be negligent in taking a car and
getting it back as well. So, a gratuitous bailment is the most interesting aspect of the contract
of bailment because it places a contract beyond just consideration in reward.

And it makes these contracts enforceable by law even if no consideration is forthcoming

between the parties.

(Refer Slide Time: 13:34)

In this case of Moffatt versus Batemen a carriage was given gratuitously and when it was
given unfortunately it was not examined while this carriage was lent gratuitously. During the
journey unfortunately the carriage met with an accident because the bolts of the carriage in
1869 so transportation by carriage was the only means, and this led to of course some kind of
an injury to the person who had borrowed the carriage.

Now, interestingly what the law says is that the bailor either in a contract of bailment for
reward that is with consideration or in gratuitous bailment the bailor should have a
responsibility to disclose the faults in the goods. This is the obligation; this is the duty that is
cast on the bailor. Now, why is this duty cast if you are handing your goods to say your
service station engineer and this is your car, naturally you are duty bound to hand over these
goods or transport the possessions of the goods it is for your purpose finally he has to send
and give it back to you, but you have the duty and obligation to ensure that why he is using
that car while he is using the goods it does not cost any injury to either him or his property.

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So, this is what the contract law states, that you are duty bound to disclose the faults in the
goods.

However, the difference is whether you knew the faults and if you know the faults did you
decide not to disclose them? You will notice that in gratuitous bailment and bailment for
reward, the distinction is that in gratuitous bailment you must disclose the faults that you had
knowledge of, whereas in bailment for reward you are duty bound to disclose this irrespective
of the fact of whether you have knowledge or not because you cannot infringe the rights of
the bailee and you cannot cause any kind of injury to him or his property.

Knowledge becomes a critical factor in this case because when I am lending my car to you. If
I knew the car is not safe, I am duty-bound to you, but if I did not know about it because I am
giving it out of love and affection or I am lending it out of friendship, I cannot be held
responsible for negligence for not disclosing the faults in the goods and that is the only
difference that can be seen.

Whereas in all other forms of bailment, if the bailee suffers an injury while using your goods
or injury is caused to his property because your goods were not safe, then the bailor owes a
responsibility of compensating the bailee as well. Apart from gratuitous bailment, there are
different other kinds of bailment which are bailment for money advance. What is bailment for
money advance?

It is a kind of bailment in which goods are kept as security. let us say a banker or goods can
be kept as security with say a finance company say you want to take a gold loan. As gold is
goods, it can be pledged, it can be kept as security and you will get money or you will get a
loan advance. A pledge is a very interesting combination of bailment and the lending
business.

So, a pledge is an essential part of bailment because in a pledge you can only have goods as
security. So, what can be bailed in a pledge, shares can be kept as a pledge and can be bailed
as well, or any other valuable security that the bank or the financial institution has agreed to
keep as security you can go ahead and pledge the same. So, a bailment is also something that
you must understand can benefit both parties.

In some cases, bailment benefits only one party, but in some cases, bailment benefits both
parties, for example, when you go to a bank and you pledge something, the bank is also going

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to earn from the money that is given to you with the interest so it is beneficial to the banker.
It is also beneficial to you because you are getting the loan as well. So, this is a unique
bailment that benefits both parties.

However, a gratuitous bailment is a bailment that is only beneficial to the bailee because he is
going to take the car, and he or is going to get his amount. So, it benefits only one party that
is a bailee. In certain kinds of bailment, it only benefits the bailor that is how we see certain
three categories of something that benefits both parties.

Some contracts benefit only either the bailor or the bailee. Bailment for reward is where both
parties are in a commercial relationship and they expect compensation, they expect to
launder, and they expect a charge that is where bailment for reward is understood. However,
one should understand that when you give your house to a tenant as a landlord this is not a
bailment.

It is for a simple reason that the house is an immovable property and it is not covered under
the contract of bailment, but in that house, if you keep your baggage and you expect the
landlord or the tenant to take care of the baggage for one week till you come back, then that
kind of baggage that is kept in the landlord house can be considered as bailment.

Bailment for hire of goods and services. Hiring of goods and services is another type and
kind of bailment. Hiring and bailment are two different things. For example, if you go in the
Ola and Uber car, please note it is not bailment why? Because the goods are not delivered to
you it is not in your possession and after use, you are not returning it at all.

In Uber and Ola kind of services, you are taking the service of hiring. It is driven by a driver
and you just sit in that, you take the goods or the car for hire, you pay the hire charges and
then you get out of the car. The car is not handed over to you. So, this is a typical hire kind of
service or the hire kind of services could be in many other circumstances and hence they do
not fall in the category of bailment.

However, if you hire a rental car service then you are given the key and you are the driver,
you can drive the car say between two cities then those cases where you are given the car or
the control of the car, the car is handed over to you for a particular purpose those cars can be
a contract of bailment. So, for example, we say I hire the Indian railways for the
transportation of goods.

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You normally hire because you also handed over the possessions of goods to the Indian
railways. In those circumstances, it is a bailment contract, but if you just want to hire for
example, I need JCB or a crane to excavate my land that was a very interesting case of an
elephant that was asked for moving often. Now, when you talk about a JCB or a crane or an
elephant if you are given the crane and the control of the crane and you are operating the
crane then it is bailment.

But if the crane or the JCB or the elephant comes with a mahout, or with a driver and they
come and do the service over there and leave then it is a hire service, not a bailment. So, that
is how the categorization of hire contracts and bailment contracts is certainly been met.
Finally, in India, we did have a Hire Purchase Act of 1972.

Interestingly, it was not enacted or not brought into force because there were issues of
taxation, there were issues of challenges of commerce and that is why states did not
encourage hire purchase act, but the hire purchase contract is kind of a bailment contract.
Now, what is a hire purchase contract? Hire purchase contracts were typically like this; you
can go to an electronic shop and you want to buy a washing machine or a TV.

You get into a hire purchase contract. So, the goods are handed over to you. Immediately you
must give a down payment and then the rest of the price or consideration of that electronic
goods may be paid in 6-month or 12-month installments. It is an EMI kind of contract. Please
note the goods are handed over to you there is a possession that is transferred to you, but
there is no sale or title that is transferred.

When can the sale or the title transfer to you in a hire purchase contract? Only after you pay
towards installment. Once the 6 of the 12 installments or the EMI is made then the goods
become yours, and you become the owner till then the goods are on bailment. So, that is the
whole reason why hire purchase transactions are also bailment.

(Refer Slide Time: 23:08)

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Another important aspect that one would want to consider is government bailment. Now,
government, say, the Indian railways can be the bailee. You could hand over the goods to the
railways to be transported from destination A to destination B. Equally you would notice the
time when Air India was with the government. If the Air India airline was transporting cargo
you say it is carriage of goods by air.

We could also consider that there was a bailment transaction. So, the government is into
business, government has warehouses that belong to the Food Corporation of India.
Government has a lot of businesses in which bailment can be inferred. Apart from that you
will notice that we have the Port Authority of India and the Port Trust that are there in
different ports, and cities of this country.

And goods are handed over there in the port so that they can be loaded onto the ship. So,
whenever these port trusts are dealing with these goods, they would be covered under the
aspect of a bailment contract unless also the point is in many of these cases some statutes
govern this kind of a relationship, but the basic law that we refer to usually is the contract of
bailment. We also have government banks that take the security of goods for a loan advance.

And hence even in those circumstances a bailment contract can also be inferred, but
interestingly one of the issues that have been raised in the State of Gujarat versus Memom
Haji Hasan case of 1967 is the government when it enters into a commercial transaction a
contract bailment is something that you can infer, commercial contract business bailment is
there with the government, but suppose through its agencies like say the custom department

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or the police department or the income tax department exercises what is known as the police
power of the state and decides to seize certain goods.

Now, the police seize a two-wheeler because it does not have license point one. Point two is
you will have the income tax department seizing and sealing certain kinds of properties or the
enforcement directed during the same or the customs department trying to seize goods that
are not declared or goods that are smuggled. Now, when these departments of the government
exercise their power of seizure towards these goods can a contract of bailment be inferred?

Now, usually, we say that these are sovereign powers, these are police powers because the
power of search and seizure is sovereign and it is not commercial. Interestingly when goods
are seized there is no consent, it is not a contract, you do not hand it over, it is not delivery of
possession, it is not voluntary and because of all of these, you do not want to infer a contract
of bailment in such cases. This is point one. Point two is you may notice that the courts as I
told you in the past when I was dealing was quasi-contract.

I did say that they do want to impose the law of obligation through the contract law especially
when it comes to government, I did tell you about income tax refunds in quasi-contracts as
one such example. Second, the court intends to make the government more accountable and
responsible to citizens interested in rights and to hold the government having some kind of
obligation in law.

And hence in the state of Gujarat versus Memom Haji Hasan case the court said to look at the
aspect of gratuitous bailment; gratuitous bailment is not for a reward; it is done out of
gratuitous character which means someone else goods come to you; either it is given to you
or it comes to you as a finder of lost goods because you have found someone else lost goods
or it has been forcefully acquired.

In any of these circumstances I think the duty and obligation are very simple in gratuitous
bailment please take care of the goods as if the goods were your own that is a simple duty and
an obligation that can be imposed under bailment transaction and the court said although you
cannot create commerce, trade, and contract and in such circumstances, I think it is important
to propose that obligation of the government.

And if the government fails to take care of the goods because finally tomorrow you would
want to release the goods, you would want to get a court order to get the custody of the goods

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back and probably you want to enjoy the benefits of goods because when these goods are
seized the government does not become the owner. The government is having temporary
possession of the goods.

They can forfeit it at a later point in time and make it out as a different issue, but finally, if it
is to be returned to the consumers, customers, and citizens. The government till that point in
time should have taken care of the goods as a bailee. It is what the court had to say in this
case. So, from the time of 1967, I think the opinion of the judiciary was very clear that the
government owes an obligation of a bailment both as a normal bailee and gratuitous when it
is exercising sovereign functions of the state because contract law is only a branch of the laws
of obligation.

And the government owes an obligation whether it is a pure contract or whether it is by

quasi-contract or whether is based on the principle of equity and justice. So, the government
owes this responsibility to the final consumer. So, that creates a very interesting dimension to
government bailment and what should also be noticed is that in government contracts
sometimes we have seen some works contracts are made or any other contract made the
worker has left certain material in the government premises.

Now, the government can take control of that material, and it can sell the material as a finder
of lost goods, but it has an obligation towards the final owner as well. So, the government can
deal with someone else’s property, but they must deal with it with care and caution. The
principal rules of bailment can apply to the way they have dealt with those goods as well. The
next point of discussion is to understand the distinction between bailment and sale.

Why is this distinction important for us to appreciate and understand very often than not
contracts the judges would go by the intention of the parties and hence if the intention is
bailment the court will bring the application of the chapter on bailment in terms of rights and
duties and obligation of the parties. So, Section 148 of the Indian Contract Act, but if the
intention is of sale, then probably the Sale of goods act and any other law for the time being
in force will be probably read into to determine the rights and duties of the parties.

However, if often than not the issues on bailment of sale are also misused in terms of the
intention of the parties because the parties may deliberately intend to deceive taxation law,
and they may want to refer to or express that intention in a manner that is different so that
they can avoid certain kinds of tax to the accountant and hence in those circumstances instead

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of allowing the intention of the parties to be prevalent the court will have to look at the facts
of the case, the material circumstances of the transaction and then control whether it is one of
sale or one of bailment. So, we usually say that the courts determine such kinds of
transactions based on whether it is an issue of fact or whether it is an issue of law or is it a
mixed question of issue of law and issue of fact. Now, let us take this instance of a Pepsi
bottle. Now, when you buy Pepsi, it is given to you in a container or a bottle.

The biggest question that has arisen in many of the cases is whether the bottle or container is
sold along with the content. So, is the container plus content sold to you or is it going to be
content that is sold to you and not the container? One more thing why this element is
important is because generally when you buy a bottle of Pepsi in a glass bottle in a niche shop
or a retail shop, the ordinary rule is that you return the bottle. It is not that Pepsi that is
available in a tin. It is not a Pepsi that is available in a plastic container. It is that Pepsi which
is in a glass bottle. Here, you must return the bottle, which is the duty and obligation. So, can
we say that the bottle that was given to you is one element because it was given to you for a
particular purpose and not to sell it?

Here, only delivery of possession or delivery of title is made. Similarly, when it comes to
liquor bottles or breweries like the case of Kalyani Breweries, there are three other cases in
which one is called the Britannia Industries case, the other is called United Breweries case,
and the Kalyani Breweries case and these were cases that were decided by the courts in trying
to understand whether the container or a bottle in which drinks or the contents are used can
also be the subject matter of same.

Now, why did companies argue that it was bailment? They argued it was bailment because
they must fix the price of the bottle and the price of the bottle is the price of the container
plus the price of content which would be the price on which sales are being made. So, there
was a kind of allegation from the state sales tax department that the companies are
deliberately not including the price of the container.

And that is now being attracted or added at the sales tax as that valuation has not got into the
determination of sales and thereby the state is losing on revenue and taxation because of the
intention, it has been reflected as a bailment, not a sale. So, based on that allegation the
matter has been given to the court and the court had to decide two things. It is not only an

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issue of fact, but an issue of law as well because you must apply sales tax to a sale, not to a
bailment.

And you must determine whether this is a sale or bailment based on fact and then apply the
law accordingly. So, generally what happens with breweries is initially, they did come to this
suggestion that we expect the bottles to be returned and when they return this bottle, we can
reduce the cost, and keep the cost less. We can recycle the bottle reuse the bottle, recap it, and
then give it to customers.

That was the reason for saying it is bailment and they also mentioned a small deposit that
they take from the retailers. Once they return the bottle the deposit is safe, if they do not
return a few bottles, a certain amount is forfeited from the deposit and hence it is bailment
because there is a firm duty to return the bottle. There was a firm understanding to return the
bottle.

So, they argued that the containers or the bottles are a part of bailment. However, the courts
did consider the fact that overall, it is not only the retailers’ role, but it is also the customers’
role, of whether the customer has the option to return the bottle, or is it mandatory for them to
return the bottle. That would be the real test to determine whether it is one of sale or
bailment.

Now, very often than not some customers take it with them, and some drink it there and
return it. So, there is no consistency between these bottles and the containers. Yes, to keep the
cost less people may be encouraged to return, but that is not the mandate rule and in case it is
a mandate rule bailment cannot come into existence. So, to set things into place, the courts
said that the containers and the contents both should be considered for the sale price on which
sales tax can be imposed.

The aspects that were on bailment cannot be considered and hence this is a transaction of sale
and not bailment. What this highlight is the conditions of bailment are very important and one
of the essential conditions on bailment is the delivery of goods for a certain purpose and the
condition of that purpose there is a mandatory duty to return the goods to the bailor. If the
duty to return the goods is not mandatory is an obligatory or optional basis then it would not
be considered as bailment.

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This is the test under Section 148 that must be completed and fulfilled for the bailment
transaction to come into existence. Interestingly, many goods that are delivered under
bailment are in the form of service like an automobile being given on service which led to a
new form of taxation apart from sales tax called service tax and hence the government which
is the Central taxes this kind of a contract not as sales, but as service tax as well.

So, this is a settled position right now, but bailment intends that there is no transfer of title or
ownership, there is a transfer of position and a transfer of ownership or title as well. Bailment
does not include the second part of ownership or title transfer as in the cases.

(Refer Slide Time: 37:04)

Next is the distinction between bailment and trust. Trusts are of different kinds; a private
trust, a public trust, or a public charitable trust, and when a trust is created, the property given
to the trustee can be either movable or immovable, who is then supposed to manage the
property on behalf of the beneficiaries.

And that is what trust property is all about. Now trust looks like bailment, but it is not
bailment due to the simple reason that a trustee can exercise sale or transfer the property in
favor of some third party. He has been given that kind of authority or right to deal with the
property and he can act as an agent on behalf of the beneficiary and make a sale to some third
parties.

So, trust is like bailment in the sense that you get hold of someone else’s property for some
purpose, but you do not necessarily return it to them as it is not a mandatory condition. On

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the other hand, a bailment is also a trust in terms of the fact that the bailor entrusts the
property to the bailee with hopes that the bailee will return the goods. Both are two different
kinds of transactions dealt with under two different legislations.

Nonetheless, there is an interconnection of the responsibilities and principles that these two
contracts hold.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law School of India University
Lecture No: 30: Special Contracts: Bailment Part 02

(Refer Slide Time: 00:15)

The responsibilities of the parties in a contract are laid down by the Indian Contract Act and
that is why we have definitions of Special Contracts wherein the parties have defined, for
example, in a contract of bailment, there is bailor and then there is a bailee. These are two
parties and the statute impose certain obligations on the parties to a contract.

The contract of bailment has duties and this will result in giving or vesting a right with the
bailee. So, the bailor's duties are the rights of the bailee and the bailee's duties are the right of
the bailor. Now, what is important here is, the statute prescribes these duties and second,
modern contracts can also add to these duties where we cannot diminish or waive the
statutory duties that are laid down by law.

And the bailor has a very important duty in that he must disclose the faults in the goods of
which he knows of, and for which he believes that it may result in some kind of damage to a
bailee. Now, why does the bailor have the duty to disclose faults in the goods? It is for the
simple reason that the goods belong to the bailor. He is the owner; he is giving these goods to

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the bailee for a certain purpose, be it for servicing. etc and in case those goods have certain
forms, he must disclose it because while using these goods, the bailee can suffer some kind of
damage. Now for example I give you a simple thing, suppose you are hiring a Hertz rental car
and you are driving this car or Drivezy or a Zoom car, these are cars that you can take on
bailment. You can drive this car and it is not an Uber or an Ola driver car.

You take this car to say from Bangalore to Mysore and you happen to find out that in
between the car has certain faults and the fault may be with the tyre of the car, the puncture
that took place, the puncture is a normal routine. So, when you drive, puncture can take place
but it is not necessarily a fault, but if the tyres are old or the tube is not serviced or the car is
not proper, the brakes are not functioning. There was no oil in the engine or there was no
coolant in the engine, all of these are faults. Now, if Zoom Car does not disclose these faults
and give this car to you for rent then they would be liable for the breach that has occurred
under Section 150 of the Indian Contract Act. So, I think you ought to look at it from the
perception that the drafter of the Indian Contract Act wanted to state that when goods are
exchanged between two parties, One who has already used the goods, one who has the goods,
and one who is the owner of the goods while giving the goods must disclose faults in the
goods and remember Section 150 applies to all kinds of bailment contracts and it is not only
for bailment of reward, but even in gratuitous bailment. If I am lending my car to you on a
friendly basis even then I must disclose faults in the goods.

Why? Because even in friendly nature when you are using my car you may get injured, you
may cause injury to even a third party because the goods had fault and hence, in all these
circumstances these duties and obligations are kept. Second, the contract of bailment also
states that apart from disclosing faults in the goods, the bailor also must reimburse the
expenses met by the bailee.

So, whatever cost the bailee incurs in the contract of bailment for example, the cost of labor,
cost of skill in servicing their car or two-wheeler, cost of redesigning a gold ornament, etc.
For all those expenses that are met by the bailee, the bailor must reimburse the bailee for
those expenses.

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Suppose an aero plane is being sent for servicing to say a company called Airbus or Boeing
then of course Indigo Airlines or any other owner of that kind of airline must need the
expenses of the bailee in servicing the same. If they do not do so, they do not have the right to
ask for the goods to be returned. So, that kind of consideration in the contract must be met
and that is also one of the duties of the bailor.

Section 152 also states something called the standard of care. Now, what is called the
standard of care is, when a bailee owns the goods, in those circumstances it is the
responsibility of the bailee to take care of the goods as if the goods were his own. This is the
test of standard of care. So, it is someone else's goods that the bailee possesses. So, how
should he take care of the goods? He should take care of the goods as if the goods were his
own. If he is negligent in handling the goods, or if he is negligent in taking care of the goods
then he would commit a breach of not only the contract, but he will be committing a breach
of the Indian Contract Act or the statute of contract which imposes such a duty and obligation
which states that you should take care of the goods in a good condition.

Suppose you hired a Zoom car or Hertz rental car or any other car on your own and you are
driving these cars you cannot drive it rashly, and you cannot misuse the goods that are given
to you, you have the duty as a bailee to use the goods use it wisely, use it in a proper manner
and in case of your negligence in taking care of the goods anything happens to the goods, you
who has hired that zoom car will be liable and responsible for a breach of Section 152 for
which you will be responsible to pay the compensation.

One of the most interesting cases under Section 152 is the case of Union of India versus
Udho Ram and Sons. It was an interesting case of the Indian railways being involved in a
breach of Section 152. The railways transport goods and hence when they transport goods,
every kind of carriage of goods be it on land, sea or road is considered as a bailee.

So, Indian railways are also bailee when I take your goods and agree to transport it from
destination A to destination B. Now, this train was leaving from Howrah in Kolkata and it
was going northwards and the train left and it was goods train as we call it and the goods
were loaded and sealed. Such goods train have a last cabin which is for the guard.

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And this cabin also had two railway protection force. Now, the railway protection force is to
guard the property of those who are using the services of the railways and may include
passengers or people who want to use the railways for cargo facility. Unfortunately, the train
left Howrah and within a couple of hours that the train left Howrah, the train was looted.
Now, a couple of things that go to the facts of these cases are very important and it is a matter
of fact to show whether bailee has breached the standard of care that is required under
Section 152. Now, as railways, what is the standard of care that is expected, is it of an
ordinary person or is it of a professional carrier? How is the standard of care tested in such
cases?

The Indian railways is not an ordinary man or a normally prudent common man. So, the
standard that is expected is not of a normal person the standard that is expected is of a
professional which is the first and most important aspect that one should analyze in this case.
Standard of care means, suppose the railways were handling their goods, would they allow
the goods to be stolen by dacoits in the night? Would they have done nothing once the goods
were stolen?

Care means the test is to look how would you take care of someone’s if you are dealing with
their goods how should you take care of it that is what Section 152 stipulates. The Indian
railways said that they had completed the standard of care and because they have fulfilled the
obligation under Section 152 for the theft of goods, they should not be held liable which
means they need not compensate the bailor that is the argument of the Indian railways.

Unfortunately, in this case, if you go by what the railways have done what did they do? They
argued that they had deployed two railway protection forces and there was nothing more that
could be done. Despite the presence of the railway protection force, if the goods were stolen,
they could not be held accountable, and believed just deploying the railway protection force
is sufficient. When the theft was happening, what was the reaction, what was the response,
how did the railway protection force service some goods or protect the goods, did they take
any proactive steps in protecting the goods that I think was the important element that the
court had to examine? Are questions which the Court had to consider. Second, unfortunately,
when this theft took place, it was not a scheduled stock it was an unscheduled stock. Now, if
you know that a particular route is susceptible to dacoity or theft and certain other aspects.
should the railways have stopped at a place which is not scheduled.

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Thereby creating a vulnerable situation, thereby exposing themselves to this kind of accident
or an incident in which the goods were stolen. So, I think unfortunately please note the
burden of proof is on a bailee to say that he had taken the standard of care. He must convince
the court that he has taken the standard of care and he is not in violation of Section 152.

And in this case unfortunately the railways deliberately failed in convincing the court that
they had undertaken sufficient standard of care in the goods that are bailed to them and the
court was not convinced by the actions of the railways hence the railways were held liable for
breach of Section 152. So, the burden of proof is very important whatever your actions are
very important so you have to say just by closing the wagons or stealing the wagons where
the goods are stored in the railways is not sufficient care taken.

I think those are certain aspects that your case establishes and hence the kind of standard of
care is vis-a-vis the law of negligence. So, if you have taken the standard of care, no
allegation of negligence can take place, but, if you have not taken the standard of care the
railways in this case were found to be negligent in the performance of their duty and
obligation as required under contract law for which the railways can be held accountable as
well as responsible. (Refer Slide Time: 11:53)

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Now the duties of the bailee is that they have to take reasonable care I have already
mentioned the same and when it comes to the kind of reasonable care that the bailee has to
undertake which also extends to bailment for a money advance. Now, when I said bailment
for a money advance, this is about goods that are pledged in a bank for a loan.

Now, a bank when they take these goods as security, they keep these goods and suppose it is
a gold loan they keep the gold and give you the money how should they take care of the
goods that are pledged or kept as security before them? They have to take reasonable care and
if they do not know what happens very often than not, we are seeing cases where the banks
have lost security. Now, if the banks lose the security can they enforce that the borrower
should repay the loan? The primary answer would be no, because the bank themselves are
negligent in taking care of goods. So, the bank should not lose the goods. This is rule number
one. Losing goods or the goods getting stolen or theft or the goods getting taken by someone
else is prima facie evidence of negligence.

See banks must have security. Now, it is just not having a security guard with a gun, but he
should be able to protect the property of the bank and the property of those customers that are
kept as security in the bank. So, negligence means that any goods that are stolen of course,
the aspect of negligence can be proved by point one. Point two very often than not the goods

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are not stolen they are lost because the banks are not very good at keeping things properly
and these are public sector banks and are not held accountable.

So, the goods are not found or the security of the goods is not found in those cases also
negligence can be easily attributed. There are circumstances in which unfortunately the goods
get deteriorated or destroyed because of the negligence of the employees of the bank. Now
bank of course do not have their mind of their own, they are not necessarily negligent of their
character, but the employees of the bank also can be attributed with that kind of negligence.
So, the bailee if he fails to take care of the goods and if there is any aspect of negligence in
taking care of the goods and evidence is attributed to the fact that there was not enough care,
enough caution, enough consistency in terms of trying to secure the goods in those
circumstances we can say that Section 152 and 151 have been violated by the bailee and for
which the bailee can be held accountable and answerable as well.

Usually, when the bailor gives it to the bailee, it is for servicing. It is the bailor who must pay
in this context. The bailee sometimes will have to give compensation and damages if he feels
to take care of the goods properly. Here, there is a reversal of rules that usually happens. So,
when you take a Zoom car on rent or hire you are the bailee. Zoom car is the bailor so they
are the ones who got you the goods. So, take care of the goods and if you do not do so. then
you can be held responsible under the contract of bailment. Bailee has additional duties. For
example, they have a duty not to mix the goods with their own. They have to Keep the goods
of the bailor separately and should not mix it because the goods are not yours. You are not
the owner you and you have to return it so do not mix the goods. So, these are very traditional
duties which go back to food grains in warehouses and so on. This is the reason why these
duties are mentioned in the Indian Contract Act.

Most importantly there is a duty of the bailee not to make any unauthorized use of the goods.
This is a critical point to note. Authorized means a permission or license from the bailor is
required to use it and what is an unauthorized use? Simply put, suppose you have given your
automobile for serving do you expect the service station owner to take the automobile for his
personal use? No. You have given it for servicing it should be used only for servicing and
nothing more. Second, let us look at unauthorized use in the Zoom car case. Now in a Zoom
car case, you have taken the Zoom car. Now does the Zoom car allow another driver to use it

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if yes then it is authorized to use, but suppose you put your son and who is a minor to drive
the car because it is someone's car, I will let him drive.

Then in that case it is a clear case of unauthorized use for which the bailee can be held
responsible and accountable. Most importantly that the bailee has a duty to return the goods
on the expiration of the contract or once the period of bailment is completed. Why there is a
duty to return because the goods do not belong to the bailee he is not the owner. Once the
purpose is accomplished the bailee must return the goods. Now, a duty to return is based on
certain conditions that simultaneously the bailor is ready to compensate which is important.

It is like a simultaneous transaction in those cases. Now, you will notice that in case the
bailee fails in his duty to return the goods at the proper time and place then he could be held
responsible for a couple of things. Most importantly what would he be responsible for? If the
goods are with him after the expiration of the purpose of the contract or after the expiration at
the time of the contract if he continues to keep the goods, this is called wrongful possession
of goods.

Rightful possession of goods is when he is within the period of a contract, right from the
possession of goods is before the purpose of a contract is to be accomplished those are
rightful possessions. Once everything is done, if you continue to go to goods for nothing then
that would be wrongful possession of goods and in case of wrongful possession of goods if
anything happens to the goods, the bailee liability will be an enhanced liability.
And there could be no kind of excuse or justification for any kind of negligence that would
have resulted in damage to the goods. So, that is an extra liability that can be imposed on the
bailee. The parties must know their responsibility and liability which seems like common
sense which the law has noted such as principles and imposed the same as duties or
responsibilities.
For example, bailment contracts take place from time to time and on a fairly day-to-day basis
and for such, contractual provisions of the Indian Contract Law will apply.
(Refer Slide Time: 19:16)

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One of those interesting aspects in which the court looked at bailment was in this very
interesting case of Orient Longman Limited versus Jayati Laila Kabir. Interestingly what had
happened in this case was that the notes written by Maulana Abdul Kalam Azad on Kabir had
been handed it over to the National Archives in New Delhi.
With certain kinds of stipulations that they must be open 30 years after the death of Maulana
Abdul Kalam Azad. This was a condition that was given to the government Generally, when
you give something to the government either you gift it or you give it as bailment. You give it
so that the government will be in a better position to use it for public purposes and so on.

Now, the government through the National Archive opened it before the 30 years as per the
condition that was laid down and hence the court said that when the government is acting as a
bailee, it has certain responsibilities and it must deal with the goods under the instructions of
the bailor. Whatever the instructions of the bailor are, the bailee should not violate those
instructions.

So, the directions that are given by the bailor to the bailee are sacrosanct and the bailee can
only use or deal with the goods as per those directions hence the court in this case said that
the government had violated the provisions of bailment because they opened it before those
30 years and hence the government is responsible in breach of that kind of a trust and in the
said contract.

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Further, you will notice that there are few cases the duties of the bailee are fine that the rights
of the bailee as well because the bailee has already worked on the goods. So, he must be paid
so that he can recover the charges, he has to return the goods and that is his duty and he can
claim all his legitimate expenses in case he is called upon to return the goods.

But what is critical now is to understand Section 170 and Section 171 because you will notice
that now the special contract starts with special remedies as well which means that that most
of the remedies that one seeks is to go to the court and this requires the intervention of the
court to grants these remedies, but when you look at the right of lien which is there under the
bailment of law, it is there in most special contracts, but the bailment contract is easily
explained through Section 170 because they make a distinction between a general lien and a
particular lien. You will notice that a lien is an equitable right in which a person has the right
to retain the goods for any kind of payment that is due to him. So, the bailee does not need to
return the goods and he can continue to exercise the right of lien if the bailor does not pay his
honorarium, his commission, his money, or his charges.

So, this is a self-remedy that parties can exercise by saying that look I will not return the
goods till the time I have been paid for the same. Now, lien is available to every individual in
a contract of bailment who has involved in the servicing of the goods or in dealing with the
goods especially when he has put in certain labor of skill. A typical example is giving your
automobile for servicing.

If you do not pay his service charges then he need not give the automobile back to you
because he has already incurred his labor or skill in servicing the goods that are billed and
hence under Section 170 he can exercise what we know as the right of lien that is interesting
because you would first force him to give the goods back and then go out and ask him to go
to the court to claim and the same will delay or postpone his remedies.

So, whatever you can exercise legitimately under the provisions of law you should do so and
hence that kind of a right to retain the goods is called the right of lien. General lien and
particular lien are two distinctive factors where a general lien is available to only certain
categories of bailee, like a banker or policy broker or a wharfinger or a factor.

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These are certain kinds of bailee who can exercise general lien. Now what is a general lien?
General lien means not only towards that product but for a general set of accounts. So, it is
broader than what a particular lien is, but a lien is a right that everyone can exercise and you
will notice that even bankers can exercise a right of lien.

So, that is how the right of lien is exercised. This concludes the discussion on contract of
bailment because we have understood bailment with the help of a couple of cases, but what is
important is that we have looked at government as under contract of bailment where
government can either be the bailor or the bailee.

In most cases, the railways are a bailee. Air India before it was sold to the Tatas then Air
India was carrying cargo. Here, Air India can be a bailee, and ships can be under a contract of
bailment. So, in many cases, government also acts as a bailor by being involved in these
kinds of contracts. So this is how the government enters a lot of these aspects of bailment in
different forms.

And that is also something that should be noticed, regarding the responsibilities, especially
with tendering and public procurement. So, that is how the aspect of bailment will give us an
idea where how this special contract is applicable in tendering and public procurement.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law School of India University
Lecture No: 31: Special Contracts: Pledge

(Refer Slide Time: 00:16)

The concept of pledge primarily revolves around the granting of loans or money. However, it
is essential to distinguish between the different types of money lending businesses in India. In
the informal sector, pledge is commonly referred to as pawnbroking.

Now, pawnbrokers, in most cities, are local money lenders. What they do is, if you go and
give them some kind of valuable goods, usually jewelry, gold, or silver, they take it. If you
need immediate liquid cash, I think they are the ones who can provide it to you. So, pledge,
on the other hand, is in the more formal sector, perhaps involving banks and financial
institutions. It is where they give you money or a loan advance.

What is interesting is that banks always require security before granting a loan, as there is
always the risk of default. Hence, they request you to provide a valuable item as a deposit. It
is important to note that pledge is typically used for movable goods, whereas mortgage is
primarily utilized for immovable property. So, if you use your house and land as collateral,
you enter into a mortgage agreement.

But if it is anything that is movable property, especially what we call goods because there is a
distinction between movable property and goods, then you have entered a contract of pledge.
Now, one of the most interesting aspects is what can be pledged, and does the government

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also enter pledge contracts? They may, in certain circumstances. For example, the normal
form of pledging property is shares. Shares and stocks can also be the subject matter of
pledge. Banks prefer this because they hold value in terms of market conditions, require less
storage space, and importantly, have a lower risk of theft compared to something like gold.

Now, when we talk about property today, tangibility was once crucial, but now we are
considering immovable property under the contract of pledge as well. Intellectual property
can also be pledged. Trademarks and patent rights, for instance, can be pledged, and they can
be assigned a monetary value.

Third-party hypothecation, is something that the SARFAESI Act, also known as the
securitization act, deals with to some extent. Hypothecation is considered a modern form of
pledge. Some authors have referred to hypothecation as "in pledge" because in hypothecation,
the goods can be utilized instead of being kept as a dead security with the bank. In traditional
pledge, the bank retains possession of the goods, and the borrower cannot generate money or
income from them, making it difficult to repay the loan. On the other hand, if the goods can
be monetized while still serving as security, it becomes easier for the borrower to repay the
loan. Hypothecation is commonly practiced with taxis or automobiles that are taken on loan
or lease, allowing the driver or owner to utilize the vehicle while it is held as security by the
bank. That is what hypothecation entails in its actual sense and meaning.

To comprehend two important points in the contract of pledge, we need to consider who can
pledge and what can be the subject matter of pledge. Regarding the subject matter of pledge,
it is crucial to understand that the Indian Contract Act categorizes pledge as a type of
bailment.

It is bailment because in pledge, the borrower intends to keep something as security with the
bank by delivering these goods for a specific purpose. And what is that purpose? The purpose
is to obtain cash or a loan. In pledge, the bank simply holds the goods as security without
taking any further action, which is why the Indian Contract Act grants them a general lien
over those goods.

However, it is important to understand that under Section 172, there is a definition of pledge,
and when we examine the chapter on pledge, we come across the fact that not only can goods
be pledged, but the title to the goods can also be pledged. In India, even with the rise of

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digital transactions, many goods do not have traditional title deeds. Some goods do have title
deeds issued by the government or possess recognized documentation.

However, for many goods, the receipt of purchase serves as the basis for claiming the title of
the goods. Traditionally, even a railway receipt is considered a document of title to goods.
So, if goods are entrusted to the railways and a receipt is issued, it becomes a title deed for
the goods. This concept is defined under the Sale of Goods Act, which outlines what can be
considered as a document of title to goods.

Hence, it is important to note that these types of documents of title to goods can also be
pledged. The subject matter of pledge is vast, as I mentioned before, and it even includes
intellectual property. Additionally, it is worth noting that there have been amendments to the
Depositories Act regarding the pledging of shares. Promoters often pledge their shares to
raise funds or loans for the company. Therefore, shares are commonly used as a favored
subject matter of pledge, especially considering the current materialistic form of share
ownership.

Furthermore, once we understand who can pledge, it is important to note that typically it is
the owner of the goods who can make a pledge. However, upon reading the Indian Contract
Act, we discover some interesting provisions that extend the rights to pledge beyond just the
owner. An agent or a mercantile agent, acting in the ordinary course of their business, can
also pledge goods. This introduces the intriguing aspect that agents can also engage in valid
pledges, provided it is done within the ordinary course of their business and for business
purposes."

So, pledge is a broad aspect it adds to the discussions of what we have already seen under
contract of bailment.

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(Refer Slide Time: 07:37)

Now, when you consider mercantile agents, friends, there are certain conditions that need to
be met. Firstly, the agent should be in possession of the goods or the document of title to the
goods. Secondly, they should have the consent of the principal. Thirdly, the pledging should
be in the ordinary course of the agency business. And lastly, it should be done in good faith.
If these three conditions are fulfilled, a mercantile agent can proceed with making a pledge.

Now, when we discuss about agents and mercantile agents, we understand that a mercantile
agent is someone who has the authority to engage in trade on behalf of their principal. A
perfect example of a mercantile agent would be a car dealership showroom, as they act as a
mercantile agent in selling vehicles on behalf of their principal. They are agents who conduct
commercial transactions for their principal, and such agents also could make pledges.

Why do mercantile agents receive this recognition under Section 178? One simple reason is
that in earlier times, it was necessary to appoint an agent in a location where you could not be
physically present, and there may have been a lack of communication. During those days, it
might have been necessary to manage the goods and have access to cash for dealing with
them. Therefore, the right to pledge the goods was granted to agents, as it provided a
temporary arrangement for delivering the goods in exchange for a money advance. These
justifications allowed agents to have the right to pledge.

Interestingly, Section 179 also states that a person with limited interest can also make a
pledge. In this context, limited interest means that the person not only has possession of the

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goods but also holds a proprietary right over them. This additional right is recognized under
Section 179.

However, one aspect that could be improved under Section 179 is the concept of sub-pledge,
where a bank proceeds to create an interest in the pledged goods. When a pledge is created, it
generates interest because money is involved. Therefore, the bank has an interest in the goods
to the extent of the lent money. Consequently, under Section 179, the bank can engage in
sub-pledging. Like the concept of sub-bailment in the Contract of Bailment, sub-pledging is
also possible in certain cases, depending on customary practices or with the consent of the
pledgor, for the purpose of the pledge.

(Refer Slide Time: 10:26)

Also, when you examine the concept of pledge by non-owners, one case worth considering is
the Philips versus Brooks case. This case falls under Section 178A of the Indian Contract
Act. Please note, friends, that this section is an additional provision and was not part of the
original text. It was added later. This section stipulates that certain types of pledges can be
considered valid even if they are made under a voidable contract.

in the case of Philips versus Brooks, it is a technical case that requires an understanding of
the context in which the pledge becomes valid. However, it is important for us to grasp the
concept that voidable contracts are deemed void either by the court or upon the parties'
decision if they believe that their consent in the contract was induced by fraud,
misrepresentation, undue influence, or coercion. When the option to declare the contract

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voidable is exercised, the contract becomes void. However, if that option is not exercised, the
contract remains valid.

Therefore, in cases where the contract is valid, despite being potentially voidable, any kind of
pledge is considered valid. Time becomes a crucial element in determining the validity or
invalidity of the pledge. The Philips versus Brooks case is an example worth considering. It is
a complex and intriguing case that encompasses various elements, such as ownership of the
contract and the significance of time in granting or denying rights to third parties.
Furthermore, it sheds light on the challenges faced in pledging goods that lack proper
documentation of title. Now, moving forward, let us discuss the pledge or the Pawnee, which
in this case refers to the bank acting as a secured creditor.

Now, that the relationship between the creditor and the debtor is divided as follows: the
debtor is the one who borrows, and the creditor is the one who lends. In the case of a bank or
the pawnee, they have certain goods as security, and being a financial institution, they can be
considered as secured creditors. The concept of a secured creditor is important to understand
because it grants them the first rights to recover their loan.

When goods are pledged and the bank has physical possession of those goods, the party with
physical possession always holds the first right over the goods, making them a secured
creditor. This security is in terms of the goods kept, as well as in terms of recovering the loan
and fulfilling the purpose of the loan.

In the case of Bank of Chittoor versus Narasimbhu Naidu, it was established that if there is a
single good with multiple claimants, the question arises as to who should have the first right
and possession of the goods. The court ruled that in a pledge, it creates a secured creditorship,
and the banks should have the first right over the goods unless their loan is discharged.

Therefore, the court's decision emphasizes the importance of the banks' status as secured
creditors and their priority in recovering their loan and maintaining possession of the pledged
goods until the loan is repaid.

Unless the rights in the contracts are discharged, no other person can claim rights over those
goods. This is how the concept of secured creditorship becomes relevant, particularly in cases
of liquidation, bankruptcy, or insolvency, where the assets need to be used to repay creditors.
Secured creditors hold the first right over such assets.

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Understanding these aspects of contracts is crucial for commercial dealings in daily business
operations, particularly when dealing with government contracts. These concepts hold
significant relevance and importance in those contexts.

(Refer Slide Time: 14:43)

It is important to discuss the rights of a pawnee. The first right of the pawnee is to the right of
retain. this is like a right of lien though right of retain is considered to be largely broader than
right of lien and drafters have very clearly said look the pawnee has the right to hold the
goods till his debts are paid off, but it is not only towards the debts that the banks can retain
the goods.

It is also for the interest on the debtor. So, principal with interest and any kind of ordinary or
extraordinary expenses banks have incurred in the pledge. They can hold on to the goods,
they did not return the goods back unless those are actually paid off and that is where the
right to retain is a broader right, it is a right of a creditor, it is the right of the pawnee and this
is the legal right.

He may not hand over the goods it is an exercise of right without the intervention of the court
as well. So, the pawnee offer the rights to recover extraordinary expenses of course this is
something that he always has this if he takes care of the goods and naturally when you take
care of the goods you may incur certain expenses of storage of preservation etc., those rights
also the pawnee can exercise or he can recover it from the pawnor.

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So, under the contract of pledge once can notice that the rights of the pawnee that is one who
has lent the money has been secured, has been mentioned and that was the purpose of the
Indian Contract Act drafter in saying in pledge now we must take care of the rights of the
pawnee. If he takes care of the rights of the pawnee they will lend that is how business
commerce and trade can happen.

And that is the purpose of calling this a special contract and having defining the rights and
obligation of the parties in the contract of pledge.

(Refer Slide Time: 16:35)

The remedies available to the pawnee are discussed further. He has the discretion of bringing
in a suit. Now please note why because you already have goods so you do not have to bring
in a suit so that his entire discretion at the same time, he can retain the goods and please note
this discretion is something that is completely left to the pawnee. No one can force someone
to first sell the security and then bring the suit no.

The provision of the contract law of the pawnee has the entire discretion unlike the pawnor.
You first sell the goods; you sell the securities from that sale if you are still having any kind
of claim only then you can file a suit. This is usually a misunderstanding that lot of people
have, but the contract of pledge very clearly states otherwise and it gives the entire discretion
to the pawnee.

They have the option to recover the debt in any manner they choose, such as filing a lawsuit
or retaining the goods. The Vimal Chandra Grover case is an interesting and significant case

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regarding the right to sell. It is recommended to read this case as it addresses an important
point. The pawnbroker has the right to sell the pledged property, but the decision to exercise
this right is entirely up to the pawnbroker.

If the debtor defaults by not paying the debt or by delaying the repayment, then the
pawnbroker has the right to sell the secured property. However, in cases where the bank has
misplaced or lost the shares, or if they have taken a considerable amount of time to locate the
shares, it may be seen as negligence in taking care of the goods as if they were their own.
This relates to the principle of bailment, where the bank has a duty to return the goods once
the purpose is fulfilled.

Now, if there is negligence on the bank, the borrower has every right, the debtor has every
right to sue the bank for that kind of a negligence. However, he cannot insist that because of
the delay his rights got affected because the share prices fell in those 9 months and that is
why he wants the pawnee to be held accountable. For that he cannot sue the pawnee for,
because that is a choice, that is a discretion about when he wants to sell.

Whether he want to sell or not in the first place or whether he wants to bring in a suit. Now,
interestingly to bring in a suit please note there is a limitation. Under the limitation act of
1963, the ordinary limitation time to file a suit for the recovery of debt is three years from the
time of default or from the three years times from the time the cost of action has arisen and if
the three years get expired the creditors cannot bring in a suit that against the debtor because
the limitation time has expired.

So, no suit is entertained unless probably that is what we call as Condonation of delay. So,
that is one kind of a plea and a discretion that the judges can allow you to even file a suit after
three years if they accept the Condonation and then accept the suit as well. However, the fact
is that will not in any way touch the security that the bank has.

The bank can deal with the securities even beyond three years that is something that the
banks always have a right upon and that is why we say under the limitation of law which is
based on the Doctrine of Laches. The Doctrine of Laches is a Doctrine of Delay. Under this
Doctrine of Laches which is the rule of delay it would exhaust your remedies, but it would
never exhaust your rights that is a very popular statement that we always say.

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It will exhaust your remedies vis-a-vis the fact that look you cannot file a suit and exercise
your remedies. If you wish to do that you have to do that within three years beyond that you
cannot. However, it does not exhaust your right, which means, towards that kind of security
the bank continues to hold the security, they can sell the security at any point of time that
right the goods continue to hold.

The fact remains that please note if the banks decide to sell, then law and section very clearly
says that a notice must be served. Now, if the bank does not serve a notice the sale will be
invalid, it would be illegal and again the borrower can have a grievance regarding the same.
So, what is provided in the statute as a mandatory notice must be complied with and if the
banks fail to comply with the same.

Then the borrower can say his rights under the contract of pledge has been adversely affected
by the bank. This is how the contract of pledge spans between both the parties in contract and
please note that these are facts that no private contract can negate, intervene, waive or
diminish because these are statutory rights that are granted to contracting parties that is how
the law and contract actually deals with the rights of the parties.

(Refer Slide Time: 22:21)

Finally, to look at what are the rights of the pawnor? The right of the pawnor is the right to
redeem. Redeem means the owner, the bailor and the pawnor who wear the original owner of
the goods and they have pledged these goods to get a money advance. They can redeem the
property anytime before the actual sale takes place that means even after default if they wish

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they can take the loan plus the interest and the extraordinary expenses whichever is there and
still they can take their goods and make it their own.

The right to redeem continues to be a right for the lifetime of the owner till the actual sale
takes place and even during the sale there is a possibility that you can take part in that kind of
sale and purchase the goods as well which is kind of controversial in this kind of a situation
because there is a right to redeem and hence before the ownership in the goods get transferred
to the third party you can actually claim it to be your own. That is one of the rights of the
pawnor it is called the right to redeem and that is a right that can be exercised before the
bankers.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr) Sairam Bhat
Professor of Law, National Law School of India University
Special Contracts: Indemnity Part 01
(Refer Slide Time: 00:15)

The Indian Contract Act 1872 and which in current times in contemporary contracts assumes
a great amount of significance in terms of say having a clause in a contract or trying to cover
their losses through such contracts and that is called indemnity contracts. Now, indemnity
contract is a special category of contracts and it is covered with indemnity and guarantee as it
is called. it has only two sections that are dedicated to trying to define and understand
indemnity and the courts have rightly said that these two sections do not entirely state what
the law of indemnity is and you can infer the laws of indemnity in several other provisions of
the Indian Contract Act itself and with reading of other sections of the law.

Like in the Companies Act, can directors claim indemnity from the company. So, if you look
at the Partnership Act, can partner claim indemnity from the firm? So, there are numerous
instances of these indemnity that exists and hence to understand what indemnity is you will
notice that there are two parties to this contract. One is called the indemnity holder who has ,
the promise to be indemnified and one is called the indemnifier who has the responsibility to
indemnify.

In a contractual relationship, there are two parties involved: the indemnified party and the
indemnifier. Interestingly, the concept of indemnity, which means to provide compensation
or cover for losses, is referred to as the "hold harmless" clause in UK law. To indemnify

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means to assure the other person that their losses will be covered. It signifies the commitment
to fulfill the contractual obligations and compensate for any losses incurred by the
indemnified party. This ensures that the other party can proceed with the contract without
worrying about potential damages or losses, as the indemnifier takes responsibility for them.

The promise of indemnity which means that you do not want your contracting partner or your
contracting party to suffer any kind of a loss that arises from the contract itself or may arise
from your actions as the case maybe, and hence in modern commercial contracts not modern
even quite from early times the most essential negotiated clauses in most modern-day
contracts is the clause of indemnity.

Section 27 and Section 23 today an employment bond is also titled as an indemnity bond. So,
you expect the employee to indemnify the employer in case he forfeits the term of the
contract or lease the term of the contract before the time stipulated for any kind of loss that
may arise from his leaving of the employment that is what indemnity means.

The essentials of indemnity is that when one gets into such a contract or such a clause in a
contract you anticipate that there can be loss that one of the parties the contract may suffer or
both the parties may suffer. In modern context you will notice that indemnity if you look at
the law and the broader context of the same it is usually mutual it cannot be just one party
promising the other.

The mutuality principle plays a significant role in indemnity agreements. Both parties
involved must have an implied obligation to compensate the other if they cause any losses. It
is a mutual understanding that if one party commits a loss, they will be responsible for
providing compensation. This division of responsibility can be explicitly expressed in the
contract. There is an anticipation that one party may experience some form of loss, and the
contractual agreement ensures that the necessary provisions are in place to address such
situations.

And intention when agreed to the indemnity clause is that want to save the other parties from
any such purposes and in good faith when you do the same whether there is an express or an
implied contract does not matter, you have a duty to indemnify. So, that is how the contract
of indemnity plays an important and a critical role in today’s context.

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(Refer Slide Time: 04:48)

What does indemnity do? It promises the other to save from the loss that is caused by his own
actions that is when you strictly read Section 124. So, from the act of the promise or any
other intention that is where Section 124 is only about such kind of losses that maybe caused
just by the contracting parties’ behavior, conduct or his contractual relationship.

However, indemnity is far broader than that because you notice that you may loss because of
not only my fault, you may suffer loss in this contract because of natural factors and natural
factors could be a cyclone an earthquake, a volcano, a tsunami, or flood so on and so forth.
So, there again you talk about saying look once you enter a contract and in case you suffer
losses from these natural factors then I will compensate you do not worry please go ahead
and fulfill your obligations in this contract.

So, that could be also a kind of a loss that needs coverage that needs some kind of
anticipation to be factored into as well. Also, you will find that losses can be caused due to
accidents. So, when someone is producing some machinery for you or you are handling
someone else’s machinery there machinery can meet with an accident and then you expect
the manufacturer to say look in case while operating this machinery if you suffer any kind of
loss or if there is an accident that occurs due to the handling of this machinery, I will
compensate and indemnify have the confidence by this machinery. So, the indemnity clause
is usually used as a guarantee to the performance of a product. It is also used to give
confidence to the parties saying that any kind of loss will be covered due to my inactions and

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accidents usually are not necessarily that can be caused by humans or natural facets it can be
simply a patent or a latent defect in the machinery.

It is not necessarily a human error or human factor that has to be taken into consideration and
those accidents are also something that indemnity may want to cover in the long distance and
has some important significant implication. How do you look at the different kinds of
indemnity in India and abroad.

Different kinds of indemnity are discussed further. For example, intellectual property
indemnification is the most popular one, IP indemnification as it is called. This is a case
where a patent holder, inventor, or a manufacturer says that if you buy this product, I am
giving you the license to this product because I have IP to it.

Tomorrow if someone else files an infringement suit against you and then you must defend it
and you suffer any kind of a loss because of that infringement. So, I will promise to
indemnify you for that kind of a loss or that kind of a hardship that you undergo because you
have taken an IP license. So, that is a promise that holders of intellectual property get into.

And that is how an IP indemnification clause makes that kind of a promise. Product
indemnity is based on the same example that I told you that I want you to take my product in
the confidence that if while handling the products anything happens to you or your employees
or any other person I will cover that loss, I will cover the risk, and I will indemnify them.
Therefore, that is what a product indemnity would also mean.

Similarly, professional indemnity now this is interesting because you want professional
indemnity to be there when suppose I am sending one of my employees to do some onsite
work and due to his actions or inactions you suffer any kind of a loss or injury due to his
professional misconduct or otherwise. Then in those cases I must give you that assurance
saying that look do not worry, allow our employees to come on site.

If anything, they do due to which you suffer any loss I will compensate you for the same that
is an assurance that is the promise that is usually given in professional indemnity. So, you
will again see the dimensions of indemnity and the applications of the same that are required
as risk assessment in modern kinds of contract that must be generally undertaken and these
have to negotiated and agreed upon.

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Though there are different forms that are available on these kinds of indemnity clauses. This
is basically how people design contracts in the modern context and this plays an important
role in government contract, indemnity has an important obligation to be completed because
you do not want contractors just to be giving you basic nominal damage or compensation
which is how the law on damages works.

Indemnity is far broader in its application and scope than what damages is. Most of the
government contracts have damages clause where they forget to have an indemnity clause.
Now, damages clause of the limitations of damages is because under Section 73 and 74 of the
Indian Contract Act you are entitled to only those kinds of damages that are reasonable in
nature.

So, do not have any kind of damages that says you can get exemplary damage you have only
nominal damages. Point two is there is something called rule of remoteness of damages
which means you cannot get damage that is remote. The damages that can be foreseen,
damages that are direct, are the only things that you can get as monetary quantification of the
loss that you suffer.

Damages has certain limitation, damage has certain restriction, it has a huge jurisprudence of
what you can claim and what you cannot claim. However, idea of indemnity is to broaden the
liability of the other party to cover things that you may not have foreseen, things that may be
due to the actions of the third parties, things about something that is indirect, something that
is consequential.

Indemnity’s basic purpose is to expand the whole law of damages which has huge limitation
to what can be claimed and what can be asked. Indemnity is used to broaden the same and
hence it becomes a very important and inevitable part of contractual discussion. Very often
than not insurance contracts have been called as indemnity contracts.

They are in one sense. They are not once that are covered under 124, they are covered under
the broad ambit of indemnity because the basic duty of insurance company is to cover your
loss. So, you pay premium, you hope nothing will happen, but if something happens the
insurance companies come and hold you harmless which means that not in the sense of a
criminal conduct.

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That is nothing like indemnity, but in the civil liability the insurance company they will say
that we will compensate with the money and that loss is covered by money. So do not have
any hesitation please go ahead with your business. So, fire insurance could be indemnity
insurance and so on and so forth. So, most companies take some of these insurances which
are critical and important.

Also, notice that today doctors take what will be called as professional indemnity insurance,
why is this important is because doctors can be sued for medical negligence from the patients
and very often than not if the doctors must pay compensation for medical negligence, then the
professional indemnity insurance can be invoked and the insurance company will pay the
patient that kind of a compensation.

The doctors need not pay from his own pocket so that is the kind of job or the responsibility
that these professional indemnity insurance do. So, that is something that lot of professionals
take including directors of the company because today directors are unfortunately going to be
held personally accountable or liable, they inevitably want to cover that risk or transfer the
risk with an insurance company.

And even directors of companies do take what we call as the professional indemnity
insurance. So, if the director is personally sued by a shareholder or by any kind of an
individual to which the director must contribute or pay, then the director will end up paying a
lot of money and hence an insurance works in his favor.

The insurance company will step in like it does in case of doctors and it will pay that kind of
an indemnity to those third parties as well. Interestingly, in indemnity there is no limitation of
liability unless you want to cap it and you say for example in insurance, we take fire
insurance, but my final responsibility is just 10 lakhs or 10 crores. So, that is the final limit
that insurance company gives to users.

It is not unlimited in every sense of the term whatever is your loss we will cover it; no, it is a
cap that usually comes into place. For example, we talk about indemnity bond in employment
it is not unlimited so it could be 3 lakhs or 5 lakhs so that is what your indemnity liability is.
So, you could have that kind of limitation of liability that is possible in terms of the amount
and figures to which you should be held accountable to.

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At the same time please note indemnity can be quite a broad in terms of third-party losses and
liabilities. In terms of those that are foreseen, in terms of those that are consequential losses
or damages and consequential is something that you know in most common law jurisdiction
is not admitted whereas indemnity can help you gain those kinds of necessity losses as well.

(Refer Slide Time: 14:55)

In matters of implied indemnity, it is important to understand that in common law and I think
if you look at how the court in India have always viewed this provision. They say that look
every contract is a contract of good faith it may not be of utmost good faith because insurance
contracts are contract of utmost good faith, but every normal contract is a contract of good
faith which means that due to the contracting parties own for they should not create a loss to
the other parties.

This is something that is implied by the laws of obligation. If there is any such laws then have
a duty to indemnity the other person. Normally we will say from that loss you will have to
pay damages, but indemnity is also about the fact that look you are going to be held
accountable, you are going to held liable and this is implied in law, implied in contract. So,
you cannot from your promised obligation or from your contractual obligation, cause any loss
or damage to the other party in the contract.

Implied indemnity has been in existence for quite some time and we know that in most cases
where contracts come into existence the party that causes harm, promises to hold the other
party harmless and any kind of harm must be compensated and equated in terms of the
monetary loss or value and everyone has a right to claim the same irrespective of whether the

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law defines it or irrespective of the fact that the contract has such a clause. That is the general
nature of indemnity in the form of damages that ought to be always paid or covered and that
loss is something that needs to be compensated as well.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law School of India University
Special Contract: Indemnity- Part 02
(Refer Slide Time: 00:16)

While understanding contractual liability on indemnity, it is important to understand the fact

that, while indemnity is viewed as an alternate to damages. One should understand that, the
cases in India and in other countries and jurisdictions have said that, lot of similarities does
exist between damages in indemnity however, indemnity is different from damages for a
couple of reasons.

And one of them is that when can indemnity commences or when does an indemnity liability
commence in a contract. Usually when you, see it as an extension of a new form of damage
then you will probably come to this conclusion that indemnity only arises when a loss is
made or when there is a recovery of dues or when there is some kind of damage or proof of
the same. So, unless someone has, suffered a loss, indemnity will not come into existent.

This is a kind of understanding that most of us have when we read indemnity along the
damages. However, the slight distinction over here is indemnity can commence as soon as the
amount of indemnity is confirmed. When the liability is certain and it is not that, the liability
has to be absolute or it is not saying that, let us assess the liability finally and only then
indemnity will commence.

So, once the, liability is certain and precisely known to require indemnity, and if that amount
certain in terms of the actual loss, then the indemnifier’s liability commences. So, it is

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important to understand that indemnity is not always to cover your loss. Of course, it is, but
once the loss is absolute, certain, and eminent, then indemnity should commence. So, you
cannot wait for or postpone your remedy to claim indemnity after an assessment of actual or
total loss.

An indemnity can even start as a contractual obligation right from the time the contract is
made. So, you do not necessarily wait for indemnity for natural breach of contract. You do
not wait for the damages to be totally absolute, in terms of the final figure or amount and then
you do not want it to, in terms of the proof or actual loss.

The obligation on indemnity can commence at any given point of time as soon as there is an
absoluteness and certainty of loss. So that is, what was stated in this Bombay High court case
of Gajanan Moreshwar versus Moreshwar Madam Mantri and it is a very important aspect of
the distinction about, indemnity as well as, the kind of compensation or damages that you can
seek in a contract. The aspects of remedies in contract and damages are usually a remedies
for breach of contract. the obligation of indemnity is something fronts that commences even
before breach. So, it is not some kind of a remedy only after breach and it can even
commence before, the actual breach of contract takes place. It means that you have a duty to
indemnify, you have a duty to hold the person harmless, you have a duty to compensate a
person as soon as he presents, that kind of a claim. Where it is in absolute terms, some kind
of obligation that you need to indemnify that other person.

So, it is not remedying post breach of contract, or is not a condition on breach itself duty and
non-obligation to compensate, reimburse, to hold the other person as being harmless, to
ensure that the other persons do not continue to suffer any other loss, or any other, damage
that is when indemnity can be brought in.

Indemnity is a contractual obligation. It commences during the contract, and it is not some
kind of remedy post breach of contract, though yes, it is, used to also assist the kind of loss
but the duty to indemnify commences even before the actual breach of contract take place.

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(Refer Slide Time: 05:01)

Finally, when you look at indemnity under insurance, we always say that to cover the
indemnity, you always take an insurance policy, and I have given you a couple of examples
of how the risk of indemnity or the anticipated loss of indemnities cover through the
insurance scheme. However, you must note that, there are several kinds of indemnities that
one seeks for in terms of the kind of loss or damage one incurs.

Indemnity is a kind of insurance, but all insurance policies are not indemnity, especially life
insurance, because you cannot, assess, the loss of life, in terms of monetary compensation.

So, the loss of life is not equated to what has been promised in the insurance. It can be more
than that or it can be less than that. So, it is just a coverage of risk, though indemnity is
something that should compensate in monetary terms the kind of loss that has been incurred.
Life insurance does not do that. So other forms of insurance were considered as an indemnity
kind of contract above and beyond 124

So, what are the rights of an indemnity holder? I think this is critical, and under section 125,
you will notice that an indemnity holder to whom a promise of indemnity has been made can
recover a couple of things. First, he can recover all the kind of damages that he has occurred
or he must pay in a suit. So, in a case that is filed against an indemnity holder, if he is
directed to pay some kind of damages, then he can recover all that, this is point number one.

This clearly says that, because of your fault, if I face a litigation, anything that I incur in that
litigation, you are responsible to indemnify. Second, in defending the suit or in bringing a
suit. So, there are two ways. So, you can bring, you can defend. Any kind of cost or some that

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include in doing the same, including legal fees, and legal cost or any kind of cost, can also be
claimed under indemnity. This is what the law says, but broadly you will understand that
contractual clauses can even say beyond it and you will notice that, any kind of damages in a
suit or all costs that, you have to defend can still be considered as some form of direct loss.
But as mentioned in the past, indemnity contractually can also go beyond the direct loss and
cover consequential damages, which are indirect damages, which will be discussed later.

The Indian law on damages does not permit you to claim consequential losses. One can only
claim direct damages, which are reasonable in nature, which can be foreseen and which have
a natural consequence to the breach of contract, and which are not very remote to the breach
of contract. However, indemnity probably provides you that kind of discretion to get all other
forms which damages cannot provide.

Every government tender or agreement should include a strong and mutual indemnity clause.
It is essential to emphasize this requirement because it is unfair to expect the contractor alone
to bear the responsibility of indemnifying the government for all types of losses or damages
resulting from their actions. Similarly, the government should also be held harmless and
compensated if they suffer any harm or injury due to the contractor's actions, acts, or
omissions, which may encompass various factors. This ensures a fair and balanced approach
to indemnification in government contracts.

Like for example, if a contractor has to be given a land for construction or doing a works
contract, if that is delay and due to the delay of handing over the land, the contractor suffers
any kind of a loss or injury, or because of the construction work on a land, the villagers
actually assault or attack a contractor, and he suffers losses, or his employees suffer any kind
of an injury, in those circumstances, the government owes an obligation to indemnify the
contractor.

Therefore, it is crucial to apply and incorporate the principle of mutuality in contractual

obligations. This principle serves as a vital aspect that one must imbibe in contractual
obligations. Additionally, it becomes essential to include a well-defined indemnity clause that
outlines the scope of coverage and exclusions. It is necessary to determine what falls under
the purview of indemnity, such as natural factors, human factors, or accidents. These three
categories serve as important considerations when drafting an indemnity clause.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law School of India University
Special Contract: Guarantee - Part 01
(Refer Slide Time: 00:15)

The contracts of guarantee, as a special contract and followed with agency and sale goods,
which is covered under a law called the sale goods act of 1930 will be further discussed. Now
all these kinds of contracts are very important and relevant for multiple reasons that these
define the contractual rights and, liabilities of the parties in this contract.

Furthermore, it is important to acknowledge that this approach narrows down the scope of the
freedom of contract theory and establishes a distinct type of contract. Under ordinary
circumstances, contracts typically involve two parties and are referred to as bilateral
contracts. However, a contract of guarantee introduces a tripartite contract, involving three
parties. This distinction highlights the unique nature of such contracts.

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(Refer Slide Time: 01:10)

And who are these three parties? You will notice that, there is one debtor, who is the debtor
who wants to take a debt and he is a borrower. And in the contract of guarantee, he is called
the principal debtor who is called principal debtor, but he is the primary person who is
intending to probably take a loan, or he wants certain performance of an obligation.

He goes to a creditor who is willing to give credit, usually a bank or a financial institution.
And you will notice that, when you look at creditors, the creditors want to secure their loan as
there is a risk in contracts, the risk in loan agreements that the debtor will not repay the loan
back.

And hence, what does the creditor do? He would take a security. Now, if the security is
movable property, we call it pledge. If it is immovable property, we call it mortgage. There
are other forms of security like charge, hypothecation, and others. Property is kept as
security, it is kept as some kind of a bond, that if the debtor fails to pay the debt, the creditor
can deal with that security and recover the debt.

Normally this kind of a transaction, if it involves a movable property, we call it, it just the
contract of pledge. In pledge, you pledge a good, and you want loan because you want
liquidity, you want cash and the gold is kept as security, the creditors want kind of a plan B in
place.

So, they tell the debtor they are willing to give you loan. You should keep something as
security, be it movable property or immovable property, but we also want a person to stand as
a guarantor for you. So, this could be an additional condition, that the creditor should have to

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recover his loan. So, what does the creditor do? He imposes this condition saying that unless
the guarantor or a surety, who is supposed to be a person in the eye of law comes in, we will
not give you this credit.

Now surety or the guarantor comes into this contract, to support the debtor. The surety does
not get anything in this contract. The law on consideration here says that the consideration to
the debtor is the consideration for the surety. So, no separate consideration needs to be
proved. Why? Because this is a trilateral contract.

So, the consideration between the creditor and the debtor is sufficient consideration for the
surety to come into the contract. So, the guarantor or the surety steps in, he supports the
contract, he is an important person in this contract because he supports this contract. And in
case the principal debtor defaults or fails to pay, I will pay

The debtor and the surety are in some kind of pre-existing understanding or relationship
because surety or guarantors do not stand as guarantors for A, B and C person. They must
know the person, they have to, have some previous obligation towards that person. So, it is
the debtor usually who approaches, this person called the surety and says, I need a loan will
you stand as my guarantor.

However, once the surety agrees to be a guarantor, he is obligation is directly to the creditor.
He says to the creditor, look, go ahead, give the loan to the debtor and I will step in and I will
support this contract. So, obviously if the surety is asked to pay and this could be chances
where the debtor defaults or fails to pay, or he is unable to pay or refuses to pay. Then when
the debtor does not fulfil his obligation towards the creditor, it is the surety or guarantor who
must fulfil his obligation towards the creditor.

And if the surety goes ahead and does the same, he can claim reimbursement from the debtor.
Obviously, that is something that, the law will have to come into place. Now, hence you will
notice that the contract of guarantee chapter in the Indian contract law does not talk about the
obligations of the creditor and the debtor, because that is already covered in the contract
pledge.

Pawnor and pawnee is the word that is used in a loan agreement, but the chapter on guarantee
is all about the surety, what is the rights of the surety? What are the liabilities of the surety
and what are the duties and obligation of the surety, when comes the contract is laid down
under this chapter.

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(Refer Slide Time: 05:52)

Ordinarily there are two types of guarantees, and we should understand this because there are
several kinds and types of guarantees. One of the most popular kinds is a bank guarantee. In
terms of the nature of the surety entering the contract, I think guarantees can be divided into
two categories. One is limited guarantee. Now limited guarantee is for a single transaction
and it is for a limited period, where it is limited by time and by liability.

The surety possesses the discretion to stipulate that they will participate in the contract on the
condition that their liability is restricted. What does this imply? It means that although the
loan amount may be 1 lakh rupees, the surety declares that they will only act as a guarantee
for 50 thousand rupees. This limitation of liability enables the surety to define the extent of
their commitment and minimize their exposure to risk. They have the freedom to exercise
their right to opt for a limited guarantee, where they can specify the maximum amount, they
are willing to stand as a guarantee, which in this case is 50 thousand rupees.

Secondly, the surety can also impose a time limitation on their guarantee, stating that they
will act as a guarantor for a specific duration, such as one or two years, but not beyond that.
This approach allows the surety to safeguard themselves from prolonged exposure to risk.
They may decide that if the debtor fails to repay the debt to the creditor within the agreed
timeframe, they will no longer be liable and will exit the contract accordingly. Limiting
liability in this manner is a choice available to the surety. It is important to note that the
surety's consent in the contract must be explicit, voluntary, and free from any
misrepresentation or fraud. Any misconduct in obtaining the surety's consent or
misrepresentation of information can render the contract voidable at the surety's discretion.

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Now quite different from limited guarantees, continuing guarantee under section 129, there
are certain kinds of distinctive factors of defining what this continuing guarantee is. It is a
guarantee that can extend to a series of transactions between, the principal debtor and the
creditor. So, it is not a onetime transaction it is for a series of transaction.

For example, there is supposed to be supply of coal to a thermal plan for the next three years.
And, to assure, the contractors, promise to supply this coal, there may be a surety who is
brought in to support such a contract. He says, look, I will stand as a guarantor, for the supply
of coal for the next three years.

That is a continuing guarantee because each consignment of coal that is delivered is a

transaction, and you continue to be the guarantor for the next three years, as a contracting
party continues to exchange, goods and services. That is what continuing guarantee means.
And this can also be something that you can extend to what we call as an overdraft facility.

Now banks give overdraft facilities. So, when they give an overdraft facility, it is like you
have a lump sum amount but you can withdraw it in instalments. So, again, that could be a
continuing guarantee regarding the same. Now, one of the aspects of continuing guarantee is
that you must notice that this kind of a guarantee can be revoked unlike a limited guarantee or
a onetime guarantee. Why? Because, once you enter a contract of guarantee, you should be
able to reconsider your decision, but that reconsideration of the right to revoke will only start
prospective, not retrospective, which means continuing guarantee can be revoked
prospectively.

So, from now on for this next series of transaction, I do not want to be a surety. But in one
time guarantee, once you give your consent you cannot revoke it back. And those are what
we call it as irrevocable guarantees. Second the law also says that a continuing guarantee,
terminates on the death of the surety or the guarantor, because a contract of guarantee is a
personal character of promise.

It is based on that kind of trust between debtor and surety. So, if the surety dies, then the
guarantee must stop. So, you cannot expect the obligation of surety to be inherited to the next
of kin of to the legal heirs. So, death amounts to termination of the continuing guarantee. And
that is also making continuing guarantee slightly different from, limited and other forms of
normal guarantee as well. What you to understand at this part of time is that, there can be
different other types of guarantees which we may come across. For example, we can talk
about what is known as personal guarantee.

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The best example to explain what is personal guarantee is the job of a cashier in a bank. Now
during early days, the cashier's job was quite a risky job, there would be some kind of risk of
he or she, embezzling the cash or misappropriating the cash or running away with the cash.
And hence the cashier's job would expect a guarantor or a surety to be brought into the
employment contract.

So, your contract or your employment is subject to a guarantor joining the contract. Now you
will be there for two years or three years, that is a point of for possibility and for those two or
three years of or lifetime, there is a surety of the guarantor who comes in place and says,
look, if he does something, I will compensate you and this is the promise that I have for you.

So, in those cases, you will notice that it is a continuing employment or personal guarantee
that is given for this cashier’s job and again, you can revoke it, but it is only prospective so
far, whatever is the liability or whatever fraud has been committed, you will be responsible.
So, it is only prospective and it stands to that extent as well.

But in such kinds of guarantee, you notice that you can have a combination of continuing
guarantee and limited guarantee because there can be a case where I will stand for the next
three years or five years, but my exposure should not be more than two times his salary, that
is something that you can probably limit and it is up to the bank or the employer to accept it
or further say, one surety wants to limit his guarantee, so you get another co-surety.

So, the concept of co-surety is also existing in the contract law and you will notice that when
one or more sureties join the contract of guarantee, the co-surety have, what is termed as joint
and several liability. This could be a possibility. Now in co-surety, for example, directors
stand as guarantors for a loan to be given to the company.

Now why should only one director stand? Here, all the directors or two or more directors may
come together and state that look they will stand as guarantors and when the company
defaults, we will pay. So, the directors in themselves will become co-sureties. They have joint
responsibility to discharge the default of the debt. And several in terms of whatever is there b
contribution or equally, they will have to come into that kind of a transaction.

(Refer Slide Time: 13:06)

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It is quite pertinent to understand the different instruments that are used in economic
transactions, both nationally and internationally. It is important for us to understand the
distinction between what we call as the contract of guarantee and instruments like letter of
credit, or a letter of comfort.

Now let us start with letter of comfort. This letter of comfort is generally issued when a
parent company wants to support a subsidiary company to get a contract from the
government, it is like letter of support.

Sometimes we say letter of comfort is like a recommendation letter. You need it because
without that, people will not trust you, as you are new into the market, so you need those
kinds of support. Where do you see letter of comfort? You can also see it in terms of a

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contractor trying to submit a bid. And the government insists that the suppliers or the
component manufacturers should also support that bid through this letter of comfort.

letters of comfort are also bringing in a third party to the contract. So, you it is the
government and the contractor. Then you have the third party who comes and gives the letter
of comfort. But letters of comfort are supporting documents and they can either be binding,
or non-binding. So that is the advantage of letter of comfort.

So, a non-binding letter of comfort is not enforceable by law, but a binding letter of comfort
will depend upon what are the wordings of that letter of comfort and how you can make it
enforceable or binding. So, that is what is the purpose of letter of comfort and it is used quite
widely, say a parent, gives a letter of comfort, on behalf of the subsidiary to a bank saying
that you can lend to the subsidy and reassure the bank stating We will come and support this
kind of a contract.

Now, if they word the letter of comfort in a binding character, it can amount to a guarantee.
So, there are multiple use of these kinds of a instrument in contracts, because they are
supporting documents, they are sometimes contractual documents in itself and hence we must
clearly understand where these applications come to.

Coming to letter of credits, you will notice that letter of credit is used for international
transaction, whereas bank credit or bank guarantees are used for domestic transaction. How
does letter of credit operate? The infamous case of Neerav Modi should tell us the kind of
challenges that letters of credit have in the international transactions. So, the Neerav Modi
case can be a case where, people who are interested in contracts and corruption and criminal
law can look forward to reading. but what does letter of credit do?

It gives the seller a comfort or an assurance saying that, please go ahead and sell goods to the
buyer, we will ensure that you shall be paid. So, it is a credit letter of the bank saying that,
look, we hope the buyer will pay, but if he does not, you already have this letter of credit.
And we as the bank who has issued this letter of credit, we will ensure that you, the seller will
be paid.

So, it is a credit line that a buyer takes. But it is not like taking money or loan or cash. It is
like a letter. So, normally when the seller sells, he goes to the buyer, what happens in contract
is that the buyer will pay the price. What does letter of credit do? It is just an assurance that if

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the buyer fails, then the bank will pay the seller. So, the seller will be assured that he will get
this payment once he has dispatched the goods or when he has sent the goods to the buyer.

So, in international transaction, without a letter of credit, why will seller send goods?
Because, he is in a different jurisdiction, the buyer is in different jurisdiction, the courts are a
problem and enforceability become a challenge. So, I think letter of credit supports such kind
of transaction. And the sellers are assured through a letter of credit that they would be
receiving payment and that is some kind a guarantee, in one form, but mostly in international
transactions.

Finally, coming to guarantee what is important for you to understand is bank guarantee.
Because in this type of guarantee the bank is usually the creditor in our traditional kind of
example, but in a letter of credit you will notice that the bank is the guarantor. In bank
guarantee the bank is the guarantor. So, this is where the bank becomes a surety into the
contract.

Now, the bank becomes surety in the contract for whom? It is usually to the government,
which is floating the tender. So, here we have creditor, which is a government agency, which
floats a tender, which invites bids. And it tells all these bidders who are the debtors look, we
will give you the contract provided you, give us a bank guarantee. Now why does
government take bank guarantee?

It is because there is always this risk that the contractor or the debtor, may not complete the
job. And, he may create a loss to the government. So, the government needs a risk assurance
saying that if the contractor fails to perform or, makes a deficient performance, then the bank
guarantee will compensate the government. At least to an immediate extent, finally, going to
the court to the arbitrator and get the final remedy will take some more time, but this is an
immediate, kind of a compensation that can come through the surety of the guarantor or the
bank guarantee that is issued in favour of the government.

So, in bank guarantee, the bank is the surety. It gives an assurance to the government
department or the government organization that we will pay in case the contractor fails to
perform. Interestingly, some of the bank guarantees are called as performance bank
guarantee, which means it is based on a condition that lack of performance will entitle the
government to encash the bank guarantee.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law School of India University
Special Contracts: Guarantee - Part 02

(Refer Slide Time: 00:15)

The surety under a contract to guarantee possesses certain rights, and it is important to
discuss these rights alongside their liability. The surety has rights against the principal debtor,
rights against the creditor, and rights in relation to co-sureties. These rights can be
categorized in this manner.

When we consider the right of the surety against the creditor, we examine how and where this
right comes into play. If the surety is sued by the creditor and the creditor expects the surety
to bear the responsibility for the debtor's default, then the surety is obliged to make the
payment and fulfill the claim of the creditor as per the terms of the contract.

Upon fulfilling this obligation, the doctrine of subrogation comes into effect. The Indian
Contract Act addresses the doctrine of subrogation in Section 140 and 141. Subrogation
implies that the surety is entitled to all the remedies that the creditor has against the debtor.
Consequently, the creditor is discharged from the contract since they have been paid by the
surety, and the surety assumes the position and rights of the creditor.

It is a scenario of surety versus the debtor. That is the relationship of what subrogation does.
surety in subrogation gets everything that the creditor had, so the creditor is duty bound to
hand over all documents, all securities, whether the surety knew about it or not, he must now

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give everything to the surety and claim his discharge from the contract. That is what
subrogation means.

Subrogation means to step into someone else's obligation, someone else's role, or to take over
that kind of an obligation or a role, and to empower yourself with all the rights that the
creditor would have as against the debtor. So, that is what subrogation will do.

(Refer Slide Time: 02:21)

We can further understand the concept through the case of State Bank of Saurashtra versus
Chitranjan Rangnath Raja. In this case, the appellant bank had allowed for a cash credit limit
of 75,000 to the principal debtor. The principal debtor had pledged assets worth 5000 tons of
groundnut oil with a personal guarantee from the surety as well. The pledged securities are
either lost, or they are not taken care of by the banks. Now, we say that pledge is an extension
of bailment. So, does the bank have a duty as a bailee to take care of the secured goods? If
they fail in the duty to take care of the secured goods, what happens to the contract of
guarantee, especially the rights of the surety. The Court wanted to address the issue of
whether the surety can claim discharge of the contract due to the bank’s negligence in taking
care of the security.

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(Refer Slide Time: 03:38)

In order to attract section 141, the following aspects are very important. The creditor should
have obtained the security from the principal debtor at the time of contract of guarantee.
Now, whether such a security was something that the surety knew or not does not matter.
Whatever the creditor, he is duty bound to give it to the surety. But if the creditor leaves, or
gives the security, or loses such a security in a contract of guarantee, without the consent of
the surety, then the surety to that extent should or can claim discharge from his liability.

So, when the bank loses the pledged goods or the secured goods due to its own negligence,
the bank cannot make the surety responsible or liable. And the surety can claim discharge to
the extent of the value of the goods that are lost by the bank. This is a counter argument that
the surety can do for his liability.

He can blame the bank for its own negligence in this contract, and then claim discharge to
that extent. So, the surety will be liable only if the bank has done equity or has operated the
contract with clean hands, without any attribution of negligence to its own conduct in that
contract itself.

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(Refer Slide Time: 04:59)

Going forward we look at a very important aspect of what we call as bank guarantee. The
case of Maharashtra Electricity Board Bombay versus the Official Liquidator, High Court of
Ernakulum is another instant case that can be looked into. Now, a contract for the supply of
goods was entered into by Cochin Malleable Private Limited with Maharashtra State
Electricity Board and a bank guarantee was supplied in this case of 50,000.

Now, whenever you take part in tenders or in government procurement, every contractor or
every supplier must give a bank guarantee. And the bank guarantees interesting defense, are
unique, unique because in India, it is the banks that support contracts and economic
transaction by standing as a surety or a guarantor to their own customers. So, this is one of
the services that banks usually provide for. Interestingly, when bank guarantees provided, a
pro forma of the nature of guarantee is usually given in the tender itself.

So, what should be content of the bank guarantee and the bank must sign and then the
contractor deposits with the accountant. This usually is also called as performance bank
guarantee because if the performance somehow gets delayed or stopped or is not performed,
then the encashment of the bank guarantee usually happens.

However, in India, one must understand that when banks give guarantee, can they revoke it at
any given point of time, or can they impose any precondition for the encashment of a bank
guarantee. So, the nature of bank guarantee in India is very important for us to understand for
this type of guarantee.

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A petition to wind up the company came up and came to the High Court and the High Court
said that this Cochin company should be wound up. Now, the bank wrote to the official
liquidator stating that the company was liable to the bank for the payment including the
guaranteed amount that is 50,000, that is what the bank wrote to the official liquidator of this
Cochin company. So, that was the facts of this case.

(Refer Slide Time: 07:11)

In case of discharge by operation of law in bankruptcy or in liquidation proceedings, only

discharge the bank permits liability in a bank guarantee. Because please note, bank
guarantees in India are irrevocable and unconditional. So, once you are given a guarantee,
even if the company gets liquidated, will your guarantee stand as an independent guarantee to
the Maharashtra Electricity Board. This was the major issue.

The Supreme Court in this case, held in such a situation as operation of law is bankruptcy or
liquidation it would not absolve the bank from its liability under the bank guarantee and the
courts would enforce the guarantee which means that the Maharashtra Electricity Board can
encash the bank guarantee when the company gets into liquidation and the bank cannot claim
discharge from its responsibility even though the company went into liquidation.

The only exception where a bank can claim discharge is in case of fraud or in case of
irretrievable injustice. So, bank guarantees are liable irrespective of whether the actions of the
contractor amounts to non-performance, short performance, or delayed performance. And
interestingly if in case the company gets into liquidation or insolvency, the bank guarantee
shall stand.

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So, the Supreme Court very interestingly says that, irrespective of what happens to the tender
bank guarantee is an independent and a separate contract. It is an assurance from the bank to
the government. And it is not dependent upon what happens to the contractor per se, or what
is the action of the contractor per se. So, the underlying contract between the government and
the contractor has nothing to do with the bank guarantee, and bank guarantee is a separate
enforceable contract. And the bankruptcy of the company does not absolve the bank from its
guarantee. So, it is a very significant judgment having very wide ramifications and impact
and we will notice that in most government tenders, encashment of a bank guarantee has
always been a very critical issue, not many have encashed bank guarantee. And wherever
they have encashed people do not know what is the law on bank guarantee.

And we think that if the debtor or the contractor has gone insolvent or bankrupt, then the
bank guarantee automatically is also a discharge or it is in the negative. Now, having said all
these one should understand the bank guarantee is irrevocable and it is unconditional. So, this
is the nature of bank guarantee in India. However, banks abroad are in the habit of giving
revocable as well as conditional bank guarantee. when tenders ask for bank guarantee they
must be very clear, which is the bank should that should give the guarantee because in global
tenders and global contracts, it could be a bank from other jurisdictions which may give bank
guarantees.

In the Maharashtra Electricity Board case and several other supreme court judgments that the
courts have taken bank guarantee very seriously as an instrument to support economic
activity and they have said that when a bank guarantee is submitted for encashment, because
it is a separate contract and a separate promise from the bank, the bank may not give any
notice to the contractor.

The government also need not serve any notice to the contractor. So, the contractor need not
be informed that there is such a process of encashment that is happening. The banks cannot
ask why the government is encasing bank guarantee, this question about being judgmental on
the encashment of the bank guarantee is not permitted as they lack jurisdiction to ask such
questions. Third, and very importantly, the courts have also said that bank guarantee
encashment should not be stopped by any kind of injunction or stay order from any court as
the whole purpose of giving bank guarantee gets defeated if there is an injunction or stay that
is granted by the courts.

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So, it is supposed to be an equitable and immediate remedy for nonperformance or for any
kind of loss that may occur to the government and hence any kind of court process that stops
that kind of equitable remedy or a safe remedy gets defeated if lower courts start granting
injunction for the same.

So, the ground for injunction is only if there is fraud that can be proved Or the parties can go
to the court and say that the encashment will cause irretrievable injustice to them, which are
very rare cases to prove. So, in all probabilities bank guarantee will be immediately encashed
within a couple of working days, and you will notice this will facilitate economic
transactions, it will immediately compensate any loss that the government may suffer from
the actions of the contractor.

And this is a very important tool or a weapon to ensure that contractors comply with the
tender conditions with the contractual conditions. And they do not commit any default in
government contracts. Because government contracts is not something that only affects
government as a party in the contract. Finally, most of the government contracts their public
sector projects their public welfare projects, citizens and public naturally get affected if these
contractors do not complete the job. hence it is imperative in government protection and
citizens and public welfare protection, that the bank guarantee is used as a tool. It is a weapon
in a sense or a kind of threat that if you do not perform we will encash it, but usually,
encashment is in the rarest of rare cases, whether the government feels aggrieved by the
actions of the contractor where he deliberately or intentionally fails to perform the contract.
the banks also take encashment very seriously. So, you will notice that the customer's
reputation in such cases gets adversely impacted and maybe the banks will not support him in
other future transaction It seems to work well with the legal system so that contracts become
enforceable and parties take such promises and obligations seriously and they perform those
obligations or they face consequences not only in that contract with arbitration and damages,
but also for future transactions, because unless you have the support of the bank, in terms of
financial backing, you will not be able to take part in future tenders and future contracts as
well. vis-a-vis bank and the customer encashment of a bank guarantee comes with serious
consequences. And that I think most contractors will be aware of, for which compliance with
promises and contracts becomes more critical and useful.

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(Refer Slide Time: 14:03)

Concluding the contract or guarantee, another very interesting case is the M. S. Anirudhan
versus The Thomco’S Bank Limited. It is a 1962 judgment and this will probably tell us how
the interpretation of contract law is very important to determine the liability of parties to the
contract. The issue in this case was about the kind of consent that is required from the surety
which is an independent consent because it is an independent obligation.

Any kind of misrepresentation or fraud, as I told you earlier, will make the contract or the
surety as voidable at his option. However, having said this, there is another interesting
provision under the Indian Contract Act which very interestingly says under Section 133 of
the Indian Contract Act that the surety shall be discharged in case there is any kind of
variance in the terms of the contract, which does not have his consent.

While the contract or the principal contract is between the debtor and the creditor, the surety
must be involved in any kind of modification or alteration of that kind of a contract. So,
variance in the terms of the contract, if it is the liability of the surety, amounts to him being a
party as it is a tripartite contract.

And to that extent, if the surety is not involved in the changes of the terms and conditions of
the contract, he can claim discharge of a contract. So, there is this kind of protection saying
any variance without the consent of the surety will not be held against him, and he should be
entitled to claim discharge of his contractual liability. Now, what had happened in the M. S.

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Anirudhan case was, initially the contract stated that the debt is around 25,000 and the surety
agreed to it and signed the contract.

Later, when the debtor took this document, which the surety had signed and submitted to the
bank, the bank said that they had only agreed to 20,000. Now, with some kind of whitener
this ‘5’ was changed into 20 and the loan was disbursed. Later on, the surety comes to know
that he had signed on a document which was 25,000 but the actual loan and the contract now
says 20,000 and this is variance, So, he claims that he should be discharged from his
obligations under that particular contract. there are multiple things in this case that are very
relevant and important, first and the foremost is that there is a plea called the plea of non-est
factum. Now, the plea of non-est factum very clearly state that this is not my deed.

And it states very clearly that look I had signed for a deed in which the amount was 25,000.
Now, the same contract says 20,000. So, this is not my deed, plea of non-est factum. This was
claimed by the surety. Second, he claimed discharge under 133 saying that there is variance.
Now, what is variance? you will notice that variance in the contract must be either material or
immediate.

In material, it means what is material in a contract of guarantee. Since, material in the

contract of guarantee would include the loan amount which will actually increase or decrease
the liability of the surety, it could include the tenure of the loan that is also very relevant and
important and you will also notice that to a larger extent it will affect the rights of the surety
adversely, thereby increasing his responsibility or liability and those are the kind of variances
that the surety can definitely claim discharge under 133. So, if there are non-material
variances, the question is can the surety claim discharge.

So, variance must be divided into material and non-material. Or can we say any kind of
variance will discharge the surety from his liability? Now, if you say any kind of variance,
then that is a very broad ground. And you will notice that, that will help sureties to get away
from their obligation, even if small changes have been made from time to time. The courts
were sure that this provision is there because, for example, in government contracts, suppose
the bank guarantee is given, and the bank states that if there is any kind of changes between
the contractor then when any kind of variance takes place, the bank will claim the discharge
of the contract. So, in government contracts, variance does happen, but that variance should
be material and it should adversely impact the surety’s liability.

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That is what the court wanted to say. Now, in this case, the variance that was from 25,000 to
20,000, the liability of the surety reduced. Now, because there is reduction of liability can the
surety claim discharge? If there is an enhancement, the surety could claim discharge, because
that is the reason why the section is there to protect the interest of the surety.

Justice Raitula while deciding this case, did infuse how section 133 will be operationalized.
He said that look if the variance is significant and material, the surety can claim discharge. If
that significant in material variance increases or enhances the labiality of the surety then
absolutely, he can claim discharge absolutely, otherwise, I think the surety cannot use section
133 to claim discharge from his contract.

That is a fantastic case for all to read and to understand. And it is one case that looks at how a
small section called 133 is operationalized and interpreted by the courts of law and why the
surety must read 133 in case he wants to claim discharge from his responsibilities and
obligations. I think with that, we should close the discussion on contract of guarantee. What
we have learned so far is that this is a very important kind of contract.

It is a tripartite contract, there are different forms of guarantee, bank guarantee being the most
significant form that supports government contracts. Bank guarantee is a separate and
independent contract as it is not dependent upon the underlying contract within the
government and the contractor. It can be encash Without condition and it cannot be revoked.
There are only few grounds on which an injunction or stoppage of the encashment of a bank
guarantee can be done. Fraud and error, or irretrievable injustice are two grounds.

Operationalizing bank guarantee becomes very critical. It is performance bank guarantee. It

impacts everyone around. And we have seen how the liability of the surety is coextensive
with that of the principal debtor. When I say coextensive, it means that the surety can be sued
first, the debtor may not be sued at all. So, the creditor can approach the surety and claim the
money. So, he can be sued first and the decree can also be implemented against the surety
first.

So, the term coextensive has been very widely interpreted by the courts. And the surety can
then claim subrogation, he can step into the shoes of the creditor and claim subrogation if he
discharges the liability of the creditor. And we know that the surety can claim discharge in
case of variance, but that variance must be significant, material and adversely impact his
liability. These are some of the aspects of that contract to guarantee clearly demarcates. What

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is important for us to understand here is also that that now when you talk about any of these
special contracts with guarantee or agency as what we are going to discuss next, there is an
implied indemnity in all these cases. So, the debtor must indemnify the surety because of the
debtor’s fault if the surety has incurred some responsibility, there is an implied indemnity that
the debtor should give the surety. So, indemnity exists in several other forms of contracting,
rather, it is implied in every contract, that due to your actions, if someone suffers any kind of
an injury, you are duty bound to indemnify the same. So, that is the sum existence of the
contract of guarantee.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr). Sairam Bhat
Professor of Law, National Law School of India University
Lecture 36: Special Contract: Agency – Part 01

This class is regarding the special contract called the contract of agency, which is very
relevant and important considering the fact that there are numerous sections in the Indian
Contract Act that deals with the rights and duties of an agent. Understanding the same in the
context that there are a lot of contracts in which agency gets created understanding this
chapter becomes relevant and important, mostly because of the employment contract.

So, to understand agency the start is by asking our self how is agency different from
employment, or what we call as the employer employee relationship, or what want to call as
the master servant relationship. It is important to notice that a servant can definitely become
an agent, but an agent is never a servant. An Agency can be created because when a person
finds not to be in the place where the contract is to be needed and hence wants someone to do
the contract for him

So an agency contracts can be created on numerous instances and occasions. As an example,

one of the oldest firms of agency is an auctioneer who auctions the property be it movable or
immovable property. An auctioneer is a typical agent who is assigned with the task of
actually selling someone's property. Today, the auction houses for instance in the UK, are
also selling arts, cultural items, or even painting for that matter.

So, they are specialist agent and what they do is auctions. They do not work for a single
master, they work for several people and are quite independent in what they do. Hence they

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are called as agents rather than servants. Servants are full time employees, they are supposed
to be loyal to their employees and they get a salary. Whereas agents are independent, they are
discretionary in nature, they can work for several people. They usually get paid based on their
commission that is agreed upon between the two parties.

However, the thing which is common in understanding between a servant and agent is the
fact that both servant and agent bind their master, or what is call an agent to the principal.
That is where the Principal of vicarious liability, where the servant or the agent, when they do
any act, they can actually bind their master(Principal) because whatever they did (or doing)
was for or on behalf of their master (Principal). One of the most interesting test of vicarious
liability is the application of the master and servant liability principle

First and foremost, the master is liable for all the acts of the servant vicariously if it was done
within the scope of employment. So the test is, if the servant has done any act within the
scope of employment, he can bind the master and both of them will be jointly responsible.
The master is going to be more responsible for the simple reason is that because he has deep
pockets for which servant has done the act during the course of employment. Hence, the
master, who finally gets benefit of this Act should also be liable for the same. Whereas when
it comes to agency, that the principal can be held responsible for the acts of the agent done
within the scope of authority and he can bind the principal, because finally the principal will
get the benefit of the agency act. Therefore, he should also be held responsible or liable for
any of the acts of the agent towards the third party.

An interesting thing in an agency is that there is an application of the test called “within the
scope of authority”. So, agents get the authority like an auctioneer and if he acts within the
scope of the authority, anything that he does, the principal will be bound and responsible for
the same and that is the reason for the agency to be created by many people

There are numerous examples where probably a celebrity or a film star or a film actor wants
an agent and appoints them. The functions of the agents to these celebrities and the film stars
are they usually try and get them certain endorsements, public appearances and other things
They take care of their external work probably get them movie or film assignments. These are
the ones who will negotiate the price, the days and all the contractor deals for the celebrity.
And that is where the that most of these celebrities go by their agents. Interestingly, even
sportsmen require agents because agents help beyond what they are doing in the sport. These
agents actually represent the sportsmen with all their external transactions, including

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advertisements or appearances, sponsorship, sponsor their training, or any of their aspirations
that a sportsperson has. It is a very common factor that an agency or agents being employed
in several of these businesses,

The Chapter on real estate law in India, it is the sector which has been dominated by agents
or brokers. The RERA act 2016 mandates under Section 9 and 10, that agents must register
with the RERA authority and only when you register, you can actually act as a broker or
agent for these real estate companies or for the clients. The RERA act regulates the agency
activity. RERA act also regulates the land and property dealers

There is an agency even in the insurance sector, which is very popular and relevant
incumbently with what is called the regulator called the IRDA (Insurance Regulatory
Development Authority) you will notice that agents have to register with IRDA and only then
they can actually sell insurance policies or insurance products. The Agents in the insurance
sector represent the insurance company and they get business to the insurance company. The
commission is based on the insurance policies that they sell. However, to note that in some of
these contexts, agents also represent the customer, it is like representing both the buyer or the
seller, or the insurance company and the policy holder as well. So, they represent both these
two parties and that is what agents can actually normally do.

The insurance business also runs through agents in as much as they actually propel the
business. Insurance agents are trained, get a license and are registered. That is how the
insurance business is largely functional due to agents as well. The life insurance in India is
called Life Insurance Corporation of India, has agents who actually help enhance the business
of the Life Insurance Corporation.

Patent law is another sector which as agency relationships A patent agent is required to file a
patent. The patent law also allows for creative agents to register and practice before the
patent controller. This is definitely possible that someone wants to seek a patent, he goes to
the Patent Agent, as he would then know the process and the procedure to actually get and
secure the patent. When they do so, that is how they appear before the court of law or before
the patent controller.

The interesting question then comes is whether lawyers, advocates are agents. Now, there is
nothing that prohibits lawyers from acting as agents. It is known factor that when an advocate
gets his client to sign a waqalatnama which it is kind of representation as the law of Agency

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is called the Law of Representation. The waqalatnama becomes kind of a document where
the representation of the authority is vested in the advocate to represent the case in the court
of law. But having said that, it should also be noticed that advocates are not only representing
their clients, but because of the Advocate Act of 1961 they are called as officers of the court.

They are officers of the court apart from representing their clients. So, they are duty bound to
not mislead the court to follow the rules and regulations of the court and to maintain the
decorum of the court. To emphasize the advocates are not making a contract for the client.
They are exercising the rights in the court of law and make submissions before the court of
law.

When an agent makes a contract they will actually bring the third party and see that the third
party actually create a contract. Advocates generally do not do that and lawyers can definitely
do these kinds of transactions. So, advocate is a registered member of the bar. The lawyer is
one who practices law, apart from representing the court.

Also, at this point of time, it is very important to understand that as soon as the law on
contract was made in 1882, the Britishers passed very interesting and important legislation
called the Power of Attorney Act. That is a very important law in the sense that it creates
agency and its documentation that is required in a formal mechanism called The Power of
Attorney. So, authority is vested in the power that is given to an attorney. That is how the
power of attorney act is actually being viewed and enacted.

The Power of Attorney in India, it is a legal in valid instrument, it is an evidence-based

instrument for the of creation of agency. In most cases, the power of attorney is important,
because it gives a legal authority to someone to act on one’s behalf. Either execute a simple
power of attorney or execute what we call as the general power of attorney (GPA) becomes
an important document for all practical purposes.

There are Supreme Court judgements regarding the Power of Attorney. There is a very
landmark judgment of the Supreme Court called the Suraj lamps case. General Power of
Attorney is normally granted there probably give sweeping or very wide powers to a person
to represent on one’s behalf. The GPA is in commercial transaction, in personal transactions,
joint development agreements are made between the landowner and the builder (JDA)

The landowner apart from the Joint Development agreement with a builder also has to give a
General Power of Attorney to the builder. The reason being the builder can actually seek

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permissions from various government departments to start the construction in the building
and various approvals for the building to be completed and then later on it can be sold to the
third parties or to customers. The non-resident Indians or non-resident businesses may require
GPA to be executed because of their resident in the country to do all the transactions

For example, an NRI who has a house and which is being given on rent may give a GPA to
one of his cousins or relatives or a friend. This can be for certain works to collaborate like
collecting rent, giving it to a new tenant, some activities to repaint the house, deposit this rent
to a particular bank.

There are circumstances in which General Power Attorney is an extended, or issued in a

personal capacity as well. It is a normal document as an agency that has be created under the
power of attorney Act. The GPA act talks about revocation of the GPA, which is definitely
possible. When there is a provision for the registration of the document it also provides for
then it becomes a legal document. It cannot be cancelled unless you cancel the registration as
well. In most circumstances, an agency then becomes a very critical factor in the day to day
normal transaction.

What is important at this point of time is to talk about two very important and interesting
kinds of agents. First and foremost is the partners as Agent under the Partnership Act of 1932,
as well as the LLP act of 2008, which is the new partnership law. In India we have we have
two partnership law 1932 British made law, 2008 Indian law or partnership which talks about
limited liability. The Act of 1932 is about general liabilities. There is a concept of mutual
agents under the partnership law.

The concept of mutual agent is interesting under the 1932 law; the partnership firm does not
have a separate legal identity. This is ordinarily done because, though person’s name is
different and the firm name is different. Registering a business name for the firm, but it is not
considered as a legal person in the eye of law. So, the partner’s identity is the firm's identity.
That is the normal technicality under the Partnership Act of 1932.

The firm does not have perpetual succession, if the partners die then the firm also dies. That
is the reason it does not have a separate legal existence. If the partners represent the firm, the
partners are representing the other partners and that’s the reason it’s called Mutual agency.
The concept of mutual agency clearly states that partners can equally take part in the business

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of the firm, they can represent the firm, as per the partner deed, whatever is the power or
authority that is granted to them.

In the Mutual agency, there is no separate legal identity among the partners and are actually
representing other partners. That is how the concept of mutual agency applies. The Principals
of agency may also apply to such transactions when the partners act on each other's behalf.

The second most important type of aspect of agency is that of the Directors of the company.
When a company cannot act on its own, because it is a legal person, it is a juristic person, and
it requires natural person to act on behalf of the company. So, company needs a person to
actually act on its behalf. So, the managing director or directors are supposed to be those
kinds of agents.

Now, when we say directors or agents of the company, they are representing the company
with outsiders, for transactions, to enter into contract, into employment, to look at
procurement and the directors act on behalf of the company

The Board of Directors are a collective responsibility and the directors are an individual
capacity, wherever that such authority is vested by the articles of association, they have to act
on behalf of the company and represent the company as well. There are different kinds of
directors, those directors who have executive functions, and there are independent directors
who may not have executive function. They may not have that Representative character, they
may not represent the company, though, they can take part of the meeting the board of
directors, they can actually monitor supervise, but they cannot represent. The role of partners
and directors who can be agents and who can act as Agent becomes very, very critically
important. The partnership deed or the articles of association, is the registration document for
both the partnership and for the company and therefore they act accordingly.

In partnership, there is concept called Sleeping partners, which means the partners does not
take part in the day to day operations or activities of the firm. The company needs a capital
investment or lends some kind of a name. doesn’t have the have authority to represent the
firm, like independent directors. In such situations it’s important to understand who is the
agent in this concept.

Finally, the contextualization of agency, when the discussion is about pledge and the bail, the
Bailee and Attorney at some point of time may act as an agent. He acts as an agent when the
Bailee while exercising is right of Lien because he has not been paid for the goods from the

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bailer. Suppose he has done some service of labor and skill and it is not paid by the bailer the
Bailee can exercise right of Lien would also means to exercise the right to sell.

When he has done that kind of labor and skill there can be an exercise the right of sale and
with the Pawnee decides to sell the security of the goods, then in those circumstances, there is
act of agency. They are doing it as an agent on one’s behalf though they do not have the
authority as ownership, they are they are exercising their right given under law

The Principles of agency even a may apply to those kinds of special contracts or transactions
as the case may be. Agency as a very important business proposition in many circumstances
in a day today activity. The last point here is to also understand that and agency in the
international context, where a lot of these trading houses or warehouses or even a captain of a
ship or a carrier may be an agent, including an air carrier or a sea carrier or a road carrier.

They also can be agents because they may actually be billing the goods on one’s behalf at
some point. The best example is that there is a road carrier who is carrying tomatoes, and due
to a strike is not able to reach the destination, the tomatoes are actually deteriorating, and the
lorry driver then decides to sell the tomato. He is a transporter and he is acting as Bailee. But
at that point of time because he has to save the goods from deterioration, he has to make a
sale when he makes the sale, probably he sells it on one’s behalf. That is where the Principal
of agency may come into place.

An agency can be created thorough a contract. Contract, can either be implied or expressed.
In modern forms, the agency contract are definitely expressed contracts. In traditional
jurisprudence on agency, an agency can be created out of the Conduct of Parties. One of them
is by the rule of estoppel, which is kind of rule of evidence that is seen under Section 115 of
the Indian Evidence Act.

In an estoppel agency then someone who has acted as an agent in the past, and continues to
do so, in the future. There is no implied or express authority, but just by the Conduct of
Parties of holding someone as an agent, they may continue to be so, in the future as well.
Under the principles of estoppel, the principal is really stopped from denying the truth that in
the past he had acted and therefore he is an agent in this current transaction as well and may
be bound by his actions.

Every other aspect of agency cannot be defined every other authority of an agent cannot be
expressed. There may be a necessity create an agency in certain situations and scenarios. For

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example, there is an agency by necessity or urgency or the fact that the Principal cannot be
contacted or is not there, therefore act on his behalf can be made. It may not be with any kind
of an authority or it could be an extension of that kind of authority.

Therefore, an agency by necessity is inferred. So, this is also important in the context of the
fact that if looked at customs and trade or usages, sometimes the principal may not be
available to seek his permission, and then agent then has to act out of that necessity. One
common example often given is the captain of a ship trying to offload goods from ship. When
there is rough weather, to save the ship and to save others goods, he actually offloads the
goods or throws it into the sea.

When an agency is created by operation of law, but it is by status, that agency gets creative.
In terms of operation of law, or by what is called a status, one would understand that the
Karta of a family is an agent of that joint Hindu family. The Karta is the head of the family in
a joint Hindu undivided family. The Karta actually acts on behalf of the coparcenaries, he
acts on behalf of the family members and has the agency to represent the family with third
parties to make transactions. He is given that express authority by the status of operation of
personal law.

Extending that operation of personal law, one of the interesting characteristics that one sees is
how a wife can actually represent the husband or the husband representing the wife as the
case may be in marriage. Now most spouses have the right to represent the other for
necessaries of life. Necessities of life means food, clothing and shelter. When the wife
probably cannot get an express authority from the husband and if it is expressed, it could be
General Power of Attorney.

The third parties to a GPA then can make a sale and buying from the husband. But the
husband may be on the ship he may be an NRI and not in town. So, the wives or spouses
should have that kind of agency, that when they procure these necessities of life, they are
procuring it for the family and the husband or the wife is going to be bound by the same. That
is how by status agency gets created, even in a domestic family circumstances.

The operation of law scenario can also be created from the things like where government
contracts are going to be made. The Article 299 of the Constitution of India brings in a law
when it says that in an executive power the state is with the President of India or the governor

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of the state, as the case may be. So, contracts are executive functions. The government of
India has to be represented by the executive organization.

The government can be divided as the legislative organ, the executive organ in the judiciary,
and the executive organ is the executive function of contracting, that is vested in the president
or the governor, as the case may be. That is what the Constitution, by operation of law, there
is this kind of an authority on the president of India.

Under Article 299, the President or the governor have these powers. There is a provision
where the contract can be made on their behalf, or maybe under their authority. That is how
the delegation comes to the Council of Ministers, the Prime Minister, the department's, the
secretaries, and so, on and so, forth. that is the kind of delegation that is generally made,
wherein others in the government can also exercise powers on behalf of the Government of
India.

An agency is important to locate the powers of an agent, for example; an agency is different
from the kind of trust or the trusteeship which is creates. Generally, if there the Trust does
obviously there shall be registration of the trust as a charitable trust or as a public trust, or as
a private trust, then the trustee has to act on behalf the beneficiary.

The trusteeship is a different doctrine, though sometimes say that the trust has acted on behalf
of the beneficiary, which means the trustee is an agent of the beneficiary. But the point is, the
trustee ship is created to manage the property for the beneficiary, but not the beneficiary
being appointing the trustee. The Principal of an agency by operation of law gets created in
trust property. The trustee then acts under the law for beneficiary, but as something that has
not been directly appointed to the judiciary, but in terms of the trust property as well.

When considering the law, even a minor can be an agent, anyone under the law can be an
agent. However, if a minor is appointed as an agent, he is only appointed for the benefits of
agency, and he cannot be held responsible, personally, individually, because that is the
protection that is given to minor. The principal has to be of sound mind and he has to be a
major.

The principal can be a natural person or legal person, Appointment of agents can be made
even beyond the territories of India, but there is as aspect of the enforceability of the contract
in India. So, that is something precisely where would the powers be located in the contract
see how agency operates under this Principle.

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The final aspect is by agency by ratification.

The term Ratification is very important, and assumes a great amount of significance in the
practical sense. Ratification or “to ratify” means to keep antecedent authority to affirm what
was done in the past, when there was no authority at all. To ratify also means to give
retrospective or prospective actions. Can an agency be created by ratification? The answer is
absolutely, yes. That is what the chapter on agency the say.

When there is a situation that an agent has have acted on someone’s behalf. When an agent
sells the car when there is neither an express authority or an implied authority nor authorized
to do it, but when done in good faith. If the deal is good when acted in good faith for
someone’s benefit. Under these circumstances ratification means the act of selling the car was
done in good faith and that someone will have to accept the payment and transfer the title to
that person to whom it has been sold.

This is how agency by ratification can come into place. Now, very often than not why
ratification is important is because every time agent’s authority cannot be defined or and
hence, out of necessity, good faith, actions for the principal, the agent may act under this
authority.

It is for the principal who has the discretionary power to either ratify or not to ratify. But if he
has to ratify the whole transaction. He cannot pick and choose if he ratifies he will affirm and
be vicariously liable. If he ratifies he must do so with full knowledge and when once he does
that ratification and agency gets created and after that the act of agent becomes a valid action

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of representative character. This is very relevant in the government contract when some
government officer acts and the government agrees to the same, it is a process of ratification
by the government.

So, however, in government contracts, the rules are slightly different because of the
involvement of Constitution, public policy, public interest and public welfare and in those
circumstances, when an unauthorized act has to be ratified, the government has certain rules
that needs to be followed. That is where the principals of constitution and administrative law
will definitely come into effect.

However, in public sector organizations and those which are government companies, in a
process where a director has acted on behalf of the company, though he had no power to do
it, though he was not authorized to do it, then the company in the board of directors meeting
might endorse whatever the director has acted on behalf of the company. If the Board of
Directors finds it good for the Company and they can go forward with the same.

When usually directors enter into contract or place orders, or they have probably in the
matters of employment, or they have acted with some third parties, without any express
authority, the principles of ratification can definitely come into place. The principal has an
option or discretion to ratify action. This is how agency by ratification becomes critical, it
becomes very, very important aspect of creation of an agency. It binds the principal when the
ratification is completed. It is also one element of that contracts that has lot in its stake. For
example, there needs to be an amendment to a contract, say government contract, which is a
long-term contract and a works contract considering 3 years of 5 years’ contracts, the officer
of the government has agreed to them. Though, any kind of amendment should be done by
the government authority but certainly the officer who was in charge of the contract
management agrees to the amendment because he thinks it is necessary and shall be ratified
by the necessary authority. If he thinks that is the best way forward and he has kept
government interest in mind, then those cases, the competent authority can definitely ratify
the actions of the officer who was in charge. The ratification in administrative law is
important ratification of contract. This is the critical process in which agency gets
established. Unless there is a complete ratification with complete knowledge, ratification may
not be valid, it is a choice that has to be done within a reasonable time.

When either ratification is sought by fraud or misrepresentation, misinformation then the

ratification becomes or maybe invalid. It is the principal who has to be very careful in

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exercising that kind of right of ratification, because it will hold him liable and responsible, for
those which will make him binding towards the third party. Obviously, when the rule of good
faith applies, it means that all the parties who are involved in this transaction of ratification
must have acted in good faith, including the third party. When the third party gets to know
that the agent did not have authority but acted very instinctively then he probably has not
done so in good faith. As a matter of administration he should have understood the role of an
agent and to have the authority from the principal for this kind of a transaction and how
agency by ratification gets created.

When looked at from the GPA perspective (General Power of Attorney) not everything can
be laid down in a document or an instrument called the GPA. Sometimes the agent may act,
because the principal is not in the country, for example, he may file eviction notice to attend,
collecting rent from house, sue the tenant, take upon his complaint, so on and so forth. So, an
agent can do so many things that are necessary to protect the interest of the principal.

When these kinds of legal actions are taken, the principal obviously has to ratify because acts
are done on one’s behalf and benefit. In some cases, ratification may be compelled and
sometimes it can be a choice and to not forget that ratification is compelled when the
principal accepts the benefit of act.

With the principal of unjust enrichment, when a person places an order for 10 laptops,
without any authority for any authority boss or any institution, in good faith. During the time
of election, the election officer finds that laptops are very essential He orders these laptops
and the government department accepts the laptop and starts operating the same. Now, the
question is, when the payment is to be released, the finance department or the accounts raise a
flag as to not having the authority to place for 10 laptops because he is a small officer. He
should have taken proper consent, having passed the files, having got the tender through a
competent process.

When they raised a lot of objections including auditors and then question is whether the third
party should be paid for it or not. In those circumstances, you will notice the third parties act
in good faith and the agency of the department accepting the order of the agent becomes very
critical because unjust enrichment has already happened.

The affirmation by conduct has already taken place because the government department has
already started using the laptop and in those cases, it will be something of ratification that the

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government ought to do. There is no choice but to have compelled to actually exercise the
option of ratification.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr). Sairam Bhat
Professor of Law, National Law School of India University
Lecture 37: Special Contract: Agency – Part 02

This session is to understand the difference between agent, servant and independent
contractor. It is important to look at these characteristics in contracts to try and look at
application of law, especially from the perspective of the rights, duties and liabilities of an
agent as prescribed by the Indian Contract Act 1872. Now that the Indian Contract Act, to
certain extent curtails the freedom of contract, there is no absolute freedom.

In certain circumstances the law prescribes what the agents should do. But the law also says
when there are rights of an agent and when the statute or the law prescribes the rights of an
agent, then he can actually go about exercising those rights. Through a court of law, he can

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enforce those rights through a court of law. For example, the agents have the right to be
reimbursed all the expenses that they have incurred in an agency contract, this is provided by
law. Therefore, the principal cannot deny those rights of an agent wherein he has acted within
the scope of authority.

We make a distinction between agent and servant for the simple reason that servant is
responsible to his master, agent is responsible to his principal. While a servant receives the
salary and agent receives commission, there are distinctions between an agent and servant.
However, coming to the difference between agent, servant and independent contractor an
independent contractor is basically a person who does not represent the Principal, he does not
make contracts for him rather he actually executes work for him. In a government contract if
there works contract or works order for construction, for laying down or pipes, roads, any
electrical work, plumbing work, they are called independent contractor. The word
independent here assumes greater significance.

When a contract is awarded, they work on the specifications mentioned, but the contractor
goes about doing his work Now, the contractor here is not the servant, because he does not
work for full time he is not an employee. So when he is not an employee, nor the servant, he
cannot get the entitlements of labor law, except PF and ESI that is permanent from an
employee state insurance. The labor laws speak about what is known as principal employer.
Now, the PF and ESI rule is basically as social security measure, because the independent
contractor and his employees will be working on the mentioned site. They must be given
some kind of Provident Fund, which is a social security measure as it is compulsory same to
get the cover of the employee state insurance in case of an accident or an incident on site,
including the medical cover.

That is the reason ESI law has been brought into place. But otherwise, he is independent in
the context that there is no industrial dispute law or any other law to be applicable to the
employees of an independent contractor. They are totally working under the rules of a
contract. They do not serve full time neither do they represent the Principal towards third
parties, which means they are not even agents.

Agency comes when the person makes a contract with a third party, an independent
contractor just executing work, as you say, I have said, but they do not represent to any third
party. So, independent contractors are responsible and liable for any deficiency of work or
service that they give me provide for. But it is not that they can have the vicarious

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responsibility or liability principle simply because vicarious responsibility and liability
principle applies to agents and servants, but does not apply to independent contractor.

So, an independent contractor is like any other contracting party who has independent
responsibilities, independent liabilities and his rights arise from the contract. It is not
something that is defined as labor law or under the contract. At the same time, I think one can
see the types of agency that we have seen we have discussed this in the past but one of the
critical aspects that one we have to understand is how escrow agents are very relevant in
today's context. The Real Estate Act of 2016 has now looked at making escrow kind of a
compulsory modality in the real estate sector. The money that the allottee is given a project,
nearly 70 percent of that money has to be deposited in an escrow account by the builders, and
they can only withdraw it in stages for the completion of the work. The idea of the escrow
account in the real estate sector is that this will not be diverted for other projects, which
usually happens with builders and many of these projects are not completed on time, or they
are abandoned by the builders when they sometimes go insolvent.

To be aware and avoid all those situations and in order to have financial stability of projects,
any money that is collected with already 70 percent of the cost gets deposited into an escrow
account. This is how the escrow becomes then an agent. He becomes someone who is the
trustee of the money and in an agency capacity because he represents the allottee and the
builders as well. The money can be withdrawn in stages, after an adjudication with RERA
authority wherein he can either give permission or not give permission for withdrawing the
money at the escrow agent.

Escrow has become a very critical aspect of agency today, especially in international
contracts and international transactions as well. Escrow account can be applied to a neutral
country with independent bank. Mostly banks play as escrow agent, this is an additional
service. They also provide for in PPP projects (public private partnership projects) the toll
money that is collected goes to an escrow account. It held in trust before it can be finally be
withdrawn and distributed among the PPP partners as well.

This is how a kind of brokerage aspect has been introduced in escrow account or an agency
where the representation is there for both the contracting parties. But interestingly the
Supreme Court has already laid down in one of the cases that an escrow agent cannot be an
arbitrator. He is a trustee of the money, he holds the money as an agency capacity, but he

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cannot decide dispute but because that could be conflict of interest. When an escrow agent;
has a fiduciary capacity then the escrow agent cannot sit as an arbitrator in that sense.

When an Escrow is like an arbitrator, but court has already said they should not be. The
arbitration is a separate clause, it is a separate process of dispute resolution and this is only
the financial trust of the money. They cannot sit in adjudication of the right or wrong about
the distribution of money, they just have to abide by the directions issued by the contracting
parties.

Whether who can be escrow agents there can be minor be an agent. Minor can be an agent for
beneficiaries, he cannot be for liability. The principal has to take the entire benefit, though
agent but the minor cannot be made personally held responsible. A minor is allowed under
various legislations under the Partnership Act of 1932. Under Section 30, minors can be
members of a trade union at the age of 14 years. Minors can be employed as child artists; this
is also permitted by labor law. So, minors are permitted to enter into contractual relationship
with the aspect is that till they are 18 years of age, they can enter into this contract only for
their benefit without any responsibility of liability that can be fixed by law.

The liability then is of the adult partners, they have to take the complete responsibility as they
cannot make this minor personally responsible and liable for any of those actions. That is
how a minor can definitely become an agent though the principal takes the entire
responsibility of liability.

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There are different types of agents. The directors in the company perform a very important
duty of representing the company as agents. Interestingly, companies rule or law as the case
may be, there is a very interesting rule called the Turquand rule. This was decided in the
British bank versus to Turquand case where the indoor management doctrine was applied

Generally, when a director acts he must act within the scope of his authority of that company.
But how does a third party know whether a director works within the scope of authority. He
is innocent, he is acting in good faith and also the third party being innocent and acting in
good faith probably under a contract with the director, supplies goods to the company. Later
on it is found that the director did not have the authority to meet the contract or make that
purchase order or did not have the authority to represent the company. Under these
circumstances what happens to the right of the third party? Interestingly one of the matters in
such cases was, there was supposed to be some kind of a constructive notice to third parties.
So, third parties must be notified about who are these directors, the independent directors, the
executive directors, the directors in a non-executive capacity. They should have some
constructive notice and that is something that all companies have a duty to perform.

To understand what powers the directors have, whether the managing director has certain
powers or the directors have certain powers, the third parties the Articles of Association AOA
has to be read. There are two incorporating documents in a company called the memorandum
of association and articles of association. The Articles of Association prescribes the powers
and functions of individuals who can actually represent the company.

The Board of Directors or collective organizations of Directors have independent

responsibilities as the case may be for the company to represent the company. Ideally there is
something that is laid down under the company's law. However, while third parties must have
notice about the powers, it is understood that there are two concepts called the “intra virus”
which is within the scope of authority while Ultra viruses is beyond the scope of authority.

In an unauthorized or an ultra-virus act is based on what is known as the object clause that is
registered under the memorandum of association. An MOE is an incorporating document,
which has the name clause, the liability clause, the object clause. Now, what is the object of a
company supposed to be is hardware, but the company later on enters into the business of
software, such a business can be considered as ultra-virus as the object of the company.
Secondly once the company is within the hardware business, then which are the directors
who can represent the company in the hardware business is something that the articles of

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association will actually represent 5 crores 10 crores that it should be done through a special
resolution of the board and of the shareholders.

When everything will be prescribed, how decisions have to be taken, who are to be involved
in that kind of decision, the articles of association will lay down the same. Now, if that is not
followed by either individual Directors or by the Board of Directors or by the representatives
of the company, as the case may be, then it becomes Ultra virus. The director or that agent,
beyond the scope of that director has entered into a contract, which will then be called
“beyond the powers of the director” in that sense. All of these are something that third parties
must view before they enter into contract. But it is often done in trust and on third parties
cannot always check these documents before they actually enter into a contract or supply
goods, or give the services to these kinds of companies, now in the UK and in common law,
they developed this very interesting doctrine called the doctrine of indoor management.

When the burden of proof on the company itself to manage its own affairs, why should a third
party be blamed, if there is an ultra-virus action. Indoor management means that the
companies must manage its affairs in such a manner that no agent of the company actually
acts in an ultra-virus capacity. Manage the affairs in such a way that third party rights are not
going to be adversely affected, especially when they are in contract with the organization. If
there is any alternative action, it is for the complete result, if there is any antivirus action is
for the company to take responsibility.

If there is an ultra-virus, then not to forget that an agency can be created by ratification. So,
where there was no authority, an agency by ratification given antecedent and retrospective
authority as well. So, it is for the company to manage its internal affairs. The company has to
take responsibility because the director has acted in the capacity of a director. He has acted as
an agent. He has disclosed that he has acted as an agent, though ultra-virus. So, this is for the
principal which is the company to take responsibility to ratify that action. The third parties
right should not be adversely affected that the third party acted in good faith and without any
knowledge of that authority and he has performed in the best interest of the contract.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law of India University
Lecture 38: Special Contract: Sale of Goods – Part 01

Moving on to a legislation which is a contract law, being part of the 1872 Indian Contract
Act, but later on it was considered necessary to make a separate legislation is called the “Sale
of Goods Act of 1930.” This is a very, very important legislation for many reasons. Probably
not significantly covered sometimes or not emphasized so much upon on the contractual
terms and conditions. The Sale of Goods Act is a very comprehensive legislation that actually
promotes trade and commerce in goods as distinct from other kinds of contract that could be
contract for services, or contract of work.

The sale of goods creates a special legislation. The comparison between Sale of Goods Act
and the Indian Contract Act, the Indian contract law defines the remedies for breach as being
damages, law of unjust enrichment and restitution. These are the two remedial provisions that
the Indian Contract Act 1872 still has.

The complementary legislation in terms of remedies for breach are there in this specific
relief. The rule now is about substituted performance of a contract which was introduced in
2018. It talks about rectification and cancellation of an instrument, it talks about injunction

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and several other types of remedies which are important. To compare those remedies, they
have been discussed so far under the Sale of Goods Act 1930, it gives certain additional
remedies for contract for sale of goods.

For example, one of the remedies that the sale of goods act identifies is what is called the
rights of an unpaid seller. Even after the sale, an unpaid seller who has made a sale, is yet to
get his price, he has been given certain very extraordinary rights under the Sale of Goods.
This very clearly means the drafters of those days felt there need not be a rush to go to the
courts to get remedies. They can exercise remedies which are provided in the statute. It is
called the equitable statutory remedies

According to the rights which are granted to contracting parties, in Sale of Goods Act can
there be a right of an unpaid seller to stop goods in transit? In a condition that the goods are
yet to reach the buyer, he can recall the goods which is not yet paid. And the right to stop
goods in transit is given to an unpaid seller, if he comes to know that the buyer is either an
insolvent or there is a suspicion that he will not be given the price for the same.

The remedy provided for a seller under the Sale of Goods Act equips the sellers with rights
that they can go ahead and seek the protection of the law in case they are not paid for the
same. Similarly, another interesting right that is mentioned in the Sale of Goods Act is called
the sue for the price of the goods. This is something that the sellers can definitely go to the
court and sue for the price and this distinction is different from a sue for damages.

In damages, the rule is that there shall be something called “suffer some kind of loss” there
has to be a damage and the proof of damage is the quantification of damages. This is critical
to understand the conceptualization or the law of damages. The proof is required is what can
be loss of business, loss of contract price, it can be injury to person or property etc…
However, when the Sale of Goods Act or a contract to the sale of goods, when the good as
are sold to anyone and has been not given the price, there is a breach because payment of
price is considered a breach.

But then to say that the price is in the form of damage not required, then going to show that
there has been some kind of damage. After having recorded the price, sue for the price and
the price is something that gets suffered because of delaying the payment. There should be
damages as well. Along with the sue for prices, an additional remedy that is provided under
the Sale of Goods Act, which is distinct from property is “Sue for damages”. To look at the

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Sale of Goods Act, it interestingly speaks about the aspects of what is called as a special
damage. There is a clear provision in the sale of goods where the special damages can be
awarded.

What does special damages actually mean? It means that when the buyer, who has informed
the seller that he needs these goods, and when there is a delay in the delivery of goods, he
may suffer extraordinary losses. Despite the seller knowing the consequences in a contract for
breach, the seller actually commits a breach of contract, then the buyer will be entitled to
special damages. There are no extraordinary damages but the special damages are more than
nominal damage. The special damages could also include loss of profit or loss of income that
could have been generated, if the goods have been delivered on time.

The consequent special damages are provided and is based on the prior information to the
parties, on the communication between the parties. It is based on the notification of the
parties. In India, special damages are part of the jurisprudence on damage, hat the Sale of
Goods Act also does not prohibit from payment of interest on damage. From the time the suit
has been filed, or from the time the breach has occurred, the parties can have the right to
claim interest on damage. Because finally, it is not the amount that is to be given, but the rate
of interest and the loss of income money that is involved. These are certain factors, which
means the Sale of Goods Act is a very important piece of legislation for contracts, especially
those that have common contracts in which goods are actually the subject matter of sales.

Under the Sale of Goods Act there is the difference between sale and agreement to sell. Now,
if one goes by section 4 of the Sale of Goods Act for the first time in the year 1930, the
contracts can be in several stages. Stage one could be agreement to sell and stage two
contract of Sale. When compared, these two stages are both contracts enforceable at law.
Because they should have an offer acceptance consideration, the object should be legal, free
consent and the parties should have capacity to contract

The basic requirement is that in a contract an element of an agreement to sell is present.

Usually the best example to say the two stages of a contract, or the multi stages of a contract.
Now generally, when someone buys an apartment, then a booking amount is given. When
booking amount or the advance is given, an agreement to sell is drafted. The parties are given
some time to actually prepare, probably the sale deed, prepare the sale consideration and
probably apply for a home loan. Three months’ time is generally taken by the buyers to

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actually to convert the sale. When the complete consideration is paid or the price is paid, a
sale deed is executed or agreed upon, then it is registered.

And that is how the two-stage contract documentation is done in the apartment or real estate
project. These two kinds of contract enforceable at law. However, there are distinctions over
here. For example, an agreement to sell is an executory contract. Whereas a sale contract is
an executed contract. The term executory contract means that the performance is yet to be
done or is supposed to be done.

It means that when an agreement to sell is entered into, there are a lot of things that are still to
be executed and that are not finalized. In an agreement itself, there are things to be finalized.
And it is executed in the character of the agreement. So, this is not a complete agreement in
itself. Contract of Sale is a complete agreement, an agreement to sell probably is the initial
kind of lock in between the parties. They may have decided as to what they can decide right
now, but finally the things will decide only when a contract of sale takes place.

The best example to explain the executed versus executory contract is the contract farming.
What happens in contract farming is suppose it is Pepsi, or any other multinational company
which goes to a farmer and wants the farmer to do farming for the companies. Because,
some of these companies control the seed having a specific requirement, it can be genetically
modified or it can be specially hybrid seed. The company gives the seed to the farmers, the
farmer has to grow the seed, at this stage, when the company and the farmer agree that this is
the crop to be sown in his land, they enter into what is known as “contract farming.”

Now, why is it executory in nature is because that this is what is called the expected
obligation. Hence the performance plus the contract is executed from both the parties. Now,
why is it called executory? Is for the simple reason is that the seed for is tomatoes or
potatoes, let us assume that it is pathetic. If it is potato, it takes some time for the potatoes to
grow. When not sure to sell is made, because in one season, it could be X kind of quantity in
another season, it could be Y quantity. Not sure how much quantity the Pepsi company will
buy or not sure as a farmer how much he is going to sell. It is all dependent on the crop.
Second, it is also dependent upon the obligations of how the product is grown, what is the
skill of the farmer, what is the quality of the potatoes, and of course the potatoes are graded
by quality.

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When the graded crop, that is A Grade, B grade, two or three months down the line the potato
crop is ready then what is the price of the product? Today it may be X price, but after three
months, it could be Y price. So, has everything been agreed? No, it cannot be. However, the
agreement is enforceable. The farmer can sue the company and the company can sue the
farmer in this case that is breach at the initial stage. This two stage kind of an agreement has
been introduced in 1930, a kind of facilitating the reality of contract saying that in complex
modern day contracts. It is not one document that makes a contract, there can be several
documents that make a contract. The parties must probably agree, which is the enforceable.
The final agreement to be taken to the court as evidence to prove their obligations under the
same.

Suppose a farmer in an agreement to sell does not sell the potatoes to Pepsi? What can Pepsi
do? What are the remedies for Pepsi? What shall be assume that the sale agreement has
already been made and the farmer then does not agree to sell the potato to Pepsi. It is now to
should understand that the remedies which will also will differ in this case. Why will they
differ because in an agreement to sale the farmer does not want to sell the potatoes. He has
not sold the potatoes; he has only agreed to sell. If he had sold the potatoes, then the character
in the potatoes would have passed on to Pepsi. That is what the contract of sale does. The sale
not only ensures transfer of title it also ensures transfer of position. So, sale here is two-
combination: - title as well as position.

In an agreement to sell note the title does not transfer neither the position transfers and hence
the farmer can sell to someone else. That is possible because he is just agreed to sell and not
made a sale. If he does, so, of course, the Pepsi company cannot probably, object to that
because they have not taken the right to do it. But they can definitely sue the farmer for
breach because an agreement to sell is enforceable, and they can sue for damages.

But suppose after sale the farmer sells the potatoes to some third party, this would amount to
serious breach of contract by the farmer, because he has already transferred title and he is
supposed to transfer the position. That was a serious breach for which the farmer could be
held responsible not only for an ordinary breach, but also for wrongful conversion of title in
the property. The third party in a sale cannot get title because it is already with Pepsi.

The rights for the third party gets normally determined when there is sale or agreement to
sell. So, third parties cannot get title because title is already with Pepsi, they can probably get
position but again, the position can be recalled from Pepsi, which requires the same to be

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handed over as well. So, these are probably some of the consequences to make certain kinds
of these agreements having very significant consequences regarding the understanding of sale
of goods, per say.

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 Advanced Contract, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law, National Law School of India University
Lecture 39: Special Contracts: Sale of Goods - Part 02

Speaking about the difference between sale and agreement to sell, this slide will give some
kind of an idea regarding the difference between these two legal contractual terms. Now,
what is also important to understand that once sale occurs, the parties get right against the
whole world that is what is called rights against “Just in rem” Whereas, when it is agreement
to sell, it is “just in personem” which has legal validity, but between the parties. Just in rem
means between the parties and just in personam means against the world.

However, what is important to understand is that the remedies though they are different, the
legal enforceability of an agreement to sell is very much established in several case laws.
This it has become a very important element of holding people accountable for fulfilling their
contractual obligation. If they do not complete their contractual obligation, they shall be
responsible or liable to compensate and pay damages as well. Critically, in this kind of risk
that passes with sale, in an agreement to sell. To notice that if goods are lost by fire in a sale
or after sale, then because the sale has occurred and the title has transferred, the buyer is
liable to bear the loss of those things that occur due to the fire.

So, once the title passes in sale it is the buyers risk whereas in agreement to sell because title
does not pass, it is the seller who will continue to be responsible as an owner and anything
that happens to the goods due to fire or any other accident or incident than the seller
continues to be responsible for the sale.

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It is a critical juncture to understand because when talking about government contracts or
tendering and procurement, there are several types and several stages in which contract is
made. At this point of time a very interesting proposition to discuss the fact is that of
selection of lowest bid (L1). The L1 declaration becomes a critical stage of contract making
in government tendering contracts.

Once L1 is declared then the second stage is issuing of the letter of intent. The third stage is a
stage where either the purchase order or work order issue or you will notice that there is an
element of an agreement that comes into place where both the parties actually sign in that
kind of agreement. These are the stages of a contract. However, the parties are confirmed
with their contractual obligation as soon as the L1 declaration is made with the processes and
procedures. Once L1 declaration is made it becomes a stage where the parties are locked in
for the contract, they cannot exit the contract unless they with an obligation or liability
towards each other.

To understand what the sale is, sale is an intention of the party to undertake a transfer of
property. Now, transfer of property is a critical element of the sale of goods act as well as the
transfer of property act 1882. The intention to transfer the property is critical to sale, intention
to transfer property. Now, property means title, property means possession, that the seller

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said that goods belong to the buyer and whether the price is paid or not at that point of time or
simultaneously does not matter

Now, in credit sales the intention to transfer property exists as soon as the sale takes place.
However, the price to be paid from credit sales or it could be on equated monthly installments
or what is called an EMI. So, the price is not the determination of the point of sale. What is
determined is the intention of parties and that becomes very important. Sale of Goods Act
actually states in section four of the Sale of Goods Act of 1930.

(Refer Slide Time: 05:03)

It is at this point of time to understand certain definitions, which are very important and these
have important bearings on the kind of contract in government and private sector. Now, the
interesting aspect to look at is sale of goods, what does goods mean because this law covers
only goods and not other kinds of contracts.

Section 2 (7) of the Sale of Goods Act of 1930 defines goods. It says goods means every kind
of movable property other than actionable claims. So, movable property is good, but
remember, the definition of movable property can be far broader than the definition of goods.
But goods are not actually the case, it is very critical and important for all to understand with
some examples what are actionable claims. They are definitely not goods other than
actionable claims and money. However, goods include stocks and shares. So, shares are
definitely movable property which is goods and hence, that can be sale of shares, that is
covered under the Sale of Goods Act.

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Growing crops, grass and things attached or forming part of land are also considered goods if
they are agreed to be severed before the sale. For example, the trees are not goods, but timber
is. So to make a contract for cutting of trees, it will be considered as sale of goods, because it
has been agreed to be severed before the sale, but this is the traditional definition to find in
Sale of Goods Act. And hence, to understand this because of several circumstances that are
arising before the court of law is “what are goods” and where does the Sale of Goods Act
actually, literally apply.

To look at critically there is a constitutional definition of goods. This was brought about by
an amendment to the Constitution. One reads article 366, goods have been defined to mean
and include all materials, commodities, and articles as well. It is important to understand, that
the Constitution also defines goods. Why the Constitution has to define goods? What is the
purpose? Why did an amendment bring into place or come into place is something that has to
analyze at some point of time as well?

Since the critical component here is that one will have to appreciate that today in an era of the
goods and service tax regime called for the GST regime. Why did the GST regime come into
place? To think that the most critical aspects was the difficulty of defining model elements in
goods or defining model contracts and trying to categorize them as goods. When sale of
goods occurs constitutionally and even before the Constitution could come, the British
government had decided to levy what is known as sales tax. The sales tax that is for sale of
goods or where sale results in for transfer of title. Unless the contract or the element in the
contract amounts to goods and sale, sales tax cannot be levied. Under the Constitution, levy
of sales tax is the domain of the state governments.

The federal structure of taxation in India, the Constitution says that the state governments can
levy sales tax on sale of goods, whereas the central government quite later on came up with
what is known as the service tax regime. Those kinds of contracts that are categorized as
services can be limited with service tax and that taxation goes to the central government,
whereas certain sales tax goes to the state government.

The conflict of imposing sales tax has resulted in some very interesting cases before the
Supreme Court of India and the various high courts across the country are trying to visualize
and analyze the modern aspects of what can be considered as goods and what can happen to
be the sale.

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(Refer Slide Time: 10:03)

whether the following amounts to goods or not. First and foremost, can be considered human
organs as being goods, can they be considered as material, commodity or article, can they be
considered as movable property. Human organs, can be commercial in nature some point of
time in India, before passing in a legislation called the transplantation of human organs,
things weren’t very sure about the commodification of organs.

Today, human organs either can be gifted or donated but cannot be bought and sold. To
encourage organ donation or blood donation because again whether blood is human organ or
not is a debatable point. This is to be considered that is that has been some debate on the sale.
To about donation of eyes, donation of vital organs like kidney and others, because we know
commodification of these though they could be considered as movable property. Can

The medical colleges would want dead bodies for experiment and that is clinical trial. This is
very crucial and critical to actually to research on the advance lifesaving drugs. So, these are
Hospital Industry and called as the medical organizations, when they actually transfer, the
human organs can be categorized them to be sale of goods.

The human organs can be movable property and not call them as goods because considering
the commodification of human organs is against public policy to understand that though it
may fit with the definition of movable property, transfer of human organs, say from the
deceased family to the medical college, from the deceased family to in terms of organ
transplantation to somewhere else, may be or not be a transfer of Goods.

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Talking of title that is going to be transferred and of commodification, whether does it fit
within the definition of sale of goods entirely. So, one will have to evaluate those kinds of
movable property as beyond the ambit of the Sale of Goods Act of 1930. Discussing all of
these if suppose the deceased family tries to give a human organ “eyes” but the eyes are not
fit for consumption because the Sale of Goods Act says anything that is a commodity or
goods that is to be sold must be fit for human consumption. There is something called as
merchantability of the goods. Suppose the eyes are defective because it could be from old
man who has died, he may have already undergone certain kinds of surgery to the eyes.
Transplanting the eyes to another person, cannot certify the marketability of the sale. Sale of
Goods Act talks about conditions and warranties. Conditions are those kinds of
representations of stipulation that are essential to the contract.

This is like the description of the goods and organs cannot be described in any way. To
certify that the organ is fit for human consumption of A quality or B quality. These are
challenges and more importantly and public policy dimension in India is very clear not want
to bring in trade and commodification or commerce as applicable to human organs. This is
more in terms of the kind of need of humanity for medical organizations. we ought to keep
these beyond contracts, commercial law, and beyond the Sale of Goods Act as well. So, those
are justifications as to why these would not be categorized as good.

Further to evaluate whether animals can be considered goods, can animals can be considered
as goods? There is a need to evaluate this for many reasons. The reasons being is the concept
called chattel. It continues to be a concept today. During early days, slaves were considered
sale of goods from Roman times, to modern times when slavery was practiced in some of the
modern countries and slaves were actually imported to be sold. In many cases, slaves were
even auctioned They were treated as chattel in one sense, movable property. The world
economy has moved forward from slavery. To talk about animals, they can be bought and
sold for example a rare breed of a dog. Animals again had to be divided into what is called
domesticated animals, it could be a cow or it could be a buffalo, it could be a bullock, it could
be a dog. These are domesticated animals. They are necessary for human endeavors,
commercial activity, agricultural purposes and so on and so forth.

Not only that there are lot of animals that come within call as the consumption market of
meat. It could be chicken; it could be any other kind of animal that is actually taken out for
culling, for meat production and hence this is bought and sold in one sense. So, these kinds of

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animals can be considered a sale of goods and to definitely accept animals as an integral part
of the definition of goods which can be traded. A very famous case where animals were
actually sold and those animals had typhoid fever. Who has to be blamed? If the animals have
typhoid fever. In the fair, the animals being sold and pigs were on sale, it was a trade place
for animals and the seller had surrounded pigs. And he said, these pigs are sold in acid virus
condition, he also said that with all defects disclosed.

When a buyer comes and sees the pigs with the naked eye inspection, and bought these pigs
and he took these pigs to his pig farm. And unfortunately, the pigs that he bought had typhoid
fever. And the new pigs transferred the typhoid fever to the existing pigs and the entire pigs
in the pig farm got infected. The buyer got angry and the went to the court. And he said that
when these were not fit for sale, were not of merchantable quality. The seller is responsible
for having sold these goods or these animals which are not of merchantable quality, it is a
breach of the Sale of Goods Act.

Now, at that point of time, the animals have these kind of risks that we attached. Now, did the
seller knowingly sell the pigs that had typhoid fever, if that can be proved because he said,
that this was all his faults, as it was is in bad condition. This could be a serious violation of
the Sale of Goods Act. Apart from being a criminal offense, please note the seller would be
responsible for violating the Sale of Goods Act for which the buyer can repudiate the
contract.

But however, when this case was decided, the courts in England, were obsessed with this
theory called the theory of caveat venditor which means let the buyer be that. They said look,
this is the it is the seller’s market. And if it is a seller’s market, the buyer should have been,
careful, assuming the buyer had checked what those faults? Should not the buyer had check
has been a pig farmer does not he know whether pigs have typhoid or not. Could not he have
done some kind of an inspection?

So, if the buyer was negligent in his own conduct, then he cannot repudiate the contract, he
cannot return the pigs back and claim damages, he has to suffer some kind of injury out of his
own negligence or fault. But today, you will notice as we speak today. The Sale of Goods Act
has provisions which is called as the consumer interest provision or the provisions that go on
to protect the buyers interest. Buyers interest is consumer interest, which means probably
talking about the exceptions to caveat venditor.

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In cases what is called as caveat venditor which means that “seller should be aware”. Any
seller should not have offered these animals for sale in the first place, knowing that it had
typhoid fever. He should have checked before making the sale? In the buyers’ market, the
buyers need protection. There are several legislations passed by governments across the
world trying to protect the buyers interest because the buyers unfortunately get exploited and
cheated The buyers unfortunately face a lot of unfair trade practices from the sellers. And
hence to those extent, you will notice that we have legislations like the Consumer Protection
Act, we have legislations like the competition law, which all want to protect the consumer
interest. So, today, you will notice that the principle rule is caveat venditor. Let the seller
beware. Today in India, the legislations regarding the food is the “Food Safety and Standards
Authorities Act.” (FSSA Act) under which the food or it could be meat will have certain
standards. If they do not meet those standards, they are not to be kept on sale. Under these
legislations that have been brought in India, there is a requirement of labeling as well. For
example, the simplest labeling requirement could be whether it is a vegetarian or a non-
vegetarian food, the green versus the red dot. Labeling requirements could also mean whether
they have Trans-fat whether they have any kind of nutritious value. These are the disclosures
that are to be made.

Labeling also means, whether it is hazardous in any sense any good that is to be sold. So,
there are different labels that have to be informed for example, one of the labeling
requirements is whether it is environmentally friendly. So, there is something called earthen
pot kind of eco mark that can be used by firms. So, these are different kinds of people that are
introduced by governments. So, that the consumers have the right to information about what
these goods are.

For example, the organic and non-organic groups also need to be debated. We are talking of
trying to give consumers the choice, consumers information and it is the sellers duty to do
that. And if the seller fails in disclosing the kind of quality of goods that he is selling, that the
seller would have violated all of these legislations, as the case may be. When it comes to
animals and meat, as the case may be, the sellers have to be bad and they have to disclose the
faults in the goods. So, the goods have to be of merchantable quality, tradable quality and
unless they are not fit for consumption, they cannot put it up on sale.

So, animals can be considered as goods, domesticated animals can be treated and meat is
definitely part of the consumption of sale of goods. However, at this point of time, it is

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critical to understand the legislations like the Wildlife Protection Act. Under the Wildlife
Protection Act and schedule which was passed in 1972 after agreeing to an international
convention where trade in certain kinds of animals are now prohibited.

The prohibition of trade in Tuskers or ivory is by the legislations. These animals were
actually smuggled if they were killed illegally. They were poaching because the ivory was in
lot of demand. Today, ivory has been a banned commodity. Certain kinds of animals cannot
be the subject matter of sale. That these are wild scheduled animals, the animals that need
protection, they are near extinction, they are endangered, they are threatened kind of species
on planet Earth and hence not to be traded and any private person holding them is also
something that is prohibited.

These animals can be part of a zoo. And in India, the concept of a private zoo has definitely
taken traction. The buying and selling is definitely not something that is permitted. As these
are protected animals. They are not part of the selling of goods process and they are protected
under law, for which the sale of goods does not apply. Commercialization of the sale is
definitely not permitted.

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 Advanced Contract, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 40
Special Contracts: Sale of Goods - Part 03

(Refer Slide Time: 00:16)

Continuing the discussion on understanding what can constitute as goods for the purpose of
the application of the Sale of Goods Act of 1930. Also looking at the cooperative federalism
of taxation, where central and state equally would want to have a tax contract. An issue that
was quite interesting is to look at these three things. LPG, that is gas, electricity and water,
can these three be considered as good?

Now, why there is the multiplicity of cases and the kind of that the courts had to look into
the application of these. When talking about water, water is supplied, electricity supplied,
LPG is delivered. Now, with LPG, what happens is liquefied gas. It is actually trapped into a
cylinder and then delivered. Now, the cylinder is measured and that is a measurement of 14
kgs. And the LPG is delivered for which we use the content, not the container. Now, this
content versus container is a very interesting philosophy that we have to look into. To use the
content first there is a necessity to pack the content. Now, that is the interesting part. So,
when the content, which is liquefied gas can be considered as goods, the rule is about the
tangible goods.

When to consider that the LPG is a goods. So, LPG is not material in any form? So, that is
the problem with LPG. Now, coming to electricity, please note electricity is supplied in terms

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of the wires and cable lines. But when it is coming into your house, probably there is a meter
that measures the consumption. But is it really it is a commodity? Can you say electricity is
an article? Now both, liquefied gas and electricity could be felt in some form, but it is not
necessarily tangible in that sense. Unlike LPG water is tangible. But the problem with water
is how to measure what is being supplied and can that measurability result in it being
commodity or not? The commodification of water means privatization in one sense,
commodification of water means private companies want to sell it, buy it

So, there has been water being sold for profits. But water that is supplied to the house can it
be considered as goods? And then can the contract be one of sale of goods? Can the Sale of
Goods Act apply that is the first rule? But more importantly, will sales tax apply to such
contracts. The majority opinion on this is that these three things are considered as goods for
multiple reasons that the judges have laid out in different cases. First among them looking at
the Electricity Act of 2003, which is the law that governs the production generation,
distribution and transmission of electricity, that the Electricity Act of 2003 has established
what we know as the Central Electricity Regulatory Commission or the State Electricity
Regulatory Commission’s. It governs the business of electricity largely right from its
production to its final consumption.

Now, there is something called electricity theft under this legislation, when there is actually
theft of electricity, maybe through unethical connection, maybe through tampering of the
meter, but that is theft and the courts have said can only be of commodity or of goods. And
secondly, to feel the electricity, means it can give shock actually, so that tangibility of
electricity is also there. And hence, today, to apply this kind of analogy of saying that there
can be electricity theft and there is another kind of theft found in the say the Information
Technology Act of 2000 what is called as data theft. The data also must be considered as
some kind of a material commodity order. So, the extension of this analogy that is there for
these three traditional forms of supply or some kind of service, which is to be considered
“goods” can actually be made analogous to the modern challenges that is faced in terms of
the application of the Sale of Goods Act.

The courts have said something that if there can be deliverability and transferability of some
forms, if there can be measurability of some forms. While measuring these three things, gas,
electricity, water and how the consumption can be measured. Actually looking at the measure
of consumption being transferred to the consumer. Those are probably some of the reasons

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that the courts have said that because there is measurability and transferability, which is the
test of deliverability to the consumer, these three things can be considered a sale of goods.

Now, what is important to understand is the primary contention in all these cases, was
whether state governments, 29 states in number. They are fighting to tax these contracts that
by increasing their taxation, because these are the contracts that sales tax can be imposed
because that is what the Constitution says that sales tax can be imposed only on sale of goods.

The contention on the others or what is reversed is, if they are not sale of goods, they could
be supply of services and supply of services comes within the domain of the central
government who can actually tax it. So, that was the central theme of the government.
However, to think that the definition of goods and try to understand it, not only from the
perspective of the Constitution, but also from the point of application of the Sale of Goods
Act 1930.

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(Refer Slide Time: 07:03)

Now, moving on to another interesting aspect of lottery tickets. Now, there are three cases
that unfortunately come into contention. The Anraj case, the Vikas sale corporation case, but
most importantly the judgment that is now prevalent is the sunrise associates versus
Government of Delhi case. Notice that the importance that these cases have in terms of why
should we decide one thing against the other?

Now, the lottery tickets the immediate reason how to understand is to look if it is tangible in
one sense. Now, is paper commodity, is paper goods, is it a paper article? The answer is yes,
it is. Now, if something is printed on the paper, suppose it is photocopy. Can it be considered
that to be goods? Paper is goods but whether the photocopier, who is photocopying and
printing it or say printer was printed on piece of paper, can be it be considered as goods.

Now, for example, a book, book is nothing but paper. But it is printed paper. Now, can books
be considered as good? The answer is yes, of course, it can be. Similarly notice that there
were times when these photographs. This is a very interesting case for the rainbow-colored
lapse case, wherein the issue was whether these color labs that are printing photographs, can
they be considered to be under the contract of sale of goods. Now, printing was considered to
be service. Just putting your labor in scale, putting the colors and actually printing it on
paper. Paper is goods but what is being printed is not was the contention in the rainbow color
case.

Now, to looking at all of these contentions there is this case called a Sunrise Associates case
where the question was about lottery tickets. The lottery tickets, is just a printed piece of

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paper. Buying a lottery ticket, why do you buy because there is a special number and this is
the not the online lottery but the physical lotteries. And interestingly in India, notice that
lotteries is kind of a regulated activity. The Constitution permits the State Governments to
allow lotteries but only if the State Government wishes to be involved in it because it kind of
naturally encourages gambling. And lotteries are floated by the state government for
developmental purposes. Karnataka government has banned lotteries like many states but
there are states like it is seeking and others who permit lotteries. There are states like Goa
who also permit gambling in some form, especially in the form of casinos.

So, State Governments are permitted to regulate that it is a lottery so lottery business can still
exist in that sense. And the question is whether lotteries that are printed just on a piece of
paper can be considered as contract of sale of goods. So, this question was raised before the
judges and the judges said, look, lottery contains three things. And that is where the
importance comes over here about trying to understand the business and contract and then
later on decide whether the Sale of Goods Act applies or not.

So, understanding the business of lotteries, notice that there is a price that is to be won in the
lottery. And the price is a chance; it is not to confirm that they will definitely get it. It is a
chance. And it is like, you may or may not. They actually pay consideration for the sales to
take part in the scheme of the lottery. So, Justice Ruma Pal, said that “while you want to look
at lotteries, in a sense that look what is to get in a lottery?” Can you transfer a lottery ticket?
Maybe yes. But again, there are would be conditions of non-transferability over here.

But when you transfer, it is nothing but a chance to participate in the lottery that have to be
transferred. It is not a commodity or article in itself that it can be traded, it has no value in
itself. The only value that lottery ticket is the winning of lottery ticket in which the number
has been announced and the number on the lottery ticket.

So, except that, the rest of this thing is just a chance and nothing more than that. So, the
question was, if you are trying to look at lottery tickets or can it be considered to be an actual
number claim instead of goods. To start distinguishing contract and say, if they do not fit
within goods, they have to fit probably with an actionable claims or within services. So, the
option of actionable claim is already there in law. And hence, going to evaluate with a lottery
tickets would come within that are not.

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Now, the term actionable claims, is just a piece of paper in which the claim has been settled,
and has been proclaimed, the claim exists in the eyes of law. So, the piece of paper is of no
value except for the claim. So, it is not a commodity or an article or material, which is there
off the shelf for everyone to exercise or transfer or get. So, that is what an actionable claim
actually means. This is defined under the Transfer Property Act 1882 and hence have to
understand what this would mean. The lottery tickets interestingly, the court say cannot be
considered as goods because it is just a chance for winning the prize for our consideration.

So, the piece of chance for winning a prize cannot be commodity, cannot be an article, it can
maximum be an actionable claim only for the winning lottery. And the lottery ticket itself
does not have a value of its own. It is merely a piece of paper and nothing more than that. It
could be the evidence of the right to win the lottery. But apart from that, it has nothing else
and hence, lottery ticket can be best considered as actionable claim, not sale of goods is what
the Supreme Court judges had to say.

(Refer Slide Time: 13:21)

To understand what actually claims are, it is very important for us to understand the same
because we have to know what kind of contract are entering in to and we have to treat them
similarly. Suppose there is an insurance policy, it can be considered as an actual claim,
because based on that claim of insurance to be made So, actionable means it is a confirmed
kind of right, that is determined on a piece of paper.

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To make a claim from that kind of piece of paper it means the exercising for right.
Interestingly, a judgment or a decree that is made by a court. Now, judgments and decrees are
put on paper and that is a judgment of paper on which has claims of rights that also can be
considered as an actionable claim. Our pass books with the bank it is actionable claim
because that is exactly known with the pass book, account balance and to withdraw the
amount.

The Provident Fund, a passbook can also be an actionable claim. So, all of these are
considered as actionable payment and that an actionable claims cannot or should not be
considered as goods. These actionable claims do not bring commercial material angle to the
sale. And that is where some of these elements in or the society are not amounting to sale of
goods.

(Refer Slide Time: 15:06)

Moving forward very interesting aspect that did come about is the BSNL case, which is kind
of one of the favorite cases that which is discussed in law classes about telecommunications
Now, telecommunication business has flourished in and obviously, there are numerous
transactions and contracts that have been made. And once a sector starts, making a lot of
noise, a lot of money, lot of contract obviously, the state government or any other
government wants to tax the same.

Interestingly, India had landline connection, even now, but mobile has actually taken over the
telecommunication business. Now, when there was landline connection, you would notice
that we had a kind of something like this. So, there was an instrument through which we

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would receive the calls and make calls. Today there is what is known as a mobile phone,
which is also an instrument that receives these calls. But landline is kind of fixed because
there is a wire because telecommunication on the phone is through electromagnetic waves,
the towers actually disseminate those kinds of signals.

So, there is some kind of distinction in the kind of businesses. Secondly, once there is a wire
to this phone, which is the instrument for a landline connection, the wire connects you to
different people across networks. But here, unfortunately, there is a SIM card, which is
considered as the activation device to actually receive the electromagnetic waves from the
mobile service companies.

So, the question before the court was, can the business of telecommunication be considered
as sale of goods? And most importantly, can the electromagnetic waves that are transferred in
terms of talk time for 2 GB data, can they also be considered as goods. And finally, can SIM
cards also be considered as goods. So, all of these issues was brought before the court.
Because, of course, if they are good, they become sale, if they are sale they become
applicable to sale tax. The goods considering the whole aspect of the business, the contract
and the intention of partners, these three are very relevant and important.

And then looking at the need of the state governments, think all of these three very important
considerations for the court to actually evaluate whether such contract should be taxed, under
Sale of Goods Act, or not. So, the court held that look electromagnetic waves were neither
abstracted nor were they consumed in the sense that they were extinguished by the user.

So, it is not something that is delivered. It is not stored or processed. It is only something that
there is a supply. And hence, the SIM card is merely an activation device. The SIM card does
not have a sale of its own. It is not merchantable of its own, though it could be tangible. It is
just an activation device. So, what does the SIM card do? In many cases, you will notice that
the hardware is just trying to support the software. Hardware is just a small component.
Software is basically the service that is supplied to activate within the hardware device. So,
the SIM card has no separate value in terms of sale ability, unless it is given as invalid SIM
card by the service companies that are actually given by the mobile telecommunication
services.

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(Refer Slide Time: 19:02)

The courts in the BSNL judgment very clearly said that the dominant nature of this contract,
does it to do service or does it for sale of goods. The dominant nature contract is very, very
important. And they concluded that electromagnetic waves are not good within the definition
of the Constitution of India.

The equipments are definitely the handset that is considered as goods and finally coming to
the activation device. They said that the activation device can be accessed separately if
required, but the question is whether it is divided between the electromagnet waves that the
service and the activation device.

So, hence the court said that the SIM cards cannot be taxed; cannot consider them to be sale
of goods. It is only an activation device. So, you cannot really divide SIM card visa vis the
electromagnetic waves. They are combined together and unless there is a divisibility test, it
cannot be separated and cannot tax them differently. All have to now understood the nature of
the judgment in the BSNL case? Considering now how is this relevant to common contracts?
The discussion so far, it is important not only to understand what nature of contract which is
integrating, but also have to draft the purchase order agreements. There is a necessity to
understand whether it is good, whether it is a sale, but it is more important that every contract
that is made must have proper applicable taxes. Therefore, it is important to know, the nature
of the contract to actually impose the proper taxation. Now, when there is no proper taxation,
then the contract would not actually, be a valid enforceable one because enforceable contract

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is a contract which is appropriately taxed. There is no tax avoidance by in circumstances and
the tax has been made as per the law of the land.

Now, at this point of time, while speaking of government contract, while we are speaking
about sale of goods, it is very pertinent to know a very interesting case of Kone elevators.
Now, Kone elevators actually did take part with government tendering contract. Now, the
question was whether was elevator was goods or service.

Now, everything in the elevator is tangible. It is material. However, elevators are not
something that are available off the shelf, if they are not something that can just go and buy.
They have to be customized, they have to be made to order, they have measured capacity,
then it has to be brought about and commissioned or installed in a particular place. So, Kone
Elevators considered that this as a contract. So, they took part in the tender and they quoted a
price with all applicable taxes.

Most tenders should evaluate the bid amount or the price bid or the financial bid, with all
applicable taxes. It is the landing cost, based on which to L1 is evaluated. This includes the
cost of transport, cost of packaging and the taxation. It could be customs duty; it could be
import duty or any other duty for that matter. What happened in this case was cone elevators,
is it a service? At that point of time, the service tax was quite high. And it was in the range of
11 to 14 percent, when they quoted with service tax their base price per service tax, they
became L2.

Now, L1, when he quoted, he quoted tax. Now, sales tax was in the range of less than 5
percent in any of the states and sales tax made the contract cheaper. Because 14 percent is
higher tax and 5 percent is lower tax. So, they said that it is sale of goods. And the applicable
tax to our contract is just 5 percent. And they became L1, Kone challenged it in the court of
law and they said that there is a deliberate tax avoidance and evasion by creating this contract
of a sale of goods. Because this is not a sale of goods contract rather than it is a supplier
service contract for which service tax should be applied.

So, this kind of mischief by judging contracts as being service as an inputs will result in
iniquity, will result in wrong choices of L1 and this would actually give a public policy
dimension to challenge government contracts as well. So, these are possible reasons to
understand, which are the contracts that are goods contract and which are the contract that are
service contracts so that appropriate taxation will result in appropriate evaluation of the

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bidders and thereby going to award the contracts as well. So, just to give a sense of why these
cases are very relevant, important and how contracts and taxation are very interestingly
brought together in the discussion here.

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 Advanced Contract, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 41
Special Contracts: Sale of Goods - Part 04

(Refer Slide Time: 00:16)

Taking this discussion forward and trying to evaluate modern elements of understanding what
are “goods” Today to say goods are movable property, one of the interesting aspects for us to
consider is intellectual property. Now intellectual property is new kind of property, it is
intellectual in the sense that it is something to create, unlike what was traditional property in
terms of movable and immovable, land and house. Movable was everything that was tangible
in nature, but intellectual property may not actually have tangibility.

Yet it is called property and have been given the rights such as patent, trademark and
copyright traditionally as individual rights or even industrial design as the case may be. Then
there are community rights like say geographical indication and so on and so forth. so,
including plant varieties and others. So, there are so many of these intellectual property rights
that can be created and whether IP can be considered as goods. Now, this is a question that
has been very important because of several reasons.

First and foremost, to talk about intellectual property, having attributes of property and if it
has economic value (which intellectual property definitely has) because it is something that to
be exploited in the market, you can make economic gains from the same. So, the first

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question that people did raise is, can I pledge these intellectual properties to the bank and
raise some kind of loop. To the discussion on pledge, pledge was only a goods, mortgage is
immovable mostly and pledge is of intellectual property. It can not only be pledged, but
please note it can be sold or there can be imposition of sales tax as well. The word sale under
intellectual property usually is commonly used is “assignment or licensing” as the case may
be. The licensing is supposed to be kind of the right to use whereas assignment is like a sale
value not only transfer, the right to use, but also transfer the rights absolutely.

So, the question has been answered by the judges and they have said that any transfer of
rights to use the intellectual property is considered as a deemed sale. Now, this is something
that is brought about in the constitution amendment. Article 366 in the Constitution has said
that if there is any transfer of “rights to use” that can also be considered as sale of goods and
the state governments can actually index the sale. So, from a taxation perspective, intellectual
property has been considered as movable property, this is something that can be taxed as
well. So, it is to understand that the nature of modern property is to be considered here

Now, going further to the most probably amazing case or interesting case that one would like
to read is the Tata Consultancy Services versus the State of Andhra Pradesh. Now, since this
case decided in 2005, but the main contention of the issue in this case is whether software can
be considered as good. The software is very integral (the recording on a software here it is
called the Camtasia software, which NPTEL has subscribed to). This course is on a platform
which is software and most of these companies say that the software “goods”. They
reconsider that this is a product development. Once the software is developed and have to
maintain it the services is upgraded, that’s the argument for software to be called as goods

Today most of the smartphone runs on software and then have antivirus as another additional
product that is also given. Most of desktops have MS office, they may some kind of an
Internet Explorer or Mozilla to actually run the system. Today in the phone, there is a
software in terms of an app and download this app, payments are made on this app. So, the
app is also w kind of software in which services are actually given to you.

So, the question is when these companies which are huge in number in terms of the kind of
transaction value, the terms and conditions that they established the kind of economic
consumer activity that they contribute to, you will notice that the software industry being so
huge, the question very clearly says is, what kind of contracts are they making? And what
kind of tax are these contracts are going to attract to?

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So, the state comment said, look, software is goods, everything is goods for the state
government. And hence they said look, we should be able to tax it. This is nothing but sale of
goods and sales tax is applicable to software products, to which TCS, Tata Consultancy
Services, they probably disagreed. The challenges they said was that only giving services of
software, because they are writing a code and algorithm is being made and that is just being
used, and it is not something that is tangibly delivered to the customer.

And hence, it is called the service and not sales. So, that was the argument of TCS and it went
to the court and the court had to decide what are this software’s actually doing. What are
these companies doing? What are the nature of this contract that has been agreed to?

(Refer Slide Time: 06:26)

Now, the court in this case at a huge length did discuss a lot of things and they brought in
jurisprudence from other jurisdictions including the United States, where a similar challenge
or a similar problem arises. Now, what the court do is they actually looked at “water” as
some kind of analogy that can be drawn and compared to software, this would look water that
is flowing freely river, it is not considered as goods until and unless it is actually drum or
abstracted into cutting. Once water is put in the bottle and it is sealed and has a brand, this
levy on water becomes goods. Hence once the software is branded, it is abstracted and it can
be put in some kind of device like a bottle or a CD, it can be stored in that CD in terms of the
number of MB or GB that it can be measured in terms of storability, then it can be processed,
it can be dealt with or it can be transferred, so the CDs can be bought and sold.

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The courts use this very interesting term called uncapped and capped. So, what is capped is
definitely should be considered as goods because it has a marketability, it has a brand image,
it can be sold off the shelf. And hence, in the TCS case, very interestingly, the court says that
look, branding and unbranding is not so important, though in one sense it is, but what is
important is that the software can deliver, transferred, store and process, then that will create
the software to be goods. So, what was sold in the CD was considered by this court decision
as goods and what was probably customized, maybe could be considered a service. So that is
how the TCS judgment was evolved.

And there was a clear segregation of the software contracts as some that can be considered as
goods and some can need not be considered as goods, because they are customized to the
customer and these are mostly the contract that TCS was intervening. However, please note,
the TCS judges did not look at the word sale. Now, this is important because sale is a yet
another aspect because there can still be under the definition of goods. But the point is, under
the definition of sale is it different test altogether? This is about about the attributes that thing
needs to be considered as goods in the Sale of Goods Act.

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(Refer Slide Time: 09:28)

Note that goods are three things that one has to understand as goods. Goods can be divided
into these categories. Certain goods are specific. There are goods that are present, they exist,
they are identified and they are asserted. That is what a specific good is. There are specific
goods because, you can have a sale of goods contract for specific goods because the goods
that are existing know that have been identified to be given to the buyer. Now, say in a sack
of rice required is just 5 kgs of rice and specify that these are the 5 kilograms that is being
giving to the buyer, then it becomes specific goods otherwise the goods are unascertained.

The goods are present but not ascertained and not been identified as the goods. For example,
to buy a car, there can be specifications. In the car showroom, which is the car that has been
identified that would be the specific goods. Still than the cars are there. But which among
them is what the seller intends to give becomes something that is relevant and important
about how the contract of sale of goods has to be done. There is this very interesting concept
of Sale of Goods Act of future goods. With an example of what is the contract forming can
there be an agreement to sell for future goods? Under the Sale of Goods Act, there can be
proper contract and that proper contract is meant to sell which that is enforceable, but how it
is for future goods?

Now, until you have the goods ascertained and specific, there cannot be sale of goods. There
can be an agreement to sell for future goods, but that cannot be sale of goods. So, sale of
goods can only occur of goods that are ascertained, that are specified. That is how the
condition under the Sale of Goods Act comes into place.

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So, goods have to be ready for delivery. And please note the Sale of Goods Act also further
acts and says that it is the duty of the seller to put the goods in a deliverable state. And to put
the goods in a deliverable state is possible only after being ascertained what he intends to
pass to the buyer. So, that is how the test on the sale of goods finally occurs.

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 Advanced Contract, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
National Law School of India University
Lecture 42
Special Contracts: Sale of Goods - Part 05

(Refer Slide Time: 00:15)

Moving onto understand what is Sale? And as it is most important context when does sale
take place or what constitutes sale. Technically to look at law, it will tell that sale has two
things, one is transfer of proprietary right. Proprietary means the right of title, and second is
the transfer possessory right, which means the physical possession of the goods.

So, sale is a combination of both and interestingly, when such sale happens, proprietary plus
possessory, obviously, the sales tax can be imposed. However, to see that in the past the
Constitution of India and including, the enactment of what is known as the Hire-Purchase Act
of 1972, which was never implemented, rather right now, the Hire-Purchase has been
repealed. There was a concept of deferred sale in hire-purchase.

What happens in hire-purchase is that when certain goods are taken on hire with the condition
that it is purchased after payment of equal installments. So, the when the sale is deferred until
unless the complete price was paid, it would not be considered a sale. In turn it was a
problematic situation, because sales tax would then be imposed after the last installment in
hire-purchase has been paid, that is when sale will take place.

Unfortunately, suppose when the buyer returns the good or stops payment of the hire-
purchase tax, then the goods have to be returned back to the seller. And this was a transaction

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that was a problematic because sales tax could not be imposed. And that is probably some of
the reasons where this concept of a deemed sale was introduced in the Constitution. To notice
that today, a hire-purchase transaction can be considered as a deemed sale. To enter to hire-
purchase contract, it is sale for all practical purposes, irrespective of the fact that you want
that ownership to be transferred after the last installment has been paid. So, these are the
aspects of understanding what is the concept of the sale for the purpose of contract and sales
tax, this has specific meaning and hence, one will have to understand it in that context itself.

(Refer Slide Time: 02:49)

To look at the elements of sale to understand what are the challenges in sale. Which
interestingly, it is noticed quite often, that the government has several legislations including
what is called as the Essential Commodities Act. There could be a sugar control order, it
could be the government passing an order saying only an agency called A can have the
business and not to agency B. So there may not be free market forces.

Now, if there are no free market forces, then can we consider that to be sale? That is the real
question in some of this context. So, to notice that the courts have essentially looked at
compulsory purchase or compulsory sale, and they have actually evaluated, whether it can be
brought up the Sale of Goods Act.

Because the kind of freedom that parties ought to have may not be there in such kinds of sale
or purchase that is done under some of the statutory legislations. So, should we consider it to
be sale or not? Suppose, if the government is selling through the public distribution system.
Can it be considered a sale? Now it is subsidized. The actual price is not paid. The question

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now is how is that related to the contract? The PDS (public distribution system) notice that
those grains that are given from the public distribution system be of merchantable quality.
Can there be breach of contract?

Even if the people are paying less than the market price, even though it is subsidized, whether
the contract law can actually work or whether it is the state-citizen relationship that should
work. So, in these contexts, it is important that the courts have looked into this matter. When
it comes to some compulsory acquisitions, it should not be considered it to be sale.

But, the courts have also said that they have no problem in considering it a sale because what
the government is doing is also buying. and there is no necessarily absolute freedom of
contract in all cases, in all contexts. So, it is important to understand the same as well. So,
this is something that is important to notice again and again, the question is whether the sales
tax can be imposed, in such transaction.

(Refer Slide Time: 05:33)

Now moving ahead, looking at the distinction of sale and contract of work, what is important
is the contract of work, where labor and skill is more. But in the final sense, there may be
some tangible commodity or article that has been given. But because the dominant nature of
the contract with dominant intention of the contract is of work, the contract will be treated as
works contract and not sale. That is what the court started balancing the interests of the state
governments and the central government.

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Now, if it is a works contract, it can be considered service and service tax can be imposed on
the same. Take an instance of contracted work. For example, when your portrait to be painted
by a painter, he is giving the service of his skill, his labor, his standard. How does he actually
deliver the service, he may actually give it to on the page or sheet or the cloth in which the
portrait is actually being made. The final outcome may be something that is tangible in terms
of quantity or article, but because the dominant intention was hiring the painter’s service, it
will be treated as a contract of work. Similarly, what is a contract of sale? To definitely go
and buy a painting, whatever the painting that is available, it is something that is tangible, it is
the format that can be bought and sold.

So, may be buying the painting, the painter’s work, but it is already painted is a contract of
sale. The same example can be distinguished as sale and contract of work. The only thing is,
how do you apply the “dominant nature test” that the courts have evolved in India. For
example, say manufacturing of coaches. Now in manufacturing of coaches everything is
tangible. Only thing is how to fit in the different parts. What order or customization have to
be done? Say, it is a bus, which 2 plus 1 seater, luxury seating, sleeper coach, I just fit all this
material. But the dominant intention in that case, may being a contract of work.

And a contract of work, yes, the final outcome could be in the form of a tangible commodity
or article, but because the majority of the contract looks to be a contract of work, it will be
treated as contract of work. So, notice that in government, they also interestingly issue what
is known as the purchase order. The purchase order is for sale or purchase of goods, whereas
work order is for contract for work.

So, there is a need to clearly understand the dominant intention, or the nature of the contract
to actually apply the distinction between sale and work. Interestingly, to take consideration of
this matter. This is the most important case of what we call as the Gannon Dunkley case of
1958. And later on, again decided in 1993, where the Supreme Court again had to inquiry in
the nature of construction work. Now construction work is using a lot of mortar, it is using
bricks, cement, steel, wood, plumbing and so on and so forth. All these are articles,
commodities and materials. How would the that fit the same unit that is labor? Labor is the
dominant nature in some of these contracts. And without labor, nothing of this could actually
look to be in a tangible, artistic, livable manner.

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So, the dominant nature in works contract, construction work is the contract. Now, over the
period of time, the courts, to balance the interest between the state and the center, to tax these
contracts, had to come up with a very interesting test called the composite nature test.

What it said was, look, in the same contract, why do not we distinguish between sale and
work? Because this is a combination, it is a composite character in the contract. Let both
governments have a share in taxing the value of the contract. Some in terms of work, say 60
percent of it could be works contract and 40 percent can be material contract for which the
state government can also tax. So, the composite character of the contract was brought into
place in terms of the taxation matter and this composite tax was applied in contracts which
had sale as well as work, and both the governments got their revenue from these kinds of
contracts.

What is relevant to understand here is the whole idea of the goods and services tax, GST,
comes from these kinds of cases, where to club the right of both the governments to tax the
contract, to ease taxation law, to facilitate commercial transaction, to clarify down some of
how to treat this contract is it 60:40 What is sale, what is works contracts, what percentage of
taxation should be applied? Because notice that in sales tax, different states have different
percentage of taxation. And this also meant that there was something called industry forum
shop. Industries would actually go to those states where the sales tax was less so that their
goods become competitive in the market, because of lower price. So, to avoid all of that, to
have a uniform, one nation one tax regime, the GST law was also implemented, and it
directly reflects to the discussion about understanding contract of sale vis-à-vis the contract
of work.

(Refer Slide Time: 11:25)

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Now, this is the case that is construction contract. If suppose when the contract cannot be
divided as works or sale contract, because there shall certainly be either sale or work. But if it
is something that is divisible in the nature of how much can be taxed as a service contract or
service tax.

So, that is how the Gannan Dunkerley in 1958 was decided by eight judges, they decided at
that point of time that construction work is not sale of goods because it could not be divided
at that point of time. So, the dominant intention and nature of tests was applied in 1958,
which was later on changed to what is called as the composite nature test.

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(Refer Slide Time: 12:17)

To understand the Sale and the definition of sale and how it resulted in a constitutional
amendment, for example the look at supply of food in a restaurant. Now, consider a supply of
food in restaurant a sale of food. Unfortunately, as it is decided then, this is service of food.
So, if the food was pre packed, if it is available off the shelf, say a biscuit packet, that is sale
of goods. But if the biscuit is made to order and to sit in the restaurant and actually eat it or
consume it, that would be considered as supply of services. That is how the pre constitutional
amendment rule was. And that is when the 46th Amendment was brought in. Clause 29A was
brought to Article 366 of the Constitution, which clarified all of these, and introduced what
we call as the Deemed Sale. So, today, notice that catering services will be considered as
deemed sale.

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(Refer Slide Time: 13:22)

And, any of the other kinds, a licensing agreement or a transfer of right to use can also be
considered as a deemed sale. However, to look at certain issues like fitting of an air
conditioner. To buy a standalone product, say 1 ton or 1.5 tons, it can be fitted in and that
could be sale of goods.

However, if any central air conditioning in the office, what kind or nature of the contract it
will be? If it is a works contract or it is a composite contract. So, this is where the challenges
still will remain because an element of labor skill is there, the material is just incidentally
going to be transferred. So, in central air conditioning, the works contract concept becomes a
very critical to appreciate and understand. Similarly, whether contract for printing of books,
question paper, whether it is works contract or sale contract. The final element is in the form
of paper, but it is printing and printing is labor or is it skill. And Courts in 1989 said that
printing of books is a works contract.

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(Refer Slide Time: 14:44)

What is a Works Contract? Just to understand it from tax law perspective, works contract
includes any agreement for carrying out of cash or deferred payment, payment or price is not
relevant. Or for any other valuable consideration. The building construction is works contract
as per Andhra Pradesh Sales Tax. So, the definition can also say what is works and what is
not.

If you are processing food, or you are processing any other material, fabrication is works,
erection of say, towers and buildings, installation, fitting, improvement, modification, repair
or commissioning of any movable or immovable properties constitute works contracts. So,
this is to segregation of sale from works. So, all of these involve labor and skill and that is
why they are not sale of goods, they are works contract.

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(Refer Slide Time: 15:36)

The changing nature or the dominant nature test, is discussed in the Kone Elevators case. So,
it was argued that lifts and elevators cannot be delivered like air conditioners, they are not
standard units. They have to be manufactured, supplied and directed and installed, involving
labor and skill, and there is a technical know how to the same, and that was what was argued
in this case as well.

So, these are certain very interesting questions that one will have to raise for example, supply
of railway wagons. Should it can have considered Sale or to be considered it as works
contracts. So, these are the numerous challenges that came for the definition of sale as against
works contract

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(Refer Slide Time: 16:28)

Now, coming to software, the interesting character of software in the Tata Consultancy
Services with the State of Andhra Pradesh case where the court said that branded software
can be considered goods because it can be delivered, it can be stored, it can be transferred.

So, that is something that the Tata Consultancy Services case did say. But remember, the
judges in the TCS case did not deal with the definition of sale. They just dealt with the aspect
of goods, can software be considered as good? But finally, one should notice that even if a,
software is goods, then what about the software in a CD during that time. Today, everything
is downloadable, everything is online.

And everything is a transfer of the right to use. So, notice that, let us assume that it is in a
CD. Now what do you do? When you buy the CD, you consider is to be goods. You think it
is liable or applicable to sales tax in case the government wants to apply it. Then, you take the
CD and put it in the CD drive.

Like, I have a CD drive over here. I will load it. After a couple of seconds, one dialog box
opens, scroll it down, to click the agree button, after which the software loads. That is how
usually when software was given in the form of goods. In a dialog box that opens to which
you click the, I agree button. Notice that what was shown to click was the license agreement.
The terms and conditions of the license agreement to which “I agree” was clicked and only
after which, actually that kind of a software was loaded

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Interestingly, there are two buttons two boxes that you can actually choose to click. One is for
the “I agree” button Now, none will probably click the “I disagree” button because probably
if its clicked it, the software will not be loaded. But is there a choice to return the CD back?
This is where to bring in the aspect of electronic contracts where it is called as shrink wrap
and click wrap, I think. Shrink wrap means that the CD have a wrapper and it says that once
you open the wrapper, the CD is yours. That is the first stage in which a contract in the
electronic nature of transaction used to happen, shrink wrap. Open the wrapper that the
copyright in the CD cannot be borrowed.

Once the wrapper is open, the CD will not be recalled backwards, returned back, no refund.
So, they may have certain terms and conditions as the wrapper to the CD as well. So, that is
called shrink wrapper, the stage of the agreement was called shrink wrap and the other
agreement was called as click wrap.

To say “I agreed” agreeing to the terms and conditions of the contract. So, that is the stage in
which the second level of contract is made when a CD is bought. To say a click wrap means
agreeing to the terms and conditions. This is like a forceful, what is called as the standard
form of contract. It is standard, the terms and conditions are standard. They do not change, do
not amend, they are standard terms and conditions. The standard form of contract, exist in
most places. In today's business context, the standard form of contract is most common. This
becomes unfair sometimes, because looking at the 199th Law Commission Report, it has said
that a standard form of contract is, could be unfair on two grounds.

One, it could be procedurally unfair. Now, what is procedural unfairness? It means the way
contract and the consent is taken, itself is unfair. When there should be two boxes that is “I
agree and I disagree.” Now, to click “I disagree” even though there is a shrink wrap contract
that has already been made, but even to say “I disagree” the shrink wrap contract should not
say that the CD cannot be back. Having to use, unless you read the terms and unless and then
to disagree. So, that is an unfair procedural consent that is usually taken in a contract. This
procedural unfairness in standard form is visible in most places. For example, in hospitals,
there is a necessity to agree the consent form. That is like an implied contract with the
hospital or an express contract that creates an obligation between the patient and doctors.
Now in most cases, people do not have even time to read it and it will be like forced to sign.
They say, unless you sign, we will not treat the patient. That is a procedural unfairness.

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In insurance, what is the standard form? The terms and conditions are so lengthy, and they
are written in such fine print, such minute font that it is unable to read it, to understand it, and
do not have enough time, probably need a magnifying glass to actually understand and read
those terms and conditions. So, you will notice that these are procedurally unfair, the way the
draft is made, the way the contract is printed, it is procedurally unfair. The 199th Law
Commission also says that look, in standard form, there is something called substantive
unfairness. Now, what is substantive unfairness?

It means that in that standard form of contract, the terms and conditions itself is unfair. Say,
procedurally how to make the contract, take the consent and take the signature itself was
wrong. Coming to the clauses in which there is substantive unfairness as to what is
substantive unfairness? The clauses say that, say they are not going to be liable, exclusion of
liability or they limit their liabilities? Are they so reasonable. So, this is substantive. The
terms and conditions are to be challenged as being against public policy. What happens in a
software licensing agreement, they cannot transfer this license unless you inform them? Even
when you load the software and say “I agree” and put the software in the laptop, the license
agreement may say you cannot transfer this laptop or sell this laptop unless you have taken
the consent of Microsoft. Because they say this is a one-time license agreement, this is end-
user license agreement, and this is the non-transferable, non-assignable license agreement.

Now, this is where the substantive fairness or unfairness of such clauses will have to be
properly tested. And the Law Commission says these are the challenges that we face in
modern day society. Because remember, the power to make these terms and conditions and
this contract, lies with agencies like Microsoft, Google or any other software company,
because they make it standard for all the work, uniform across the world. And hence, they
will use this power, they will abuse it or misuse this kind of power of making unfair
substantive clauses in the contract. And all have to be really careful about the same.

There will be the substantive unfairness in standard form content in various stages, in various
places. For example, in the insurance sector. The Insurance sector there is regulator called the
IRDA, which will probably regulate this unfairness to some extent. The RBI will have the
Reserve Bank of India trying to regulate unfairness in banking standard forms contract.

So, the regulators will definitely play the role including the Competition Commission of
India, and they will probably bring in an element of public policy that is required in contracts.

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But having said all of that, one of the most important issues that the Madras High Court dealt
is the Tata Consultancy Services, judges could not deal was the issue about sale of software.

Interestingly the Madras High Court actually evaluated the agreement itself, the licensing
agreement, the right to use. Looking at the licensing agreement nowhere there is the intention
of sale. Now reading Section 4 of the Sale of Goods Act of 1930, notice that sale is to be
understood by the intention of the parties. Unfortunately, the software companies have no
intention to transfer, proprietary right in the software. They only give you a user right. So, it
is license to use and nothing more than that. And interestingly, to say it is end user, means if
any person has started to use it, he is the last person to use it, no one else can actually get a
right to use the same.

Now, this is where you notice that the Madras High Court said, it is not a sale, it is only a
licensing agreement. So, there is no proprietary interest that is going to be agreed to be
transferred in this particular case. And hence, this cannot be considered software agreements
to be sale contracts. What the court says is, in this case, very interestingly, the court says that,
for such kind of software it is better to come up with some sui generis system, something
unique for them because it is neither sale nor the works contract, it is a different element of a
contract. So, why not treat it as a different contract. Article 366 there is something called the
deemed sale provision and in that deemed sale provision, can you fit a software agreement,
The Madras High Court finds it very difficult to define Goods and Sale. And that is why they
say that such kinds of contracts cannot be charged with sales tax because there is an element
of transfer of the right to use the software, but cannot conclude entirely whether it has been
given that complete right to use. The right to use means an assignment, whereas a license
agreement is a non-exclusive right. So, it cannot be an absolute right to use, and hence
whether it fits within the exception provided under Article 366 29A the court had to evaluate
in the software case.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 43
Tendering, Contracts, Public Procurement

(Refer Slide Time: 00:15)

This lecture session is being attempted is to give brief overview of the various regulatory,
legislative and executive framework for government contracts, tendering and public
procurement. An overview of the legislative executive framework, it is important to evaluate
what are the implications or good and bad contract, and why the law and contract is something
that is a prerequisite, before contracts can be entered into.

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(Refer Slide Time: 00:44)

I think knowing the law makes a better common sense. Knowing the law ensures compliance,
knowing the law probably avoids disputes and knowing the law makes an effective profitable
commercial venture. How does bad contract hurts anybody? A bad contract means it could be
badly negotiated contract, it could be badly drafted contract, or it could be a contract that is in
non compliance of the law. All of these, would be considered as bad contracts. Does or will it
hurt businesses, enterprises, and the contracting parties? the answer is pretty straightforward, it
does hurt.

The first and the foremost implications of a bad contract would be that it would result in an
economic loss to the parties. Friends, contracts or about commercial terms, contracts about the
pricing the profitability, the business situation between both the parties. So, when the parties do
not agree to the price and the cost of the products or services in the contract and calculate it
effectively, of course contract will result in economic loss.

Now interestingly, economic loss in private and public sector means that in the public sector,
economic loss would mean loss to the exchequer. As we have seen in cases like the
Commonwealth Games, loss to the government, as an entity and a contracting party, but more so,
it is lost to the economy and to the citizens who are the real taxpayers.

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So, economic loss implication in tendering and government contract has huge ramification for
judicial review, scrutiny by the CAG and probably ending up with a vigilance inquiry with the
central vigilance commission. And hence, it is important to avoid, prevent our temptation of
entering into bad contracts. Secondly bad contracts may always result in unfair terms and
conditions. Of course, when terms and conditions are to be agreed upon, it is always possible that
these terms and conditions could run into several pages. Reading the terms and conditions,
understanding its implication is required to any fair, good contract.

However, it is always understood that contracts are an instrument of ensuring proper profitability
of business enterprises. And hence, one who drafts the contract may always make the contract
favorable to the circumstances, they may reserve rights, actually create circumstances which be
fair to him, whereas it could be unfair to the other party. This is quite visible in consumer
contracts, but it has also been visible in government contracts, especially when the drafting of the
contract is left to private entrepreneurs, private parties and private law firms. They would
actually make the contract in favor of the client. And this would result in government having an
unfair contract.

Can unfair contracts hurt the government? It has already, in several cases. This has meant, not
only an unflavored, biased, one sided arbitrary contract, it has also meant that it has costed the
government time and delay in execution of essential infrastructure and civil work which
probably would enhance citizens-centric approaches to common contract. False estimation or
false cost estimation is a real worry for government contracts because of the lack of resources in
making this cost implications. And hence, most of the times when such contracts of high value
are given, the government would actually end up appointing a consultant so that they can avoid
such kinds of challenges and problematic situations.

Interestingly, fake or false fast, cost estimation is an unfair practice. It can actually amount to
disruption in the market as well. And hence, tendering, when it comes to the proper estimate of
work, has an important implication because that kind of publication that goes to the tender
notification is always binding on both parties.

Of course, bad contracts will end up in bad technical performances, because unless you agree to
the technical parameters, that the contractor must do, unless you understand the technicalities

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and technology, and science or engineering that is involved in the performance of the contract, a
bad contract will result in bad technical performance.

This is definitely the way in which you see public works actually being executed very poorly.
And that is something that the citizens have always evaluated the performance of the
government. Because I think the government contracting is about government's technical
understanding, appreciation of such facts.

Bad technical performance can also be in terms of the bad technical product that has been
ordered, because the current advanced technology is a requirement. And it can affect, right from
the Defence to the IT sector, to any other sector, including textiles and others, in which the
government is keenly procuring goods and services for the nation's economy and strategic
development.

Bad contracts result in bad project execution because if projects have to be executed, they have
to be executed on time, executed efficiently, both in terms of performance efficiency and quality
efficiency. So, project execution becomes very critical. So, it is not about having just good terms
and conditions in the contract. The contract should be quite flexible and practical in terms of its
expectations of implementation. The time schedule for performance also have to be very, very
realistic so that the project is completed on time, as well. Of course, bad contracts have always
resulted in bad reputation. In the international contracting space, with cases like Antrix, and
Devas Corporation, where government entered into the contracts with Devas has now resulted in
a bad reputation, not only for the Antrix Corporation, which is the commercial organ of ISRO,
but it has also resulted in bad reputation to the government because the government, at the
international platforms, especially at arbitrations, was considered not respecting the white letter,

So, bad reputation is something that one needs to be clearly cautious and aware of. And hence,
notice that when it comes to the ease of business ranking, India actually was ranked very low,
especially in terms of contractual enforcement. And to a larger extent, that had to do with a lot
of government disputes that has gone into arbitration.

Thanks to many of these contracts, thanks to many of the bilateral investment treaties that India
did enter into. And this has all resulted in implications that has hurt the nation, that has hurt the

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nation's economy as well. The ease of business ranking, India has been ranked overall 63rd
ranking.

Whereas in contractual enforcement, we were ranked 163 out of 190 countries, which probably
states very clearly how contractual enforcement in India is probably one of the weakest among
developing and developed nations. Despite having a common law system, despite having
democracy, despite having a very robust, active judiciary, contractual enforcement has always
suffered in this country. Only a good contract and avoid the challenges of enforcement. Because
I think the judiciary can come up with judgments, but in terms of implementation and
enforcement of the judgment, India has always faced numerous challenges.

The World Bank has estimated that 30 percent of our GDP is driven by public procurement and
government contracting. That is one-third of the entire market is driven by government
procurement and government contracts. So, government is a very big player and government
contracting opportunities actually increases the right to business. It increases enterprises, ability
to actually develop, and hence government is not only the biggest buyer, but government is also
the one, the biggest agency that is giving you the largest grants, the licenses for extraction of
natural resources, so on and so forth. So, I think that is the driving force of the economy. And in
India, especially with socialism as one of the cornerstones and the pillars of the preamble of the
Constitution of India the government is not just looking at governance, it is looking at taking part
in active businesses.

And very recently, the government did take up 33 percent equity in Vodafone-Idea, a telecom or
telecommunication company so that we have a third competitor in the telecommunication
market, especially the private space, apart from Airtel and Jio. the government is investing, the
government is buying and granting licenses.

And that is quite a sizable portion of what we are speaking about in this course. Unfortunately,
though, to talk about contractual enforcement, the challenges and the ease of doing business
report very clearly talks about the number of judges per million in India, which is pretty low in
terms of the of the population, whereas U.S. has the highest

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India has just 15 judges. Is this, the reason why contract enforcement is weak in India, maybe
one of the factors. And this is totally to improve the of purpose of contractual enforcement,
government have created the commercial courts. And these are, this is a special law, a special
court that has been brought into existence. Arbitration as a special kind of dispute resolution
mechanism, a commercial arbitration that will resolve disputes before it reaches the court. Right
now, in the courts, you know that are specialized court, family court is a specialized court, Court
of Small Causes is also specialized. In the similar fashion, the government did come up with this
commercial court law.

And under the commercial courts, the specialized judges will only decide commercial disputes,
they will apply the specific law, they look at remedies damages, specific performance and
substituted performance. Interestingly, this law has now been, become a very robust legislation.

So, it should be resulting in timely disposal of cases. We are pitching the commercial courts as
equal and competent institution like an arbitration but this is a proper court, this is not an
alternate dispute resolution. So, the commercial court has seen some success in places like Delhi,
Bombay and Bangalore. It is yet to be replicated in other parts of the country.

However, what is important is that, under the Commercial Courts Act, there is a possibility of
pre institution mediation under Section 12A, which means the parties can settle the matter before
the court actually takes the matters on merits and decides, which can actually avoid delay. It can
actually force the parties to actually build the trust, despite the dispute.

And mediation is considered as a very important tool today, apart from what is there as
conciliation. Should you litigate a contractual dispute? Now, this is kind of a question that all
must understand. And government more so must answer this question. Now, to litigate a
contractual dispute, involves cost, it involves time, it involves a lot of executive action and
purpose.

For example, let us just understand this, once the government contract goes into court, it is not
easy for the government to actually hire a lawyer, again, they will have to probably have a panel
of lawyers, most of the panel of lawyers maybe junior advocates, then you have to make an
exception to have a senior advocate.

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So, there is going to be delay in just deciding who the lawyer will be representing the
government in some of these contractual disputes. So, avoiding dispute is the best. And it is not
about just the time but also the cost, because the legal cost is just escalating. And in many cases,
the legal cost escalated the contractual damages that is actually claimed.

Now, that is a scenario that can be clearly avoided by the government. And hence, they must
have a contract in which there is clarity of obligations, there is clarity of expectation, and there is
clarity of alternate dispute resolution in case the dispute arises. And that should be the main
focus of area in which this resolution of disputes should actually take place.

Talking of management in most corporate organizations, the most important question that a lot of
people have asked is, what is better a short or a long contract? Maybe 20 to 25 years back before
LPG, that is Liberalization, Globalization and Privatization came into this country, there was
always shorter contracts.

And interestingly, lengthy contracts were not something that was existing. Thanks to Google,
online, thanks to drafts that are available, today, lawyers are actually charging based on the
number of pages that they draft in a contract. So, long contracts, has become kind of a standard
practice. It is not probably long contracts, but long contractual clauses have become a very
standard practice. Now, to be honest, “if you ask me for my experience, whether it is long or
short, it does not matter in terms of dispute” longer the contract, more will be the complication in
terms of interpretation, construction of the clauses in the contract and trying to arrive at the
specific obligation of the parties. So, longer contracts are not necessary to avoid disputes.

So, is the problem or the challenge of shorter contract. Short contract does not necessarily mean
it is good, because short may avoid the necessary obligations, keeping it short is always good,
because it is very clear and specific. But sometimes, you may miss of the details as well. So,
somewhere a, bridge between short and long contracts, is what people must attempt to. Lean
contracting is something that one must attempt, simplifying contractual clauses is something that
one should attempt.

Because keep it lean and simple, disputes can be decided based on the merits of it, and not
necessarily based on the documents that has been entered into. Dispute must be decided at the
time the dispute arises. And it should not be something that is referred by the White Letter Law.

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It must be based on facts and proof rather than on the circumstances of drafting the contract. All
of these are critical in understanding how tendering and government procurement and
contracting must probably take place. This is probably the background to start understanding the
law and the different legislations that govern government contracts.

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 Advanced Contacts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
National Law School of India University
Lecture 44
Public Private Partnerships: Law and Policy in India - Part 01

(Refer Slide Time: 00:16)

This class is to try and understand Public Private Partnership and public private partnership is
an interesting aspect of government contracting. It has elements of the rules that apply to
government contracts. And it has those elements that have the freedom of a private contract
as well.

To notice PPP model is considered to be one of the successful models in government

infrastructure and citizen-centric projects. The success of PPP in this country is in several
sectors, be it the highway sector, the airport or the port. Some of the PPP principles
established for public private special purpose that kind of a model has now been taken to the
railways, it has also been introduced in the different sector in some manner.

The government finds this model to be a win-win situation both for the government as well as
for the citizens who would require certain facilities, especially in terms of what kind of
critical infrastructure. So the public private partnership model is also important in sectors like
electricity, where the first kind of process of privatization of public services was scripted.

Some efforts of bringing the public private partnership in the water sector has also been
initiated. But it is not being that successful though. Because water is a very emotional,
politically charged issue and hence, there has been a different model, kind of what we see as

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the EPC model that has been adopted. The Ministry of Jal Shakti, under the National Jal
Jeevan Mission is trying to actually bring water connection to every household by 2024.
There should be tap water for every household, ensuring at least 55 liters of water. Instead of
going by the public private partnership model, the Ministry of Jal Shakti under the National
Jal Jeevan Mission is adopting something very similar to the public private partnership, but
under what called as the EPC model.

So, even in the water sector, this has been adapted. So, broadly, even if you do not consider
the PPP partnership in all sectors, the principles of involving the private player in government
contracting is something that has been emphasized in India. And we know that the highway
sector has always been the champion of the PPP project. It has experimented PPP quite
elaborately. It came up with several models.

Today, currently notice that there is a HAM model called the Hybrid Annuity Model, which
is adopted in the highway sector because unfortunately, when initially the highway sector,
PPP was introduced, it did not, be profitable for the contractors. And then the highway
authority that is the National Highway Authority of India, which was building the golden
quadrilateral, connecting the different metropolitan cities of this country, came up with
another interesting idea to actually make this project viable and feasible for the private
contractors by coming up with what was known as the Viability Gap Fund.

Now, the Viability Gap Fund is an interesting kind of bridge, so as to compensate the
contractor for the kind of investment and work he had already committed, but which could
not be written back due to toll collections. And the contractors felt that they were running out
of funds and money and projects were not going to be viable. So, the Highway Authority had
to actually had to pitch in with the Viability Gap Funds to actually compensate these
contractors as well.

And later on why there was the HAM model is that to have the PPP, along with the EPC. So,
I will talk about this EPC model and why the HAM model was introduced. It is kind of a
hybrid model. It is not pure PPP; it is not pure EPC. It is something in between of the same.
And that is something that the highway sector has been adopting quite well.

The public private partnership project has been very, very successful in the airport sector. Let
us take some examples of the same. So, sector wise, the public private partnership has been a

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great initiative. It is actually a great public contracting study. If some of you are interested on
how this contract is made, I think you could always read our book that was published.

(Refer Slide Time: 05:01)

This is called the NLSIU book series number 5. And the title of the book is public private
partnership in India - A Sectoral Analysis. This is an edited book, it has quite a bit of
information on public private partnership, and the critical issues and challenges in which
courts have intervened and given direction about how the government should go ahead with
the public private initiative. And this book also discusses the central and the state legislative
framework for the public private partnership sector to be brought into place.

So, this book is something that one can keep as a ready reference to understand, detail study
about the modalities of public private partnership project in this country. Also, notice that
there are several ministries that have come up with the model agreements on public private
partnership. These are available for study. And the model agreements, even the NITI Ayog
has come up with a model agreement, which can be adopted by agencies that would want to
actually go in for a public private partnership model, especially the state governments if they
want to put their infrastructure projects on the PPP model.

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(Refer Slide Time: 06:17)

Moving forward understand the history and development of public private partnerships in this
country. Now, the traditional form of contracting the government has been always
outsourcing. What is an outsourcing contract? For instance, or an example.

If the government or the Public Works Department of the government wanted to lay down a
road, they would actually call for a tender in which the bidders would participate and the
lowest bidder who will actually lay down the road for the lowest price or cost would be given
the contract to actually lay up the road. So, the government always relied on private
contractors, vendors and private companies to do a lot of the infrastructure development in
this country. And this has been going on and this is probably the way in which the
government gets citizen-centric services, citizen-centric infrastructure or schemes.

So, that, to be honest, one Supreme Court judgment very clearly said, the right to do business
with the government is actually a fundamental right. It is part of Article 19 where SC talks
about the freedom of trade, occupation or business, but it also means that under Article 14 to
about right to equality, it means every Indian citizen has an equal opportunity or should be
given an equal opportunity to do business with the government.

And hence the government, whenever it wants to go by such kinds of tenders, or wherever it
wants to give for private participation of its work, it should go by a tender advertisement, it
should go by a public advertisement, giving a fair and equal opportunity to anyone who may
probably qualify for making such kinds of work or executing such kinds of work or supplying
such kinds of goods that the government is in need or in requirement of.

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So, that was a traditional model,. And we know that in India, while we talk about the law of
tenders, we mostly rely on the legislative executive rules, regulations and guidelines. But also
we rely on Supreme Court and High Court judgments in which the courts have given
directions about how this tender has to be managed and taken forward.

Coming to the kind of change that occurred. And change occurs because of the economic
reform in the year 1991. The liberalization of the economy and the privatization and brought
in globalization to have a global perspective. So, opening up our economy, said foreign direct
investment can come in, foreign companies can do business in this country. So, that was the
aspect of globalization.

Liberalization is very, very important. The government has to have an outlook that it may not
be a businessman. It may not be running trains and buses and aero planes. It will not produce
goods and services, it better do governance. The liberalization of thought and governance was
very critical. And what is important is that the liberalization of policies in terms of finance, in
terms of budget, in terms of trying to make citizens’ lives much better in this country.

Encouraged privatization of not only private businessmen who are already doing business,
but also to encourage foreign investment and privatization. But privatization, actually, in the
context, meant that whatever government had, you could think of privatization. It could be of
companies that were already government, it could be handed over to private. It could be a
small disinvestment of these government companies where private shareholding can be
permitted. It could be privatization in terms of private management.

And hence, privatization has been very key post 1991. And the attempt to privatization has
been a bumpy ride in India, unfortunately. Since privatization is a unique opportunity, it is an
opportunity where private players are given lot of business opportunity. For example, the
privatization of coal, extraction of coal mining had a monopoly by Coal India Limited and
then we allowed private players to actually mine the coal. It is good because government
companies cannot solely provide the kind of critical natural resources that the country needs,
because coal is important for electricity and thermal power generation.

But the idea was that privatization has great opportunities and the government was opening
up the economy for private players to actually do business. Because at one point of time,
there was what we say nationalization or a socialization or social theory, or socialism that
was adopted by the government. And that is where the government was unfortunately,

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running its own airline, without any private player competing for the same. And the
government was actually producing LPG, it was running busses and trains.

So, the socialism model of development had to change. And if socialism had to change, we
had to adopt a little bit of capitalism, allowing private players to actually capitalize from the
economy, make profits from the economy, getting to extraction of resources and provide
services to citizens. And that kind of an opportunity was supposed to be provided post 1991.
Interestingly, privatization, whether it is good, has to be evaluated. In certain sectors,
privatization is inevitable.

But in certain sectors, whether it would be better to have a public private participation,
because privatization has its own risks, it has its own challenges. And in a country, which
was under transition or getting into a transition model from socialism to capitalism, from a
very closed economy to a liberal economy, there is lot of contractual matters and issues and
challenges that may arise from pure privatization.

The classic case or the two cases that were very critical in the 1990s post LPG era in this
country. The two cases were: the ENRON of the Dabhol Power Corporation case and the
second was the Bangalore-Mysore Infrastructure Corridor case. In one case, the ENRON
case, it was the Government of Maharashtra and in the Bangalore-Mysore Express Corridor
case, it was the Government of Karnataka, both who were contracting parties and for the first
time, these two states were getting into contractual litigation issues and challenges with
private companies.

ENRON happened to be a U.S. company. The NICE road happened to be a consortium of

Indian and U.S. companies. It was a joint venture. And when privatization was attempted, in
ENRON case it was electricity or power generation, that was attempted. In the Karnataka
case, it was the road infrastructure that was attempted to be privatized. In both these two
cases, the two governments faulted in their contractual obligation.

There was lack of planning, there was lack of negotiation, there was lack of drafting, there
was lack of legal acumen in executing these two contracts, and hence they ran into deep
trouble. Interestingly, the ENRON case at least, was resolved through amicable settlement.
And it was created as, Maharashtra State Electricity Board was given stake in the Dabhol
Power Corporation and to some extent, after a hard fought legal battle this matter was
resolved and the Dabhol Power Corporation started producing electricity and it was sold.

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But it took 10 years for it to be resolved. But what happened in the ENRON case was
ENRON itself collapsed in the United States. It was a Multinational Power Company and
because ENRON collapsed, it was easy to resolve and find solutions for making the work,
making the project operational and working.

However, coming to the Bangalore-Mysore Infrastructure Corridor case, this case is still not
resolved. The road has not reached Mysore. This was an interesting project that was designed
and conceived by a consortium company called NICE, that is Nandi Infrastructure Corridor
Enterprise. It was headed by Ashok Kheny, who was the Managing Director of this project.
He had experience in critical road projects in the United States. He thought he could build a
similar highway between Bangalore and Mysore. It was supposed to be an express corridor,
which means there would not be any passages in between or stops in between or red light in
between. And it was 111 kilometers project that was conceived at that point of time.

Interestingly, when the government of Karnataka entered into an MoU with NICE, the
expectation of NICE was not only going to build road, it also wanted to build actually 7
townships which was later reduced and brought down to 5 townships. And the idea of was to
have some of Bangalore’s population move to these townships through the road network
connectivity. They could keep the IT corridor of Bangalore and they could keep the tourism
corridor Mysore into one Express Highway.

So, it was quite a well-designed project. But unfortunately, the way the contracts were
executed, the MoU was executed, the way the land acquisition process was actually
commenced or started off with. Interestingly, what happened with the NICE case was the
government of Karnataka through its agency called KIADB, the Karnataka Industrial
Development Corporation, they acquired land for this project. And of course, you will notice
that in privatization, the land acquisition cost is usually borne by the private player because
the government unfortunately does not have resources to acquire that particular that.

And once the land was acquired for NICE, the Karnataka Industrial Development Board,
transferred that land to NICE and NICE built the road. And this was in three stages, three
phases. First was the peripheral ring road, then was a 40 kilometers road and then the last
phase was to reach the road to Mysore. And in between, there was township. So, there were
phased construction of this project.

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Interestingly, if the phased construction of this project was so badly done in terms of the
contract, because naturally, the contract was one sided. It can be clearly assumed by
reviewing the contracts that the contracts were drafted by the legal team of NICE and the
Government of Karnataka officers did not properly negotiate, lead, review and understand the
implications of the contract. And they were probably abused, misused in terms of the
contractual power that NICE had and the Government of Karnataka probably signed on
dotted lines.

And that is why the government of that day when it was signed 1995, it was the J. H. Patel
government. Sri Deve Gowda ji also felt that this was not a boot project, it was a loot project.
And interestingly, very recently, there was a defamation suit that was filed by Ashok Kheny
on Deve Gowda ji. And a court in Bangalore, very recently, awarded 2 crore rupees as
defamation cost to Ashok Kheny by Mr. Deve Gowda because it led to a political slugfest.
The politicians of the day felt cheated, they felt that they were taken for a ride, because the
contract was not fair.

It was supposed to be a PPP project, but it was actually not. Because in NICE, the
government did not have any equity. So, the government really found this to be a problematic
contract, problematic situation, they found the citizens interest and public interest to be
compromised and hence, the government stopped acquiring land for this project.

Now, notice that in any critical infrastructure project unless there is land, as only the power of
land acquisition is with the state, the power of land acquisition cannot be transferred to a
private player. So, unless you acquire land and the government hands over this land to the
private player, the private player cannot build the infrastructure for any purposes.

And right now, because the ownership of land is with NICE, they are collecting the toll and
interestingly, the toll money also is with the NICE company. So, the NICE project and the
ENRON project where critical history and historical lessons about how we should have
actually planned PPP sector in this country. What kind of preparation, what kind of planning,
what kind of policy, what kind of negotiation should have been done before such big
infrastructure projects will be granted, either by the Government of Maharashtra or by the
Government of Karnataka, I think that was very clearly highlighted in these two cases?

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These were lessons that were learned, unfortunately, the hard way, about saying that once
involved with private players or private companies, there are going to be challenges of
contract, there are going to be called challenges of unfair terms and conditions, there would
be some mischief because naturally that in contract, every party seeks to profit or maximizes
profit to the extent that he wants the contract to be favorable to his side.

So, the government also ought to be prepared and the private player ought to be prepared.
Fair and equitableness of decision making is very, very important. If not, it will land up in
such kinds of disputes like the NICE case has already landed up in. Despite it being more
than 25 years of this project having been designed. Initially, it was offered to the Asian
Development Bank to fund them, that was private funding that was actually brought about,
the design of the project was very good, because it wanted to take away Bangalore’s
congestion, it wanted to decongest this city by an external ring road and then take the traffic
away to Mysore.

So, while the design was great but the planning also was great, Unfortunately, it was not
negotiated properly or effectively, because the Government of Karnataka probably did not
employ the best minds to negotiate. And it was drafted very poorly. And finally, it was
executed miserably. And the execution part is where the critical issue comes into place.
Because, once there is a convert in the land ownership to a private company, the private
company becomes completely and substantially the owner of that particular land.

And in no sense, one can actually come into a public private partnership mode, it becomes a
private mode and not a public private mode. So, public private partnership has to be
understood from the sense of the partnership where trust and confidence, in partnership
between the partners, there ought to be fiduciary relationship. And it should be such that both
the partners profit benefit, but at the same time, not to breach public interest or public
policies. And that is very important to establish, grow and employ the PPP model in this
country.

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(Refer Slide Time: 21:41)

Let’s now move on to understanding or evaluating the 3Ps that is public private partnership.
And let us try and evaluate the advantages and the disadvantages. Now, why there is
necessity to evaluating the 3Ps is because we are trying to understand whether it is beneficial
to the government and the citizen or whether it has certain risks to public infrastructure
projects.

And the point is, if the risks are lower than the advantages, then there is always a need to go
forward with the 3Ps. But if the risks are higher than the advantages, then we need to pause,
rethink, revise, review, the public private partnership contracts. Now in terms of advantages,
notice that the 3Ps pose quite a few advantages.

And that is why they have been very popular in the last 25 years, not only in India, but in
different other countries where this has been obtained, in most cases of say, highways, the
ports, telecommunication, airports So, these are the focus sectors in which actually the public
private partnerships have been initiated. But most importantly, that it has not only limited to
these traditional sectors, it has moved on to even sectors like waste management.

That most of the municipalities are actually trying to move the idea of public private
partnership in electronic waste management, in construction and demolition, waste
management, in municipal solid waste management and waste to energy, waste to profit, kind
of business has now been promoted, thanks to privatization or private investment.

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To talk about public private partnership, it is not only about the money or the economic or
financial advantage that we are speaking about, it is also about innovation, it is about ideas, it
is about business opportunities, it is about finding solutions to the existing problems that the
nation and the country faces.

So to talk of waste management, nobody will have an objection about public private
partnership, because it is a huge problem. And the problem needs to be resolved and only the
private sector can actually come up and resolve that kind of a problem. So, first thing first,
what happens with 3Ps is the private sector is able to finance or raise the money (budget) that
is required to complete the project. This is one of the distinct advantages because in
government, we always see that this money is a huge problem.

Not that the government does not have money, but the problem is about allocation of those
resources for these kinds of sectors, because most of the resources are taken in welfare
schemes in terms of trying to look at poverty alleviation and it is probably spent on defense,
education. So, these sectors receive less finance, less attention in terms of budgetary grants.

And hence with the 3Ps, one of the distinct advantages is to actually invite the private player
who is actually financially healthy or who is capable of raising the finance to actually
establish complete and successfully run the project. So, finance is actually one of the main
reasons why public private partnership is actually undertaken. Because the government
cannot probably find its own source of money, it does not want to probably pay upfront to the
contractor to complete the work, and he wants a contractor to bring in the kind of investment.
And how do to get the returns to the contract or investment, probably give it through the toll
money in the highway sector, through the use of development fee in the airport sector, so on
and so forth.

So, finally the private sector is going to get the return on his financial investment, it could be
in the range of 15 to 26 percent, that is the rate of interest that he is expecting or even more
than that. So, the private finance has certain places to invest those finance, it has those places
to get written from the finance as well. Apart from say creating avenues of investments, in
land or property, real estate, shares and stocks, this is a great avenue for public finance, to be
tying up with private finance, allocating private finance in interesting sector to actually
invest, take advantage of the sector because in India, friends, please note because of growing
population, because of the growing economy, there is a great demand for these kinds of
services.

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There are a lot of uses, like for example, in airports, there is a lot of generation of revenue
from the use of the airports as well. So, private sector finance is one of the distinct
advantages why a public private partnership is usually preferred. Second, about efficiency.
when public sector undertakings or government departments and ministries operate any kind
of infrastructure project or any kind of citizen centric services, efficiency is the greatest
challenge.

In India, there are numerous sectors. Now, interestingly, to look at the electricity sector
today, most state governments have actually looked at private participation of companies in
the electricity sector, which has seen a very, very measurable, kind of a very high efficiency
level of power distribution and power generation. Efficiency increases citizen and consumer
experience, efficiency brings in efficient use of resources. For example, court for that matter,
or any other resources that actually adds to sustainability and environmental consciousness.
Efficiency of the resource utilization, not only resource extraction, and it is also efficiency in
terms of finally, delivery of consumer or citizen services.

I think efficiency is something that one can see very clearly in many of the sectors which has
turned into PPP. They look very fancy, they look very upmarket, they look modern to enjoy
the services. And today, the consumer does not hesitate to pay when the services are very
good. And that is something where the government very soon realized that that is was a
critical part, when private management of these sectors take place, the management
efficiency actually improves citizen and consumer centric approaches.

The third distinct advantage is about employment or labor. Now, when these sectors are
employed by the government, they have huge problem about how one can actually employ
labor, that is a recruitment condition, government employment cannot be hire and fire. There
are many protections that government employees have. You have to follow a tender process,
you have to go by a public recruitment process, there is a pension bill. So, the cost of labor
adds up to the government’s difficulty in actually managing these sectors.

Now, one of the advantages of PPP is that the labor is not working for the government, they
work for this kind of special purpose vehicle that is created under the public private
partnership. It is not public employment; it is not government employment. And these
workers actually work much better. But still, they are not government employees, they are
private employees.

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And hence, that solves a major labor market issue for the government, because then, they do
not have to look at hire, they do not have to look at recruitment, they do not have to look at
pension, they do not have to look at department inquiries. This is a distinct advantage and the
government actually replaces government employees with private ones in the PPP sector.

And labor costs is a huge cost that makes the PP Project far more viable, because that is an
input cost. That is a kind of a cost that goes into the project. And if labor cost is pretty high,
the project is not going to be feasible and the returns on investment is going to be delayed to
that extent.

The fourth advantage at this point of time is, one will have to realize that the government
manages this project, then looking at government procurement, the government has to
implement or execute the project and the procurement rules have to be followed. And in the
PPP sector, that is something that you do not have to do. So, they can go for the best product,
they can actually subscribe to branded products, they can actually get the best experiences,
the best material the best technology and they do not have to go under the carpet of a
government tender. This clearly creates a huge advantage to public private partnership
project, and they can focus on saving time and cost which usually and unfortunately get spent
in the tender format as well.

This is where the advantages are. Talking about the advantages is that because there is public
in the private, please note, the public private partnership, the public part always will ensure
transparency and accountability. So, there is public investment to some extent, it is not real
finance, but it is, say, conversion of the land value into the equity. But because the public is
there, transparency can be ensured to some extent, accountability can also be ensured.

And hence, it is not complete privatization, because the public is participating in the private
kind of business. From the public side, accountability, transparency, fairness of process
procedures, can be ensured. Ensuring the citizens’ rights are not adversely infringed by the
private player and can also be controlled in such a unique partnership that the government has
with the private sector. Yes, some of the critical issues is, who can the government partner
with? Of course, it is to have a transparent mode of the kind of a partnership, who you want
to choose to be a partner.

Of course, a private company cannot be a foreign company, because that is a jurisdictional

issue, there is a liability issue. And hence, whenever the government chooses its private

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player, it has to critically look at security, it has to look at strategic and defense interests,
before it actually ties up with any private player in that context. Also, when we look at public
private partnership models, there is always this issue about how you can balance the private
interest as well.

Now, why private interest has to be balanced is a simply for the simple reason is that private
player is there for some kind of return on investment. So, it is the duty of the public, that is
the government to ensure that the private player’s interests are also protected. Thereby giving
him a decent return on investment and also protecting his investors and the relationship as
well. So, that will be a very increased kind of advantageous experience in the public private
partnership mode.

Finally, to talk about the public private partnership mode in the last 25 years, they have
created a numerous levels of contractors who have already tied up with the government. They
have a great reputation; they have a great advantage having tied up with different government
status center. This is a whole list of new companies that have come into existence, just in the
infrastructure and the civil construction space. So, there is a different sector that has been
created.

And there is intense competition that can be introduced. Fair competition can also be
addressed, so that the government also gets distinct advantages from the bidding process in
the public private partnership process. Now, coming to the disadvantages, though the
disadvantages are not as many as the advantages, as in any kind of projects that are risks. And
the risks can be legal risk, they can be political risks, they can be economical risk.

Now, to look at the legal risk, the legal risk is that most of the PPP or the 3P kind of projects
are a contractual project. It is signed through a concession agreement. Now the concession
agreement, if it is fair, if it is kind of mutual to both the parties. The concession agreement
can be a great agreement in which the project can actually come into existence. However,
despite having the best of the contracts, the legal challenges, look, it is a joint venture, public
private partnership, public and private, it is a joint venture.

Now, within the private also, there will be two or three parties who will actually create that
kind of a consortium or a joint venture itself. Now, between the joint venture partners who
are completely private in the 3Ps, there can be disputes, there can be differences. One of the
joint venture partners can go insolvent, one of the joint venture partners may want to sell his

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stake to someone who is not cooperative, someone who cannot align with the existing
partners.

So, within the private joint venture interest, there is a legal risk of many things falling apart,
because the PPP contracts are long term contracts. They are 20 years, 30 years, 60 years right
now, with Adani airports being handed over in Ahmedabad and Mangalore, notice it is a 60-
year contract, it is a long term contract. Luckily, with the Adani’s there is no private joint
venture. In the initial phases, there were GBK, Zurich Airport, L&T coming together.

So, that could be those kinds of challenges and legal risks that could come through the
contract that they have entered into. And contractual issues can also lead to arbitration and
litigation. Second, the political risk is always about the fact that, in the NICE case, just to
give an example of an instance, it was one government that actually entered into the MoU at
that point of time, it was later on another government that was actually supposed to have
executed the contract.

Now the political parties have huge differences. They are not consistent with the contract,
they are not consistent with projects, they take it as an emotional egoistic and political
debatable issue and change the priorities. And at that point of time, many of the contractors
are felt, have felt neglected, they have felt kind of an experience where they were not able to
complete the projects.

So, the political risk is that political party’s inconsistency with their likes or dislikes of a
project, with the likes of contractors or not, because we know that the contract and the
politicians have been in a relationship of a give and take sometimes. It is not necessarily in
terms of corruption, because there is political funding. And political parties know who the
funder is, and they are probably aligning themselves to those kinds of contractors and
funding’s in many cases. So, that is a political risk that can definitely be evaluated in the 3Ps.

The economic risk is when the private person actually enters, he brings in the finance, he
completes the project. Please note, like I said, in the National Highway sector, the toll
collections did not give enough returns to the private party. And that is why then we had to
come up with the Viability Gap Fund, we had to come with a hybrid model, we knew that the
contractors’ money is something that is not, something that they were able to take adequate
return off.

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And we saw in the early stages, some of the contractors actually got liquidated. They were
not able to withstand the pressure of these projects and the money that was required. The
banks and the financial institutions also did not support adequately in terms of loan or credit
lines. And some of the contractors had to actually exit from that kind of a business. So, that is
a huge economic risk. Because by certain calculations, if the traffic will increase in the next 5
years or 10 years, it will double or triple. Based on those calculations, contractors actually
negotiate the concession tenure.

Concession tenure, can be 20, 30 or 60 years. How to decide this tenure?? I think we decide
this tenure by considering that look, during this time, this is the kind of returns that is
expected, it is a projection, it is a kind of an anticipation. Once the toll road opens, maybe
people will take the village roads, because they do not like paying toll, there could be
alternate routes that can be established. In many cases where the central government has laid
down the highway, the state government comes up with a parallel highway for its own
citizens, that is a free road, this is a toll road and hence the toll. So, that again in terms of the
kind of anticipation in the long term basis, economic issues could be a major problem.

Second is also on the economic side; you look at return on investment right now with
investment say, what is the lending ratio? What is the ratio in terms of reserve bank of India
lending rates? So, having taken loan from banks, to return it with the rate of interest is
required. But if you do not actually make money at the same rate of interest, or double the
rate of interest, return on that kind of loan or credit becomes a lot more difficult.

And then the banks then take action, say under the insolvency and bankruptcy code against
these contractors, and probably try and look at insolvency proceedings. That could be a huge
economic risk in the PPP sector. So, unless the contractors have additional businesses to
withstand, if they are purely into the PPP kind of contracting mode, they can face a lot of
issues and challenges as well. Also, one of the issues with 3Ps has always been government
interference. This is kind of a pressure situation, because tying up with the government.
Government servants and government agencies can also be very, very arbitrary, they can be
unfair, sometimes they can be kind of dominating the private business. So, they may not give
too much of a free hand to the private players to probably change the model, design changes.

For example, from a 4 lane to a 6 lane, there is a lot of policy paralysis at times, because the
government is very slow in giving those kinds of permissions, the government is very slow in
acquiring additional land, the government is slow in raising the toll money, because all of

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these have public interest that is involved. So, then what happens is in any of these sectors,
wherever the 3Ps have been established, to bring a regulator in place, bring an autonomous
body because you do not want the same government to be a contracting party and also to not
to make money. So, let an independent regulator decide what should be the tariff, what
should be the toll, so that some kind of expansion, some kind of advantages can be given to
the citizen at the user bases to which the private person can also make profits above.

So, those kinds of challenges will continue to remain in the public private initiative. And sure
these are something that now almost everyone in the public private partnership basis knows,
but that is something that they will definitely be able to withstand, definitely be able to
address, and also take due note of.

The biggest disadvantage in public private projects is delay. Now, all contracts impose a
penalty for delay. And very often than not this kind of delays can occur due to many
circumstances. One of the biggest circumstances 3P projects is that there should be adequate
land and the land should have been acquired by the government. If there is delay in handing
over the land, that becomes a huge problem for the private investment, the private player, and
that literally postpones his return on investment. And that exposes them to a huge risk in case
that is done by the government. So, vis-a-vis the government the kind of negative approach,
for instances like, protest of land acquisition, or maybe some of the land acquisition cases end
up in court, it ends up in litigation, it delays, so it is not necessarily the fault of the
government.

It could be the kind of fault of determining the kind of compensation for land acquisition, that
may also result in delay. And later on, it may be due to a strike, it may due to procurement
things. So, the private player may lose interest due to delay, because that would also lose its
time to make revenue from that kind of a project.

So, these are some of the advantages and disadvantages, just to give the kind of an idea of
what it requires to us to study the Public private partnership model, because it is important for
us to understand the risks that are involved. Obviously, there are many risks. And these risks
are something that every businessman is used to. But the risks, when there is actually
business with the government, is something that one cannot fight with. And the only remedy
then at that point of time is to approach to the court of law, through the writ repetition,
approach arbitration and try to resolve the matter and continue good business relationship
with the government. That is something that is very, very critical and important.

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And that there are lot of protection mechanisms introduced in the concession agreement in
the public private partnership mode. This is to avoid any litigation dispute, differences that
parties may have from their own project. For example, there is this issue on what is called as
the escrow account. Most of the money that is made from the 3Ps project is not suddenly and
immediately distributed between the public and the private players. So, it is put in an escrow
account, it is actually studied, evaluated, reviewed and audited before it can be distributed
between the parties.

So that whatever money has been made been made fairly, it has been made as per the legal
and ethical standards that are required to bring this partnership into existence and to progress
this partnership forward. And with that only, the escrow account is then used to distribute the
money after the election of cost as profits that may be necessary for the parties to actually
take due note and advantages of.

To conclude by saying something like this. The public private partnership projects have
advantages, they have disadvantages, there are challenges of sales tax, there are challenges of
operating costs, there are challenges of say ownership of assets that are built on land. So,
whether to allow profit, if so, to what extent this profit should be allowed? Should we rather
look at just profits to be taken away, or should the profits be flowed back to bring in
innovation, technology, to bring in new experiences and to combine with the public sector to
actually deliver better citizen-centric approaches.

It is something that one will have to take due note and consideration of, but remember,
friends, no person is coming here for charity, it is not a not for profit kind of project. The PPP
projects are completely for profit projects, profit for the public, profit for the private is
something that is always attempted in a PPP model. And hence, that is the reason the tolls are
revised and the money is actually flowed back into the system as well.

However, notice that despite the numerous advantages, the adoption of 3Ps is very slow in
other sectors. For example, in the hospital sectors, this has not seen much of growth, for
many reasons, maybe it is about hospitals and the kinds of services that have to be given to
the poor and the needy. And so many services in the hospital have to be free.

So, the private sector hospitals may not be ready and willing to tie up with the government.
So, the hospital sector has not seen much of the 3Ps growth. And that is quite disappointing
because I think healthcare needs private investment, it needs private technology, it needs

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private participation. And the government must actually do this in such a manner that it can
actually favor and show the private individuals have great advantage in the same.

For example, the post COVID-19, it is important it is for private players to tie with the
government, especially with the vaccine. And that clearly displays the fact that from now on,
I think the government must look at hospital and the medical healthcare sector as a very
important sector for the growth of the public private partnership mode.

Also, that public private partnership mode can be a great leverage in terms of public
education. Today, the government schools have rotary schools as well, some kind of private
initiatives in public education system. But in terms of education, two kinds of public or
educational institutions are there. One is completely public; one is completely private. Even
university or higher education is either private or public.

It is time at least a public private partnership model, even in the education sector, can be
something that can be explored for. It would also have some kind of a huge boost for the
education market, which now has seen exponential private growth. And there is a great
private investment in education sector, in India as well.

It is important to understand that PPP being a long term contract, there must be enough
systems in the contract to actually make the contract a successful one. It is not successful
only for the parties, but it is finally successful for the citizen, for the society and for the
country because these are infrastructure projects, it has important projects as well.

And hence, it is very natural for the 3P projects to have long term business relationship. And
hence, they must have clauses like what we call as the monthly review meeting sometimes or
interestingly, what the UK has adopted, especially in the construction industry, it is sort of an
arbitration clause, rather, it is not a replacement to arbitration. It is actually supportive or
supplementary arbitration. It is called the Dispute Review Board Clause.

It is called the DRB Clause. And the Dispute Review Board Clause is a clause wherein all
these minor differences, disputes or even kinds of challenges that cannot be solved by the
Board of Directors are referred to the Dispute Review Board from time to time. It is not like
one-time escalation of disputes that should result in arbitration or court proceedings.

So, trying to resolve disputes through a DRB from time to time would be a great way of
making this proper system to work and a proper system for the public private partnership to

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be a successful one. Finally, municipalities or urban local bodies must take PPP quite
seriously. There is so much lack of infrastructure in our cities.

And the municipalities are very slow in maintaining parks, roads and public transport
systems. To know that already certain metros or metro railway networks have been given to
private player. It is time that most of these municipalities take a very important lead in
enhancing citizen experiences in those cities and they can invite the corporate sector to
actually tie up with them for a better municipal governance as well.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 45
Public-Private Partnerships: Law and Policy in India – Part 02

(Refer Slide Time: 00:17)

In this session, understanding the public-private partnerships is very important. One of the
interesting ways of awarding government contracts, though, something that is not very
common, but yes has been accepted practice is the Swiss Challenge method, or the method of
unsolicited proposals that the government can actually undertake to award contract.

Now, usually we have two methods of awarding government contracts. First is the top down
approach, which is the tendering process. The tendering process is a process where the
government comes up with the tender, with the proposal, it requests the bidder to actually
submit those proposals to the idea or requirements that the government had already finalized
with. So the government will bring in the proposal for example for a road project we want a
road project, port to be built, with a willingness to tie up with the project structure.
Sometimes they would want the private player himself to design the project, build the project,
and operate the project as well. Or they may have some kind of parameters of saying this is
the kind of growth that we are expecting to which the bidders will submit the proposal.

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So this is generally the top down approach of government contracting. There is this very
interesting approach of what is known as the bottom up approach, which is probably the
citizen-centric approach to government contracts, where the citizen actually comes up with an
idea of the proposal and he places before the government saying that “why do not you
actually take this proposal forward.” The bottom up approach is called the Swiss Challenge
approach. And this is where to notice that the government does not come up with a tender, it
comes to the tender at a later stage when it has given principal approval to the project. But the
idea of the project, the proposal of designing the project comes from the citizen or the
corporate citizens as the case may be.

So in this kind of an approach, the first question is whether this approach is valid in India, or
whether it is something that cannot actually operate upon. Now, obviously are looking for
some kind of a legal framework to allow Swiss Challenge method, it can randomly, probably,
be misused or abused at times. Secondly ought to know how the process of Swiss Challenge
has to be implemented or operationalized. And hence, whether the law actually permits Swiss
Challenge or not, is something that we will have to be tested under law

Now in this case could Ravi Development versus Shree Krishna (2009 Supreme Court
judgement) Ravi developers, real estate company obviously presented a suo motu proposal to
the Maharashtra Housing and Development Authority. They wanted to develop certain plots
of land in the Mira road area in Thane, Maharashtra. And the Maharashtra Housing Area
Development Authority, obviously, this was a proposal that is coming from Ravi developers,
so that this will accept this under the Swiss Challenge method.

Now, looking at the Swiss Challenge methods, understand that suo motu proposal, that is
self-initiated, proposals or ideas of government contracting can be welcomed. However, the
process of ensuring transparency and accountability of the project is something that is
inevitable in government contracts. And hence, the project details were circulated by the
Maharashtra Authority, they gave in principle approval to this idea presented by repeated
members. And they said it is a suo motu proposal, it is not the government idea. Very
interestingly, the right of the first refusal clause in such projects, very critical.

Now, the right of first refusal very clearly means that when to open this proposal submitted
by Ravi developers for the challenge. Is there any other person, who will put an
advertisement, will put it for public in a scrutiny, will probably have a public hearing if
necessary, public consultation if necessary, have an expert committee that will decide if

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necessary, all this will be relevant and important for this Swiss Challenge method to be
acceptable?

Now, the first thing first is that, the one who proposes always have the right of first refusal,
which means if there is a proposal that is received, which is in challenge to the existing
original proposal made by the citizen, then Ravi developers who has submitted this idea will
have the right of first refusal. So they will have the right to match the bid submitted by any
other person. So it is like open competitive bidding process. Ravi Development will have the
first right to refuse. If they match to the winning bid, then they will have the first try to
implement the project. That is how Swiss Challenge works.

The word challenge is competitiveness in government contracting cannot be compromised.

Transparency and accountability of government contract can never be taken away. It is a
primary rule and arbitrariness, unfairness and unreasonableness of such contracts cannot be
compromised, and it will be held in violation of Article 14 of the Constitution of India. So
tendering is followed in a process after giving in principle approval to the suo motu proposal.
And there is public scrutiny, there is public consultation that will have to come into process.
And then, once they open it up for bidding process, Ravi Developers was the first original
person who was given the idea will have the right to match up to that winning bid. If he
refuses, that is, Ravi Developers refuses, then the project can be awarded to the winning
bidder.

This is the ordinary way in which Swiss Challenge is permitted. This is how it has been
followed and practiced. And the Supreme Court in 2009 said, this is also a very good method,
and the government can definitely adopt such methods. However, the Supreme Court laid
down a few principles that they thought should be important in the Swiss Challenge method,
so that it is legal, it is permissible, and it is wide.

The first thing that the Supreme Court said in this Ravi Development case was that it is
important that the authority publishes the proposal of Swiss Challenge quite well in advance,
it should not be done in a hurried manner. So people must have time to read, evaluate,
scrutinize and give comments on Swiss Challenge method. So, it must not be something that
should be done in an urgent manner in which citizens participation is rolled up. So advance
publication of the proposal and the idea of the contract and project must be something that
has to be done quite well in advance, so that citizens can participate, and that can be a

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competitive proposal. So, that is the first ground, which the Supreme Court has laid down in
the Ravi Development case.

Second, the nature of the project is quite critical. So the nature of the project should be such
that it is something that has come to the Swiss Challenge method. Now, it cannot be an
ordinary project, which the government has already tended upon, or in the past, the
government tendering was the process through which such projects or contracts were
awarded. So this must be something very unique, something not really thought about
something on which the government had no previous idea project tender, or any kind of
experience in executing the same. So it has to be unique in terms of the project requirements
as well. Third, what is important is that the private person who wishes to make the proposal
on Swiss Challenge should not have been approached before by the government, that is very
clear, right?

So the private player, who comes for the Swiss Challenge method is someone who has not
worked with the government on the similar project before. And this has to substantially say
that he has not had any previous allegiance or kind of idea with the government. So this is
also very important in terms of the Swiss Challenge method. Also the nature of the project at
the feet of the project, or the categorization must be notified before. And this would probably
help potential bidders who are coming to the challenge prepare to match up to the proposals
submitted by someone like Ravi Development. So that is also something very important. And
ample opportunity must be provided to everyone to participate in the competitive bidding
process. And the rules should be very clearly framed, is also something that has been laid
down from time to time.

So these are some of the precautions that have to be followed. And the Supreme Court said, if
these precautions have been followed, then the Swiss Challenge method is also something
that the government can definitely adopt. And the courts have said that that is also a
wonderful way or idea in which government contracting can be approach, especially if, even
though if it is in the PPP mode.

Now, one of the interesting aspects of Swiss Challenge has always been something that you
see under the insolvency and bankruptcy code. Now, in the insolvency and bankruptcy code
there is the opportunity to take over bankrupt and insolvent companies. Usually, the
proposals to take over these bankrupt and insolvent companies are unsolicited. They come by
their own. And they come up with a resolution plan as well and place it before the NCLT,

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that is, the National Company Law Tribunal. Based on that, that it is taken forward So, even
under the IBC code, an unsolicited proposals are generally entertained, that is, the process in
which taking over of companies under the insolvency and bankruptcy code is entertained, it is
valid, it is enforceable.

The future of Swiss Challenge is here to stay. The only thing is that the development
authority that the government must be very clear. The basis on which Swiss Challenge
method is going to be awarded for. Ensure transparency, competitiveness and accountability
of the project and such kinds of contracts are something that can always be taken forward
with.

(Refer Slide Time: 10:49)

Moving on to understanding whether there is a legal framework for Public-Private

Partnership in India. Very often the law tribunal tries to evaluate legal frameworks for
contracts. And hence the discussion all through has been the Indian Contract Act at 1872, the
Sale of Goods Act 1930, the Specific Relief Act of 1963 and so many other legislations,
including the competition law.

Now, the public-private partnership is very important framework, it is quite a sizable amount
of contracting that happens in this country. There are so many numerous projects, both Centre
and state. The public private-partnership projects in India would actually be more than 100
such projects that have entered into from time to time. So it in terms of the space of the sector

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in which public-private partnerships exist, in terms of the quantum of economic activity that
these projects have impacted in the country, one would have thought that a legal framework
for this project would be passed in this country.

However, in India, we have allowed contract law or the basic contractual provision to
dominate. We have not created a special framework, at least, there is no central law that looks
at a framework on PPP. There have been some guidelines issued, say, by agencies like the
NITI Aayog, the government has established the PPP Appraisal Committee so, as to evaluate
the proposals both at the state and the central level.

There have been ministries and departments that have designed model, PPP concession
agreements, like in the highway sector. This is to allow a model contract to be entered into so
that there is no disparity, changes, amendments and variations and uncertainties in these
contracts. So, lot of this activity has already done but no legal framework was brought in.

However, if you compare India to the United Kingdom, in UK in 1997, they enacted
legislation called the Local Government Contract Act. This does allow local government to
enter into PPP. It is a facilitating legislative provision to allow local governments. That in
India, local governments play a very critical role and they can actually raise a lot of
infrastructure through the public-private partnership mode.

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(Refer Slide Time: 13:22)

Now just to look at the state legislative actions on PPP, in Andhra Pradesh, there is Andhra
Pradesh infrastructure development Enabling Act of 2001. Assam has a policy, Bihar as an
Enabling Act of 2006. Goa applies PPP in most projects that are sponsored by the
government or the public sector undertaking. The most interesting legislation is the Gujarat
Infrastructure Development Act of 1999. It was amended in 2006. This is one of those
legislations that actually facilitates public-private partnership. And that is one specific
legislation that has been often referred to as the legislative framework for public-private
partnership process in India.

Karnataka has a policy that facilitate the same. Orissa also has a policy. Punjab has enacted a
legislation called the Infrastructure Development and Regulation Act. Rajasthan has
developed a fund, and West Bengal has a policy. So between the policy and act, the few
states run PPP through the policy framework and few states run PPP through the legislative
enactment framework.

The governments have the free hand to select sectors, projects, for a public-private
partnership initiative, they have committees that can actually monitor, scrutinize the amount
of PPP projects that can be done. And hence, it is done in a very careful manner today, so as
to balance the interests of the government and the public sector as the process is.

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(Refer Slide Time: 15:04)

Now, looking at the process of the public-private partnership, it is quite complicated and
time, and time driven. It takes a lot of efforts for the governments to actually bring the PP
project into place. Because we do not want to repeat the mistakes of the past. And hence, it
would take anywhere between 2 years to 4 years for a public-private partnership project to be
executed and the project to commence.

Actually, that is the timeline in which most of the projects have been brought into existence.
So the broad processes involved are in this framework and that they are very broad. They are
not very detailed and specific, but just to give you an idea of how the PP project is actually
conceived and designed. First is, it goes by project identification, where to do it, in which
city, which area, which sectors, whether it is water, airport. Again, to notice that airports are
in the Central Union legislation so only the central government can decide, though it requires
the state government’s consent and approval to do the same, because land is something that
only the state governments can actually identify with.

So project identification is very, very critical, which areas can be done and which cannot be
done. For example, a lot of these smart city projects today, are something that are outsourced
they are not necessarily under PPP, but the smart city projects or smart city missions have
been encouraged to at least build projects in the PPP mode. So the cities have been kind of
focus area right now, because the big infrastructure projects have already been brought into
the PPP formula.

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Second is to, once a project has been identified, the feasibility study is very, very critical. The
feasibility studies about whether it can be viable, under say, an outsourcing mode whether it
is viable for a complete government execution, operation maintenance, or should it be under
PPP, if it is PPP, will the private sector will be interested in? How to make this, very
attractive to the private sector? How long is the feasibility study becomes a very critical part?

Because the feasibility study will not only look at economic feasibility, it may also look at
environmental feasibility as well. Because see, the environmental impact of projects, though
its government, or PPP, are very, very important and critical. So the legislative framework
and the public concerns of feasibility have to be taken into consideration as well. The
sensitization of local communities is also very, very important. Taking them into confidence
also becomes very important for the successful execution of the public-private projects.

Why PPP has to be answered, it is very important. Is it because the government does not have
money to invest in this or is it because the private sector will bring in more efficiency in
terms of operation and maintenance. So whatever may be the motive or the reason for
projects to be granted under PPP, it should be money driven. And it should actually result in
some kind of economic propulsion of activity once it is there or granted to the public-private
partnership.

Otherwise, the private players will actually exit, they will not find this feasible at all. So it
should generate revenue, it should have a revenue model, a robust revenue model. The
calculations of revenue become very critical. To tell why money driver is important? Because
remember, tomorrow to want a competitive process, in the public-private partnership space, if
it can add value to the contractors, they will be interested in it. So that will be greater
competition. Otherwise, there will be having just one or two bidders for this public-private
partnership initiatives. It is very important that the political, economic and social risks are
managed in the public-private partnership. The government has a major role to play in
management of risk. And that kind of certainty can only drive the success of such projects
and hence, the government must actually invest in management of all the three forms of risk,
political, social, and economic risk.

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The fifth, in the process is to enter into a robust concession agreement. Once the private
partner has been identified through a competitive bidding process, the concession agreement,
that is the title of the agreement, that is the framework agreement which will be the master
agreement, that goes into public-private partnership, it must be very appropriately negotiated
review and drafted.

A robust contract is a well driven contract. If the contract is properly entered into, it is not
one sided or unfair or it is not taking into consideration the existing challenges with other
projects, then the contract becomes very weak. So, robust contract can drive a very, very
robust execution of the contract because this is a very long term contract.

What is also important is the project expectations. This is a problematic situation in most
cases? Project expectations are not clearly defined by the government. Most of the time, it is
left to the private player to identify and actually completed. Because of which lot of time
mismatch can happen. Project expectations along with project completion schedule, are
something that had to be attached to the concession agreement, and they have to be also
carefully negotiated and agreed upon. Unreasonable expectations of project completions
would be actually a hindrance to the project, it will actually start with a lot of distrust and
mismatch of expectation.

So, the delivery schedule should be very, very reasonable, it should be flexible as well. What
is important is not that the project gets completed on time, what is important is that the
quality of the project is not compromised while time is made important for the completion of
the same.

So, the quality of these projects are very important. The quality, is because these
infrastructure projects should be world class, and expect the private player to actually get the
world class technology, get the finance that can actually make this project a qualitative one. It
should withstand the test of times. The government projects lack execution, because very
often we have to understood that government project lack execution, sometimes are affected
by quality.

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And that is probably one of the main reasons for going into the PPP sector. Of course,
selection of partners, is also critical, can the private player to also have a consortium of
partners? More the partners, more the problems or challenges of driving consensus decision
making. So, notice that at the start of the PPP process in India, that was a consortium of
bidders in the private-public space.

The private players were not one, they were actually two or three or sometimes four. Right
now, India has seen quite a bit of experience in PPP, so just permitting one player to partner
with the government. That is something that we have always seen as a development of the
sector and development of the contractor maturity, as seen today

Tariff fixation is also critical and important. For example, the problems of electricity tariff
fixation, we have seen it in Delhi that electricity now is unfortunately given free, tariff
fixation can be a social and an economic risk or challenge as we go forward. There has been
lot of protest at toll booths for, where tolls have been increased, or where there is an
expectation of the citizens that the tolls should be given free. So, toll free roads is what the
citizens would demand because they will not allow the private player to actually recover his
investment.

In the airport sector also there the Airport Economic Authority that would fix user
development fees in the airport. This has been a challenge whenever expansion takes place,
the user development fee goes high. The customers who are using the airports always find it
to be quite pricey. So, there is a social and economic challenge over there. How do you fix
the tariff? How do you revise the tariff? Tariff needs revision whenever where is expansion,
whenever there is additional investment, whenever there is an additional maintenance cost or
whenever there is price escalation of essential maintenance and operation costs, including
labor and raw materials.

And hence for tariff fixation, notice that in the electricity sector, we have come up with a
regulation or tariff, we allow the CERC that is a Central Electricity Regulatory Commission
or the State Electricity Regulatory Commission to actually determine the tariffs which
consumers have to pay to either the government or to the private player. So these are
independent regulators, they can act on behalf of both the parties, they can actually act very
reasonably like a judicial commission or a judicial quasi-judicial authority can do.

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Tariff is critical because that cannot be fixed in the contract but because of public policy
concerns the tariff fixation is an important process of how to make a PPP a successful one.
And then the policy can drive, tariff policy can be something that these adjudicatory agencies
can actually fix. The tariff fixation would become a critical component of balancing the
public interest as well as the private interest as we go forward.

Finally, coming to the process of the contractual management. Contract can be entered into
but how it should be managed? I should be managed by the Board of Directors of the Board
of Managers who actually manage the PPP process. There is need for very, very professional
administration professional management because some of these sectors are very, very
technical. For example, electricity sector. Some of these sectors can demand a lot of attention
from professional business managers. They need competency at the management level. So
government interference in such projects should be minimal. They should be driven just on
public interest and nothing more than that.

So, the contract is a management phase becomes also an important phase. Because there is a
need to break deadlocks between the Board, you need to actually find some resolutions to
these deadlocks. And those are something that the management should be able to drive
forward too. Government must appreciate contractual management, they must bring in
professionalism to facilitate better project execution in the PPP sector , also is something that
the government owes a responsibility as well. Do not forget that contractual management is
not a compromise for corporate due diligence and corporate compliances.

The PPP process is definitely something that could be regulated under the Companies Act,
because the special purpose vehicle that is established on the PPP could be a private limited
company, it could be a limited liability partnership, and hence, corporate compliance is also
something that have to be managed, they have to be complied with.

And hence the regulators like the Registrar of Companies and others and the government can
also monitor the public-private partnership process. Do not forget that when we talk about
contractual management, they are also talking about some leverage of accountability of the
private process. And it is not pure private contract, which is to be kept in the private domain.
There is a public concern because you are actually exhibiting public work.

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Citizens are going to demand accountability, are going to demand answers. So the contractual
management should be pursued in a manner that has an absolute rule of transparency and
accountability to the citizens at large. That is the process in which contracts should be taken
forward in the PPP sector.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Lecture 46
Public-private Partnerships: Law and Policy in India – Part 03

(Refer Slide Time: 00:16)

The Important question to be addressed is, is a public-private partnership a joint venture? Is it

a joint venture? Now, what is the joint venture? is it public and private together? The answer
is absolutely yes. Is it a kind of partnership? Probably we will answer it in a little while,
because here is where probably the law on organizations becomes very critical and important.

But the point is that joint ventures in India have been existing for quite some time and have
seen that post the 1991 liberalization era, where the foreign direct investment was allowed to
come into the country and foreign companies to do business in this country, but allowed them
in a very staged manner. In some cases, the FDI was allowed just 49 percent. Later it was
increased to 74 percent. In some sectors, now, there a 100 percent FDI that can actually float.

Joint ventures in India are very important because it is an important form of commercial and
business ventures. Probably some of the initial joint ventures were on high technology
contracts. Companies like Hero Honda, Kawasaki Bajaj all of these were kind of technology
joint ventures because the technology was not in India. Hero wanted to tie up with Honda
and they wanted this technology to make two wheelers.

Initially, notice that two stroke engines then we went into four stroke engines to develop that
kind of technology. So, technology had to be brought to this country. And one of the best

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mechanisms of getting this technology is through a joint venture or a collaborative
technology partner into this country where the branding and royalty is shared with the
technology partner.

In joint ventures in the product space, where companies like Mahindra trying to bring the
product called Renault, with a company called Renault tied in get in a product like Logan or
what is called Verito. So, this was a joint venture just for the product, it was specific to the
Indian market between two automobile manufacturing companies, one is Indian the other is
foreign.

Mahindra and Renault have collaborated for this product called Logan. Now, product joint
ventures are also quite popular in this country. So two companies coming together of course,
is based on the sales it is based on commercial launch of these products and the kind of
money that they make that the royalties are shared between the joint venture partners.

Then there are equity joint ventures. This is the most important one because these are in
terms of a shareholding pattern. And most of the equity joint ventures are kind of
incorporated joint ventures. Now, technology and product joint ventures maybe
unincorporated. Incorporated means that two companies come together and create a third
entity.

So the incorporated joint ventures, when they create a third entity through a special purpose
vehicle, that incorporated joint venture could be in the form of say, actually a partnership.
Please note it could be a partnership under the 1932 Act. We know in India, though there are
two laws of partnership. One is the unlimited a joint in several liability partnerships under the
1930 the Partnership Act, which is a British law.

Then, limited partnership law and that is why we brought what is known as the LLP Act of
2008. So incorporate it under the LLP and because the 1932 law definitely has its own
problems or shares of legal risks and liability. So, joint ventures will ever go under the 1932
law. Because for simply the unlimited liability in the joint and certain liability principles,
which will actually make one person extremely liable for the other person and that liability is
not only limited to the capital that is contributed. The liability is also extending to his
personal liability. So, no company would want that unlimited liability model. So LLP is one
form of incorporation that can be done, but it is not something that is favored by joint
ventures. The joint which is usually go to the private limited company model which is under

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the Companies Act of 2013. They may make it public limited but not public listed though. So
incorporation is one way in which joint ventures are created and private limited company
model is quite a, considered to be quite an interesting model.

And notice that they bring in equity. Now equity here could be say one partner holding 49
percent of equity and the other person holding 51, just giving the 51 percent a majority kind
of a stake. Now incorporated PPP models are existing in India, the Hyderabad International
Airport is an interesting model of incorporated public-private partnership model.

PPP models can be completely unincorporated as well. They will be, what is called as the
contractual base model as well. So the recent airports that are given to the Adanis could be
the contractual based public-private partnership model. They are not necessarily to be
incorporated into a third entity, that is not a necessary creation that has to be done. Giving an
instance or an example of an unincorporated JV is purely run through a contract.

So that is kind of how the joint ventures in the public-private partnership mode can be, it can
be purely contractual or it could be incorporated joint venture where the government is
involved. Example of the same in the next slide. And what is also important is that joint
ventures in tendering as well and joint ventures as consortium bids

Consortium bid is when two or more persons actually club together to fulfill the tender
condition and submit a joint bid. This is called the consortium bid, it could be two or more,
remember that. Now consortium bid are based on government discretion, whether they accept
it or not. They can probably say no, we do not accept consortium bids, or they may say
consortium of bidders can also participate in the tender notification.

This is something that the government will have to make conscious decisions about. Now,
why do two or more companies submit consortium bid is for the simple reason is that the
tender conditions are such that one company cannot fulfill the tender conditions and hence,
they want to tie with another company which could partially fulfill those tender conditions.
And hence, both of them could actually take the tender, they can actually participate in the
competitive, if they selected, both of them, will actually put in their expertise to complete the
project.

So that is how consortium bid becomes very important. Also, there are advantages of
consortium bid, it is not about only just getting the technology or getting the expertise of two
or more companies to fulfill the same, it is about sharing of the profits and risks also, because

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the project is of such magnitude and scale and running in so many thousands of crores, that
one company may not be wanting to expose its own risk to that kind of a project.

So tying up with other companies like sharing of that risk as well, and sharing of that kind of
capital that would be required to complete the project. So consortium bids have its
advantages. Of course, they have the disadvantages as well, because what happens in
consortium bid is that the consortium of bidders must have an agreement between themselves
and hence the tender conditions are very clear that you will notice that the joint venture
agreement of the consortium bidders must be submitted before they can be selected.

So, there should be a complete understanding between these two partners, before they can
submit that consortium bid as well. Because interestingly, friends, what happens is sometimes
during the term of the tender or during the term of the execution of the common contract, one
of the players may want to come out. Can you exit? Usually, yes, exit clauses are provided
for. How can he exit? Can he sell the shares to some third party with whom the existing
partner is not aligned or is comfortable with or should he sell his shares to the existing
partners first?

So all of these will be relevant to bring in the liability because remember, the courts have
gone on to say that in consortium bid, the principles of liability, because this is like a
partnership, though not registered or though not incorporated. And hence, when it looks at
what is known as implied or express kind of an agreement between two or more persons to
come together. Please note it is nothing but a partnership that is created.

Now under the 1932 law, partnership, registration is optional. It is not something that you can
mandate or make it very, very compulsory. And hence, anything that is not incorporated or
registered, but is an agreement between two or more persons, the partnership is almost like
implied, it is something that can be inferred.

And the courts have gone out to say that between the partners in a consortium bid, the joint
and several liability principles will be applicable. Joint, then both of them are joint and
several to the extent of their capital contribution to the extent of that rule, it is several as well,
but it is unlimited joint several and unlimited liability is the principle that will be applied in
the consortium bid space.

Of course, in case of joint ventures that needs some time for incorporation, because
remember, there is always a gestation time between what is agreed and how to probably

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execute it. Generally, in case of equity joint ventures they enter into what we call as Not Only
the Joint Venture agreement, which is the basis of two partners coming together based on a
joint venture agreement, if they want to actually further incorporate and take it, take the
equity forward. Generally, they would enter into what is known as a shareholder’s agreement.

So two or more partners who hold the shares in that kind of JV, come together and hold a
shareholder’s agreement. How do shareholders manage their shares in the company? Who
will put in what shares? How will the shareholder’s agreement be taken forward into what is
called as the Articles of Association, which is the incorporating document in a private limited
company?

So in Incorporated JV’s first there will be a JV agreement. Second stage, there will be a
shareholder’s agreement. And the third stage will be the articles of association that will be
registered under the private limited company model. Generally, more or less the
shareholder’s agreement, clauses go and get incorporated in the articles, but not necessarily
so. But that is the basis of registration of the articles of association in a private limited
company.

Of course, joint venture partners will also execute a nondisclosure agreement or a

confidentiality clause or a confidentiality agreement. Because during the joint venture before
it is incorporated, there will be so many proprietary information that is shared, there is so
many confidential data that will be shared, so many economic and financial data that will
have to be exchanged between the parties, to go forward. And hence confidentiality becomes
critical between the partners.

And that is also, that could be part of the JV agreement, or it could be a separate agreement,
even before the negotiations for JV start. So that is also something that is complied with, as
well. And even in a PPP project, friends, notice that confidentiality is very, very important
because government information is to be held as confidential information as top secret
sometimes, especially in critical infrastructure projects, as well.

Exclusivity. Now, this is also very important because of the simple reason is that, when you
are tying up with someone, you do not expect that someone to actually go and tie up with
some kind of competitor. So exclusivity between the joint venture partners is something that
needs to be agreed to, it needs to be executed and implemented as well. So the joint venture
partners have a business of exclusivity between them.

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So for example, in the McDonald's joint venture case, how exclusivity important because you
do not expect the other JV partner to go and sign up with a Subway or Pizza Hut or someone
else that is kind of a competitor in the food chain, or food supply business. Of course, before
a joint venture can come into existence, due diligence from both the partners is very, very
essential condition.

When the public or the government is trying to tie up with a private player, due diligence is
compulsory, it is mandatory. What this company is, you need to know who the commuters
are, you need to know what the balance sheet is, you need to know the physical and financial
capacity of this company to actually come into existence and to execute this project.

So unless you do due diligence, and that is something that was very visible in the 2G case,
when the Ministry of Telecommunications granted the 2G license to so many companies that
actually did not have any kind of business with the telecommunication networks. So the
ministry itself by giving that license even had not complied with due diligence.

This is something that has seen in government very often that once you have participated in
the tender and you have become the L1 or like in the 2G case, what we call as the first come
first serve policy. Everybody who applied, got the license without any due diligence that was
complied with.

And interestingly, in some cases, notice that you would end up giving license to shell
companies. So I think due diligence is very, very critical. I think it is mutual between the
parties. The private company will offer to do due diligence or the ministry or the department
or the authority that is entering into the public-private partnership says.

So due diligence is something that has to be complied with. And very importantly, let us
apply due diligence in the labor sector. For example, about corporate due diligence, financial
due diligence, labor due diligence. For instance, this is not a greenfield project now most PPP
can be greenfield, but, public-private partnership project can be brownfield project.
Brownfield projects are existing projects.

Say the Bombay and Delhi airports, they are already existing. And they were given to a PPP
mode for what we call is the operation, maintenance and development. Development means
new terminal can be developed but to retake our existing operation and take existing
maintenance, we handed over the project to say the GMR as a JV case.

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Now, notice that labor due diligence is also critical and important. For example, today, the
Tata have taken over the Air India. It is completely privatization. It is not public-private
participation. But there are employees with Air India, there would be employees in the
airports who are already working, say for 20 years or 30 years or even maybe a couple of
years. Now, the labor due diligence is important in terms of how many people are working,
what is the current salary, what could be the existing salaries that will have to be increased
over a period of time. Maybe in such kinds of due diligence, you will notice that is there is an
initial lock-in type.

Now to confer the laborers and the trade unions, you will notice that we would probably give
them assurance that for the next five years, there is a lock-in that they will not be removed.
Or they will be absorbed by the new public-private partnership. So that is an assurance that
labor always requires. So from completely a government and labor set up to actually give to a
PPP labor setup, notice that the trade unions will always have some kind of concerns and
objections, already seen that in the BALCO case, where the trade unions also challenged at
the privatization of BALCO and they said they were not in favor of public policy, especially
when labor is adversely affected.

So, labor due diligence also will be necessary and very important. For example, what are the
existing workforce, how much extra would be required, whether extra would be required or
not, which are the technical sectors or areas in which labor has to be strengthened, whether
they need to be re-skilled, whether they can coexist with the existing workforce. So, all of
these would be also there in a labor due diligence process.

So, because public-private is a joint venture due diligence if done, appropriately with
adequate care, it could actually result in a very successful implementation of the joint venture
between the public and the private space. Finally, to give due diligence to finance in terms of
loans or encumbrances that are existing in such a brownfield project is important.

And most importantly, finally want to conclude a due diligence on tax matters. Taxation is
also very critically. Are there tax dues? Are the tax disputes? Is there tax pending claims? Are
there consumer litigations? So, that is the legal due diligence that is usually done.

So, all of these are very, very critical, because that is where the transparency of the
transaction will be ensured, that is where proper information can be shared with other partner,
the other partner can actually take a very informed decision in terms of the joint venture that

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comes into existence. So, due diligence helps the process of a better implementation of the
public-private partnership space.

Of course, there are certain conditions precedent before a joint venture can be accepted. Like
the foreign direct investment policy, sometimes a competition regulator, called the CCI
Competition Commission of India, under the combination regulations may have to permit the
joint venture to come into existence.

Now, notice that under the Competition Act, the Competition Commission may have an
objection to the joint venture, if there probably two major entities coming together to actually
create some kind of a monopoly, it may actually disrupt competition. And hence, under the
combination regulation, the CCI may not give an approval to the same. So just to say that
though contractually agrees and want to take the joint venture forward, the existing
regulations on joint venture, which are not specifically law that we have.

But I think there are laws that talk about finance or money and how who can be a JV partner?
How can the foreign companies do business in India? Can they do business to subsidiary
model? Can they do through the finance model? All of these will have to be complied with?
And yes, of course, there are some regulators who may have to get permission before the
joint venture can come into proper existence as well. So if these are complied with the public-
private partnership can be a very good joint venture to actually take the complete process
forward.

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(Refer Slide Time: 18:09)

So, continuing and understanding joint ventures consortium bids in a public-private

partnership contract, one of the interesting issues that did come before the Supreme Court of
India in 2018, is that when does a contract come into existence in a PPP mode. Now usually,
in an ordinary government contract, as soon as there is a declaration of the L1, we know that
the contract comes into existence, because the contracting parties are confirmed. And the rest
is the documentation process in which, say, the letter of intent is issued, the work order or the
purchase order is issued, or the agreement is actually executed between the parties.

(Refer Slide Time: 18:55)

Whereas in the PPP mode, what is the issue? The issue is termed as two stages of one PPP
contract. The first stage of the PPP contract is to confirm the private partner. Only if the

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private partner is confirmed and the private partner adheres to the preconditions of the tender,
only then the concession agreement will be entered by the government with the PPP SPV that
is, a special purpose vehicle.

Then what happened in the, this was about the Jawaharlal Nehru Port case. And in this case,
there was a request for proposals that was floated, and consortium of bidders, it is a joint
venture among the private players, this was evaluated, and two companies came together.
They participate in the bid and they were selected actually.

This was an Indian company along with the Singapore company. Now this consortium was
declared as L1. Now unfortunately, what happened is that the Singapore company withdrew.
Of course, the Singapore company cannot be under the jurisdiction of India. So this is usually
the problem of foreign companies actually entering in consortium in India. And what it leaves
it, it makes the Indian company solely responsible and liable for the execution of the product.

But inevitably, because a port requires prior experience, port requires prior business purpose,
entering into such consortium between the foreign companies has become the practice and
norm of the day. Now, the Indian company that was left because Singapore company
withdrew, they actually then said, okay, we will make another SPV. And we will continue
this work. But the port trust said, as soon as you come up with a different, “we have made
you L1 because you tied up with a Singapore company” Now you are tying up with
somebody else. We have some preconditions of actually given clearance of that second
consortium player. And hence, the Board of Trustees of the Jawaharlal Nehru Port, they sent
this for approval to the Ministry of Shipping, the new consortium that was created.

Unfortunately, the Ministry of Shipping, which is the approval authority of the regulator in
the space about who can do business in what sector, even including the PPP, who are the
private entities, that is interestingly, noticed vis-a-vis foreign companies or security clearance
also has to be given by the ministry.

Because, of course earlier a lot of these Chinese companies or Russian companies were trying
to do business in India, secondary clearance from industries for any kind of JV or public
projects or command Public-private Partnership projects is a must. So the ministries actually
have to give their due diligence before giving such clearance.

Interestingly, the Ministry of Shipping did not clear the new consortium. And because they
did not clear the new consortium, the issue was whether the contract had come into existence.

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So there was issues about arbitration and whether the arbitration was entered into or was
there a clause in an executed contract or not. That was another separate issue that was that in
this case.

And the tender document had said that the courts in Mumbai alone will have jurisdiction and
tender did not have any mention to the arbitration clause. Now, what is there in the tender
will be something that will be binding, if no contract is made. If a contract is made, what is
put in the contract will actually come into existence.

Now, note that the concession agreement is the contract. Selection of the private player is not
the completion of the contract with the PPP. Selection of the private player is only to create
the special purpose vehicle, it is only to identify with whom the public will partner and who
is the private player with whom the public wants a partner. So it is not just once the private
player is selected, they cannot come into conclusion that the contract has come into existence.
The contract will come into existence only when the concession agreement is entered into by
the government and the PPP special purpose vehicle.

That is what the court held. So the court held in this case, that there was no concluded
contract with the Port Trust. And what was done was pre contractual. So selection of your
private player is completely pre contractual. And hence, probably it is not binding on either
of the parties to actually go ahead, they can actually withdraw. That is definitely a possibility.
The Port Trust need not go with this consortium player, the Indian person, because the
Ministry of Shipping has not approved the new consortium, which was a prerequisite or a
precondition before the concession agreement can be entered into.

So please note even a PPP project, the contract comes into existence once a concession
agreement is signed, not when the private partner is selected, be it in the L1 or in the H1
process. So that is something that has to understand how PPP contracts are different from
regular contracts when declaration of L1 is the time and place when the contract comes into
existence.

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(Refer Slide Time: 24:01)

Now, just to give you an example of a public-private partnership, friends, the best example is
the Bangalore International Airport Limited case. Now this slide compares the NICE case
that we discussed at the very beginning of this chapter. And because the NICE case, as I told
you, friends, is a flopped model, it is a problematic model. We learned from the NICE case
how it is important to make a PPP project. And then want to compare it with the BIAL
project which is the Bangalore International Airport Limited project, which is probably one
of the successful public-private partnership initiatives in this country, along with Hyderabad
Airport

But Hyderabad and Bangalore were greenfield projects. So it started from the very beginning.
So it is actually very important for us to understand the same. Now, first of all, if you
understand the NICE versus BIAL. Please note BIAL and NICE both are private limited
companies, they have been registered as private limited companies. However, you will notice
that in NICE, the government or the public equity is almost nil, there is no equity of the
public.

So, it cannot be at least in the special purpose vehicle sense be called as a public-private
partnership project at all. Whereas in BIAL, you will notice if you see the shareholding, the
current shareholding, friends, it was a shareholding that was slightly different earlier. But in
2016, GDK actually sold much of its stake to a company called Fairfax India holding, which
is actually promoted by a Canadian NRI

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And Fairfax is now holding around 54 percent in BIAL along with Siemens, and some of its
joint ventures which is holding 20 percent. That makes 74 percent of this Bangalore
International Airport Limited, which is a PPP to be held in the private space. Now, if you
again, notice the planning for holding the 74 percent is critical because that gives the private
player more management and ownership stake, to dominate decisions and to run the
company.

Now, we know that if government holds 51 percent or more in any company, then it is called
the government company. So, government has majority over here. Now, here giving 74
percent to encouraging the private payer to invest more, because there is 74 percent stake to
take part in the management more, to take the liability more, Finally, they will also get profit
more because they have 74 percent stake.

But how do to conclude that this is PPP or three Ps is because you will notice two
governments both the central and the state government have 13, 13 percent stake in the
Bangalore Airport. So, it is 26 percent public, 74 percent private and this is how the holding
of PPP comes into existence in the Bangalore International Airport Limited case, which is
registered as a private limited company. It has the following shareholders who have probably
entered into a shareholder agreement.

Karnataka State Industry Infrastructure Development Corporation, 13 percent, Airport

Authority of India, Fairfax Holdings and Seimens. So this is the shareholders pattern and
shareholder’s agreement we will go through this kind of a pattern. When you compare it to
NICE, friends, NICE is completely private. The 100 percent equity is owned by private
player, there is no public participation in that. And now you will understand, see, the point is
very simple, friends.

If suppose government in Bangalore airport has 26 percent shareholding, please note the
exposure to risk is also 26 percent, the profits of 26 percent is also going to go to the
government. Whereas in NICE, when you notice, that this contract now of a highway, which
is built around Bangalore is going to be operated and maintained by NICE, and the toll
money that is going to be collected is going to the NICE company.

Now what of the toll money goes to government? Nil. Simply because they are not in the
equity participation in the company that has been given this contract. So that is where the
fault in design of NICE and the lessons learned could be clearly visible in the BIAL project.

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Not that this cannot be a PPP model, I will just come to that in later while in the Adanis case,
how that is done, because Adanis case is not that there is an equity PPP, but it is a concession
agreement to which government can earn royalty directly.

So that is a different kind of model. But the original PPP model is in this case. The type of
business, friends, y notice is the build, own operate method. And finally, the transfer, that is
boot, which in the NICE case does not seem to be there but in BIAL case, definitely it is
something that is very important. Build, own, operate and transfer.

So because it is a greenfield project, right from say the issues of land, identification of land
may be designing the project, this is called the DBOT model. So design, build, own, operate
and transfer that is DBOT model, but in the Bangalore case, it is build own operation. So, the
land was already taken by the government. Now please note when we saw about government,
you will notice that the Karnataka government, how does it invests 13 percent equity in
BIAL. It does not literally, what it does it? It just acquires land and the land values taken as
equity.

It may give a soft loan of 450 crores and so on and so forth. But that is usually how
government equity is actually converted into these companies. So on the government land,
please note, you will build the airport. You will own the airport. Own means, it is not an
absolute ownership with only owning the assets built on the land. The land belongs to
government; you will only own the assets built on the land.

For what purpose? It is not absolute ownership for lifetime, it is ownership during the
concession period or during the lease period. And you will own it for the purpose of selling
mortgage or you will charge that has to be done or maybe you need to raise some money
from banks to do the expansion activities.

For all that purpose, probably the ownership can be granted, but please note it is only
ownership to that extent on assets built on land that you will be granted that kind of a right.
You will operate the airport which is very, very important in the PPP formula. Operation only
on the civilian side, operation only in the passenger and cargo facilities, but not air traffic
control, not the security operations are handed over to the BIAL company.

Now, coming to NICE case, interestingly though, say it is built own operate, the problem
with NICE is, some of the land in NICE have been transferred to ownership of NICE. So,

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once you have the ownership of land, friends, there is no question of, the only option if you
ask me is to reacquire that land.

Some of the lands that were leased, some of the land that have been granted to NICE just to
build the roads, they can always be taken back. But the ownership of land once it is
transferred to a private player, the private player is not in a PPP mode. He is actually the
private, completely private. No equity, land is just, he just builds the road. And that becomes
private road in most sense. And that is why I said NICE happens to be probably the first case
of a private road project in this country.

And then he takes the toll and the toll money of course, he keeps it to himself. Of course, if
you look at the toll to the national highway projects, because it is a PPP, that is public, the
Highway Authority also earns from the roads, because that is public-private. Participation is
the same. But that is not the case, unfortunately. The NICE case, because there is nothing that
the government earns from this project, because the government does not have equity, neither
it has a contractual right in that kind of infrastructure project.

Again, the concession period. Now, what is interesting is say, some of these NICE projects, if
you look at it, the concession type has not been negotiated at all. They say for toll roads; it
can be 40 years. It is not necessarily 40. Sometimes, you will notice that in some of the
contract, it is not mentioned at all. So NICE case has been completely kind of not a pre-
planned, properly executed implemented kind of a project.

Whereas in BIAL, the continuation period of the term of this PPP is 30 years. That is a
concession time. Now in the new airports, the term has been extended to 60 years, a long
term giving the private player more time to actually look at. Were the private players chosen
in NICE? They were not chosen at all. Whereas, the private player chosen in BIAL case, Yes,
it was chosen and the state government also then signed an MOU with the chosen player,
after which the concession agreement were actually was signed by the Ministry of Civil
Aviation with BIAL. That is how the project was actually given shape of.

Now, some of the ownership of land in NICE, as I told you, has been transferred to NICE.
Some of them have been given on lease at 10 rupees per acre, which is probably one of the
most horribly negotiated clauses. And the consortium, interestingly, that is NICE has also
done a resale of some of these land. Yeah, they did so. And that is why the government
started feeling quite objective, because the purpose of the land that was acquired and given to

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NICE was for road and now they are reselling it for something else, and hence, some of the
disputes in NICE were raised because of these kinds of complications.

So, now, the road on which the land is built, friends, please note the government will have to
require the same after say the 40-year period or whatever period has to be done. So, it cannot
be easily transferred. Like in the BIAL case, please note the land belongs to the government,
you come and build.

Now after the concession period, everything that is built on “my land is mine.” It is an
automatic kind of a conclusion. And hence, the transfer could be far easier in Bangalore
Airport case rather than the NICE case. So, this is precisely the lessons that one can learn
from NICE and not repeat those mistakes and probably formulate the PPP project far more
structured, in a far better sense to serve both public purpose as well as private interest.

(Refer Slide Time: 33:40)

Now, to look at the public-private partnership model, friends, notice that there are different
models. Design build, operate, maintain, there could be a rehabilitate and operate, maintain
that is could definitely be a concession model. And finally, finance, operate and transfer
model. So there are many such models that are existing for the PPP to come into existence.
And one of the concession model agreements are, please note, like the current Adani airport
cases where the government is not in the Adani airport, they are not an equity participant.

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However, the concession agreement very clearly is based on facts that to select the
concession based on the kind of revenue they will generate and pay to the government. So it
is going to be H1. So the government enters into a concession it is like any other outsourcing
but they get to build airport, you get to operate the airport, it is already a government airport
with certain piece of land.

And based on the traffic projections, they have already gone to the government that this is
the annual royalty that you will pay to the government from that particular project. To make
it profitable to make it workable is your choice. Government gets an upfront profit. The
government did not take part in the management and the equity or the formation of the PPP
structure.

That is how the concession model operates. That is not our preferred model. Rather, notice
that there is news that Airport Authority of India will actually divest its stake in the
Bangalore airport, the 13 percent stake that it has, because it no longer wants to be a
participant and take part in the business operation, in the day to day management, it may have
to appoint one Director.

So why should we do? Finally, the government should earn, government must be able to
control the activity. And to do that even without taking part in the BIAL process or in the
airport Specially Purpose Vehicle, then it is a win-win situation, even for the government.
And it is a better situation for the private player, because they do not have to worry about
government interference into the Board and the management policies, as well.

So to think right now, in the PPP structure, what we realized is, it is important to select the
concession, enter into a concession agreement. The government need not be an equity player
in that PPP model. That is a free hand that you can give to the private player, and make the
operations far more efficient and successful, as the case will be.

Finally, p the land on which this concession model of the Adani’s is going to be built is
government land. It is going to be with the Airport Authority of India, which is the regulator
for airports. So when going to area to do that, to take part in the process of establishment of a
private limit company, I need not be an equity holder, and create more complication.

So simpler model is the concession model. And I think that is something that new airports
have actually been adopting too. However, notice that in the airport sector, some of the
airports are still completely public, they are not into the PPP model like the Chennai airport,

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and several other reports, which are made by the Airport Authority of India. Whereas the
some of the airports are in the PPP mode, which has created SPV, some of the airports are in
the concession.

So all such kinds of experimenting with the different modes of PPP, trying to evaluate which
is more advantageous and which is not. And that is how most of these public-private
partnership contracts are actually moving forward. And I think whatever is convenient,
whichever is less cumbersome, whichever is easy to execute and operate, I think that is the
kind of model that has been raised.

The government is looking at developing the infrastructure for citizen centric experiences and
approaches. It wants to execute them in a faster manner, so that the citizens are benefited
buying. So they are focusing on that time as the essence. Simplification as a process, and
efficient execution, as a management principle.

(Refer Slide Time: 37:33)

Are there legal conditioning issues and challenges to public-private partnership? There are
some of the legal issues. And some of them, take up for our discussion, as a concluding part
of the chapter on public-private partnerships. Now, choice of criteria for the public-private
partnership projects. Whenever a tender is called by the government, who does it want to
partner with? What are the qualifications of this private consortium or the private entity to
take up this PPP project?

This is something that can obviously be taken to the court of law or a petition, and people can
challenge the criteria that have been floated in the tender. So when the tender document or

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the request for proposals are actually being enacted, I think it is very, very important that the
criteria that are mentioned, are very objective and character and nature, they are feasible in
terms of its approach and fulfillment.

While, I am sure the government is very keen to select a private player, who should be an
Indian company, of course, that is an essential criterion, but notice that saying that airport
sector, Indian companies when the airport sector was opened up for PPP mode, Indian
companies do not have experience in managing airports.

And the Airport Authority and the Ministry of Civil Aviation could not give it to a person
who did not have experience managing airports, because airports are not like highways, they
are critical security infrastructure area. So someone experienced in management of the airport
or building the airport was equally necessary. So what did the government do is that they said
look, we need some experience with the consortium.

So let the Indian company be the lead consortium bidder. Let them tie up say Zurich Airport
or any other airport company, which is already managing airports across the world. Let the
consortium participate and who actually gives us the best terms and conditions is the one with
whom we will actually tie up for the Bangalore or the Hyderabad airport.

Now, the courts usually do not want to intervene in tender conditions. But yes, of course, they
can be called upon to test the reasonableness of the standard conditions. And hence, you will
notice that, in cases like BALCO, the Supreme Court has clearly laid out that the criteria of a
tender or request for proposal can be challenged if the sum to be quite arbitrary, unfair and
unreasonable, and more importantly, if they are not feasible at all.

So while the concerns of the government can be definitely respected, I think the practicality
of the private parties and private persons are something that are also very important for us
due take note and consideration of. Now notice that in some of the tenders, the courts have
said that you cannot create tender conditions so as to exclude some parties. There are certain
very mischievous tender clauses which actually are not inclusive in nature, they deliberately
create something to exclude competitive parties from the tender. That, is a problematic
situation.

So, tender conditions must be as inclusive as possible, giving wider participation as possible
to everyone concerned. And I think that is the tenders that will be least intervened by the

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courts of law, thus the courts have a tendency to actually direct what in the conditions have to
be laid down.

Now, the courts have very clearly said that we do not interfere in the technical parts, policy
decisions of the government. If the government requires certain kinds of technicalities, the
government is the best judge to do that. So the courts have also said that, however, wherever
their exclusions can be brought in, the courts have already very clearly laid down what are
the criteria for its implementation.

Actually, there is recently one case, this was about airport handling services. Interestingly,
the Airport Authority of India for airport handling services went in for a global tie-up. And
they did not give preference to MSMEs in India. So, the MSMEs actually challenged that
global tender. They said for airport management services is there a need for a global tender
and allow more competition from external market markets.

And when you offer global tenders to look the annual turnover that is required, definitely
raise up and want more turnover of these companies as well. So, very recently, in the airport
case, I think the courts did lay down that it is an exclusionary kind of a tender, it excludes
MSME, it excludes local companies. We say vocal for local, we say promote more of MSME
small scale industries in India, we say Make in India we say Atma Nirbhar Bharat.

So, unless you want to promote Indian companies, talking of promotion, protection of Indian
companies. And notice that in a lot of government tenders, 15 percent of tenders are reserved
for MSMEs to protect small scale industries. And here was a global tender that was actually
excluding them and taking them away from the competition. And interestingly, in airport
handling, for a lot of duration of time, these were the companies that were involved. They are
small scale companies and they can actually do those business in tire 2, tire 3s kind of
airports and cities.

Why call for global tender to such kinds of cities, airport handling services, because the
traffic is pretty low in some of these cities. So local companies should have been given the
opportunity, they should have been given priority. And the Airport Authority unfortunately
did not do that. Was an AAI issue, let’s put in that case.

So tender conditions have to be very carefully drafted. And I think it is a matter of public
policy, and how they can be actually brought into consideration. Coming to the second most
important challenge of a PPP whether PPP is a state under Article 12 of Constitution. These

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projects were state till they were transferred into PPP. These were all state under Article 12,
they were unable to grid jurisdiction, under Article 32 of the Constitution and Article 226 of
the Constitution.

Now that to make a PPP, it is like putting it at an arm's length distance. It was public, but
now, I put it into the private. So it is an arm's length distance. And being at arm's length
distance, can we consider this to be or can we continue to be straight under Article 12, which
means, then, a BIAL in which 74 percent is the private, will be answerable under Article 226
before High Court for violation of fundamental rights or for the violation of any legal right.

At least when it is a state, have to follow all the principles of state, procurement and state
recruitment or even state policies as the case may be, which may be applicable to any
government sector rather than those advantages that are there in the private sector. So that is
the real broader question. And that question was answered by the court, in this case for the
Flamingo Duty Free versus Bombay International High Court, MIAL, Mumbai International
Airport Limited.

Flamingo Duty Free Shopping versus MIAL, it was a Bombay High Court decision that came
in 2008. And there is a parallel case with the BIAL that was decided by the Karnataka High
Court as well. And both these high courts very clearly said this would be considered as the
instrumentalities of the state. Though the state just has 26 percent, they would still be
continued to be held as the instrumentalities of state Under Article 12, and they can be held
accountable under the jurisdiction of the high court, that is something that the courts have
very clearly laid out.

Also, whether provisions of exclusivity given under the concession agreements can be
considered as anti-competent, because giving them exclusive jurisdiction. The courts have
very clearly said that look, when you are giving an exclusive right to one person to say do
something, it could be the highways, it could be the ports, it could be the airport.

It is not necessarily to be anti-competitive, it just to protect its investment, it is just to

promote the project, which should have been promoted by the public, but which is now done

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with the three people. So it is not considered anti-competitive, though it looks to be so, it is
just trying to protect that kind of an investment or opportunity that was created.

So, that some return on investment is assured. Otherwise, if you open up the sector, and even
if the government, say, after doing one PPP group with an A contractor, suddenly it does
another PPP with B contractors, then to that extent it will affect the market condition, it will
affect the public policy as well. And hence, these kinds of exclusivity provisions are not
considered to be anti-competent.

In the DIAL case, this is the Delhi International Airport limited case, it is a brownfield
project, both Bombay and Delhi were actually and notice that the employees of DIAL went to
the court, they went to the Supreme Court. And they were looking at their benefits, because
once it is transferred to the PPP, what benefits they can continue to have, I have already
addressed this kind of a due diligence that could be required, what kind of promises are made
to the unions and employees before such projects are taken over.

They will become a very critical part of the whole sector. And you will notice that the DIAL
case was an important case, which has helped a transfer other airport businesses in other
cities as well. And that I think has been a great way in which you can ensure the success and
proper implementation of the project.

Of course, dispute resolution becomes critical. These are long term contracts dispute
resolution has to be addressed in a win-win situation. It is not about pointing faults; it is not
about pointing mistakes. It is not about finding breach in contracts. Even if there are some
breaches, those gaps have to be filled, a long term plan has to be in place.

I think submissions are there on the table, there has to be some give and take. And the Dabhol
Power Corporation case is a wonderful example of resolution of disputes. We always say
arbitration is an attempt to resolve disputes. In an outer court settlement, in a formal
mechanism, we call it alternate dispute resolution. The term resolution is critical and
important for PPP projects to come into existence.

And in the Dabhol case, notice how that resolution plan was clearly laid down for the
Maharashtra State Electricity Board to get involved both equally, and in the management

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structure of Dabhol Power Corporation to make it a successful project, to make it an
operationalized project. Otherwise, it would have been kind of, it could have been a
monumental heritage kind of a piece with no purpose whatsoever. And I think the
government did very good in bringing about a resolution plan in the Dabhol case. And I think
the same goes to all PPP projects as well.

So these are some just to give an idea about the issues and challenges in the public-private
projects, and where such issues can be resolved and what kind of policies have been laid
down. And what interventions were called in by the court of law is something that can always
take note and consideration of.

Now, to conclude this slide, two issues can always take into consideration. One is whether the
PPP projects are going to be audited by the Comptroller and Auditor General of India, that is
CAG. Now with 26 percent of shareholders, all the PPP projects will be audited by the CAG.
From the stage of the time when the tenders were floated to the time the profits are being
shared or the accounts have been submitted.

So CAG will have the right to audit and account this project. So there is no problem about the
kind of control in terms of account, finance and budget that is required from this public or the
from the state or from the citizen’s perspective. This is one part of the advantage. At the same
time, maybe from the private player, it could be disadvantages, but it is a very clear
advantage in terms of control of public over private.

Secondly is PPP a state? The other challenge that did come by is whether Right to
Information Act will apply to the PPP projects. The RTI Act, 2005, friends, is something that
is applicable to all public authorities. And please note, look at Section 2H of the Right to
Information Act which defines public authorities, it says any non-governmental organization
which is substantially financed by the government is also covered under the Right to
Information Act.

Now, substantial finance means what? Can it be land at the subsidized price? It could be. Can
it be equity of 26 percent? It could be. So the courts and the information Commissions have
very clearly gone on to hold that the PPP projects can be covered under the Right to
Information Act. And they are supposed to give information under the RTI Act as well, so as
to ensure transparency and accountability so a concerned citizen can also use RTI to get
information about the project or the PPP project.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhatt
Professor of Law
National Law School of India University
Public Private Partnerships: Law and Policy in India - Part 04

(Refer to Slide Time: 00:16)

PPP Contractual Clauses

So, coming to the last leg of understanding public-private partnership contracts, we will try
and take three kinds of clauses, which are critical to such kinds of contracts. Of course, the
discussion of all clauses is impossible. But, as an example, we can take three clauses which
are normally there in a public- private partnership contract. One of the first and most
interesting clauses that do exist in a PPP contract is that the government declares and agrees
that it will not claim sovereign immunity in this contract.

Sovereign immunity, is a great kind of defense, it is an immunity that is generally provided to

sovereign governments. Only governments are sovereign, and under sovereign immunity,
governments cannot be sued and they do not have tortious or civil liability. And hence, very
often than not in India, on the ground of whether the government is liable and responsible,
like any other civil contracting party, there have been lots of issues and challenges in this
country.

And we have decisions like the Kasturilal case, and several others, which have debated
whether the government can be sued and can the government be liable and responsible
equally as any other private contracting party can be. We note that in India through the legal
system, the Constitution developments, though article 300 says that a suit can be filed against

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the government, the question is not about the suit being filed. But the question is about the
extent and the content of liability of the government when it is sued, because, unfortunately,
in the past, the government has taken a lot of defenses and a lot of arguments have been put
across against imposition of government liability.

And very often than not, the government has escaped contractual performance and
contractual obligation, on the grounds that the sovereign public interest and public policy
concerns forced the government not to complete the contract or the contractual obligation.
So, the larger public interest defense is something that the governments have often taken as
sovereign powers and sovereign powers have no limits; sovereign power is a completely
absolute power.

And for anything interested in terms of public policy and public interest, the sovereign has
every right and every decision can be made in that kind of sovereign power, or what we call
the ultimate absolute power of the state to override any private civilian contractual obligation.
Considering India's history, the legal system, the legislative framework, it is a very well-
negotiated clause, where the government waives the right to claim sovereign immunity in
such contracts because it is no longer a sovereign asset, it is no longer a sovereign contract, it
is a PPP contract in which the private party rights and interests are involved and hence, unless
the private parties’ rights and interests are being discharged, the government cannot override
and take over this project, under the plea of sovereign immunity. It is important and critical
that you consider these infrastructure projects as commercial projects because the
government can definitely enter into commercial contracts.

They are not defence related projects and hence, this claim of sovereign immunity should not
be there. They are not something that the private parties cannot do, like running of highways,
airports and so on and so forth. So, it is not a sovereign function in any way. Sovereign
functions are legislative functions, the taxation functions, they can be defence, but running of
infrastructure, running of any of these commercial ports is not a sovereign function and hence
sovereign immunity does not exist to the government in this context. So, that is the
background, that is the purpose, that is how the clause is actually operationalized and viewed
and that makes this clause a very interesting one.

Second clause is the exclusive territorial and business operation clause or promise.
Interestingly, in Hyderabad and Bangalore, the PPP concession agreements are given
exclusive operational area of nearly 150 kilometers in diameter to the concessionaire which

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means that no other civilian airport will be allowed to operate within that 150 kilometers of
radius.

And the private player will have an assurance that the government will not establish another
competitor and will not enter into a contract to establish another airport. 150-kilometer
radius is quite a huge radius for your operation, it ensures your revenue, your profit
maximization and it also ensures that you will not have a competitor. But interestingly and
controversially, you will not have this competition for the next 30 years, that is a kind of
challenging atmosphere there.

Now, we have seen that very modern cities like New York or London have more than one
airport and these are definitely within 100 kilometers and 150 kilometer radius. It is
necessary because the traffic in one airport becomes unmanageable; we need to distribute the
traffic of the city as well because we cannot have everything concentrated in one area.

And 30 years is pretty huge a time, you will already notice that in cities like Bangalore and
Hyderabad, this kind of a clause is already a challenging one for many reasons, citizens want
at least some flights to take away from a closer airport, not from the airport which is around
50 kilometers away from the major city.

Also, you want competition in even the airport sector so that it can be competitive with rates
and services. And airlines can also distribute the traffic between the two airports that exist in
the city. Apart from this, the exclusive territorial clause becomes problematic to those kinds
of cities that are on the border of other states.

For example, Hyderabad, now, the 150 kilometers promise that is given to Hyderabad airport
also means that say Bidar, it is a city, small city, on the borders of Telangana and Karnataka
and it falls within that 150 kilometers radius and range of Hyderabad airport.

Now, you cannot probably have a civilian PPP kind of an airport. Right now, the Bidar
airport is an Air Force base strip that is used by commercial airlines. It is a small city, so
there are not many flights. But, just on a jurisprudential point, such clauses before we make
such a promise of exclusivity, one we have to revisit, one we have to think about.

In the Delhi airport, no such promises were made because it is an operation maintenance and
development airport and hence Delhi may get its second international airport very soon near
Noida, that is in Uttar Pradesh because Delhi has been surrounded by different other states.

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You will notice that there is Rajasthan, there is Haryana, there is UP and these states will
probably want to have an airport very close to Delhi as the second airport.

Anyway, that is not the complete discretion of the state government. It is a discretion that is
there with the central government and the central government will also have to divert traffic
in Delhi, Bombay, and some of these metropolitan cities as they are very crowded there right
now. The last interesting clause that we would just want to consider for our discussion in this
course, is the Renewal Clause.

Interestingly, the renewal clause or clauses are very clearly put in this contract because there
is a possibility of renewing the PPP for another 30 years. So if you want to renew it for
another 30 years, it is a possibility. And in case you are planning to do it as a PPP again, the
Right of First Refusal (ROFR) is the right of saying, ‘if I am not interested to continue or
renew, then you can give to someone else. If you intend to renew it at any point in time at the
30-year mark, then I should be given the first preference to continue as your preferred
partner’. That is how the renewal clauses are put in these contracts and, to some extent, they
are justified, because there is already an existing relationship, an existing contract, it is better
to continue with their existing partners rather than search for any new ones.

Plus, it also gives a kind of assurance to the private players that it is not a short-term business
relationship, it is a long-term business relationship; you are looking at long-term profits, and
it can go beyond 30 years and that is kind of one generation to another generation kind of
transformation of the infrastructure project. So, that renewal clause does exist and hence,
though the initial period of concession is mentioned, it can definitely be extended on
mutually convenient terms and conditions, however, the existing partners do get the first right
to run the airport. And interestingly, in the Bangalore case, you already have a private limited
company that is incorporated and hence continuation of the same makes sense. You do not
want a new incorporation and a new business partner and hence that is how the continuity
may go forward with. So these three clauses are just giving you some insight into the
concession agreement and the clauses that exist in a concession agreement.

They are unique in a PPP contract. They are generally not used in other forms of government
contracts. And hence, understanding them gives you a broader perspective of how the
negotiation processes in PPP take place, and how the contract is customized for such PPP
contracts.

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(Refer to Slide Time: 10:26)
ROFR in Government Contracts

In the right to first refusal in government contracts, there is a very interesting case called the
Gwalior Jhansi expressway case. It is a 2018 Supreme Court judgment. This is with respect to
the Gwalior Jhansi Expressway, where the concessionaire was able to complete only 62 per
cent of the work and he could not deploy machine and man to complete the remaining
amount of work. Interestingly, you will notice that most of these contracts have what we call
as the cost and risk clause, or the cost purchase clause.

The importance of the cost and risk clause is demonstrated here; which means now, if the
existing concessionary is unable to complete the work, then you go into what we call a
substituted performance, which means you get the performance done for somebody else.
Now, please note, substituted performance today is by the rule of law, it is under Section 20
of the Specific Relief Act, whether the clause exists or not, today, in these infrastructure
sectors, the government can actually get the work substituted by someone else.

That is a very settled position as we speak forward with. The constant risk project clause, or
what we call, the risk and cost purchase clause sometimes, it does give the government the
leverage to get this remaining part of the work completed from someone else and the
difference in the cost can be probably taken from the first concessionaire or the first
contractor.

Now, why this clause exists? It exists so that you do not have to issue a notice of termination,
then consider breach, then sue for damages and then, later on, find someone else to complete

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the work. Right now, because the concessionaire is not showing any intention of completing
the work, under this clause. You can give it to someone else, you do not need his permission
or guideline to do it.

And the difference that you have to pay to the second party or substituted performer to come
and complete the work, you can recover as damages from the first party. So, the contract
itself has a plan B in place, because plan A is for the concessionaire to complete. Many times,
there are risks. The contractor may not be in a position to complete, he may probably do it
intentionally or may not do it intentionally; it all depends upon who the contractor is.

Hence, a breach is something that you can always anticipate, and these are critical
infrastructure projects. So, they affect the citizen approach, they affect the political scenario.
So, you have to go to plan B and plan B is to have such a clause called the cost and risk
clause, and the risk of non-completion and the cost of getting it completed by another person
has to be borne by the first party. That is how that clause operates.

Now, in the Gwalior Jhansi Expressway case, the concessionaire went to the court and he
said that the work has to be given to a tender, so that plan B will come into place. And he had
the right of first refusal clause in his contract. So, now right to first refusal clause usually
operates only after completion of the work and in terms of extension. How does the right of
first refusal clause apply to a person who has just completed 62 per cent of the work?

Can he take part in the second tender in which you are going to give it to Plan B or the
substituted performer? Generally, unless you are blacklisted or debarred, then he should be
allowed to participate. But suppose the National Highways Authority decides to float a
tender, then the first party of the L1 or the person who had left with 62 per cent work, that is
Gwalior Jhansi Expressway company, have to take part in the tender.

And in that tender if they do not take part, how can the right to first refusal clause come into
existence? So, this was a technicality that was involved in this contract. So, the court held
that unless the party had participated in the tender for the remaining work based on the
contractual clause in the agreement, the right of first refusal cannot be granted to the
concessionaire. So, if you want to exercise the right of first refusal, you must take part in the
second tender in the second call and then try and invoke the right of first refusal.

However, in this case, more than the fact that the concessionaire could take part in the tender
and invoke the right of first refusal clause, the point here is, if you are seeking equity from

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the court of law, the principle rule I have always said is that you must do equally. If you have
not completed the project or the work and you have just completed 62 per cent of the work
and you do not have the man and machine resources to complete the work, how can you take
part in the second render to come and establish yourself and say, I will complete the
remaining part of the work? That is not possible.

So, to some extent, the courts should here very clearly say that in case you want to invoke
any right of first refusal clause, you must take part in the second process of finding a
substitute performer, you must complete the tender requirements and only then, if you wish to
match to the price of the substituted performer and you want to take part in it, you could
possibly try and do the same.

So, the right of first refusal clause is not an automatic clause in a government contract. You
have to fulfill the process that is established for invoking the right of first refusal, which
means taking part in the tender or call for request for proposal or negotiation, and then
wherever that bid or the winning match is announced, you will then get the rights to match it.
If you cannot match it, then it will be given to the new substituted performer.

Otherwise, under the ROFR clause, you can be given the right to match to that winning bid,
and you will probably be given the contract. That is how the Court has held on the right of
first refusal in a PPP government contract. This is quite substantial in terms of the discussion
that we have taken so far under the Public Private Partnership process.

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(Refer to Slide Time: 16:30)
PPP/EPC

And finally, we will conclude by looking at PPP vs EPC. EPC is the Engineering
Procurement and Construction Contract. This is kind of a contract now that has become very
popular in the highway sector because there are PPPs that have not been profitable. And EPC
is something that has been insisted by the contractors.

So, why EPC and not PPP? Because EPC has certain distinct advantages as compared to PPP.
The first thing that you will notice is that for the private contractor, EPC mode is the most
preferred mode. The reason is, in EPC mode, the government secures the funding for the
construction of the project. In the PPP mode, the entire investment has to be borne by the
government.

So, the government can do it by floating government bonds or by starting toll collection even
prior to the construction or post-construction. But that is what the government will have to
do, so the government funds the project and the government pays the upfront money to the
project proponent. And with that money, the project proponent can easily complete the work
on time that is expected.

So, he will have to design, he will have to procure the material and he will have to construct.
And he will have to also take the responsibility of getting all the clearances, and permissions;
he will have to look at environmental, social and other problems in the project, including
litigation. So that is also something that he loves to take care of, he will have to complete the

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work in time and with that kind of money that he is paid by the government, he will
obviously be able to complete it.

However, once this project is completed, the project may be given to the government entirely.
But, the toll is something that he would help the government to actually collect. So that is
how, probably in the EPC mode the government gets a contractor to complete the entire work
right from design to build, to operate, and collect toll or whatever it is. And to that extent, the
government has to just shell out the initial money. But the government will be helped by the
private party in the collection of tolls, in getting that revenue.

And the private party will continue to even maintain the contractual obligations during that
stage as well. Of course, we have the Hybrid Annuity Model that was introduced in 2006.
The annuity model is an annual payment model. It is kind of a combination of PPP and EPC.
So, these are structural, basic foundational changes that have been introduced so that private
contractors are compensated very immediately at the completion of the project at one time, so
he gets his money, he can put that money into other projects as well.

And then the government which can actually cushion out that kind of thousands of crores of
rupees, they can probably get that recovery through the toll money. And then for all the
expenses, the deductions can be given to the contractor. Again, there will be a maintenance
cost of the roads and those expenses also can be given to the contractor. So, this is like very
interesting combination of PPP, but on a different style, where the initial capital or initial
project cost is paid by the government and the entire revenue is something that the
government will have to take back through the total expenses.

So, that is EPC model for you. And EPC model is very advantageous to the contractor and
hence, that is something that is preferred in the highway sector because, unfortunately in the
last two decades, the hybrid sector has seen contractors suffer huge amount of losses for the
kind of money and investment and expenses they have incurred in building those highway
projects.

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(Refer to Slide Time: 20:14)
Project Performance

So, let us conclude the discussion on public private partnership mode and you will notice
finally that there are 10 factors that are identified for project performance in a PPP structure.
There is preconstruction time, and there is construction and total time is taken into
consideration, the speed of construction is always very important, unique cost of the building,
time overruns and risks has to be always factored in and cost overruns, client satisfaction,
and then quality. So, these are some of the factors that are measured to check project
performance by a private contractor. And there are parameters and criteria that is fixed on
each of these 10 factors to test whether project performance has been satisfactory or not.

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 Advanced Contracts, Tendering and Public Procurement
Dr. Madhubanti Sadhya
Assistant Professor of Law
National Law School of India University
Government Contracts-Part 01: Introduction to Government Contracts

Hello, my name is Madhubanti Sadhya and I currently teach at the National Law School of
India University, Bangalore. In this segment, I would be introducing you to government
contracts. This is a part of the NPTEL course, on advanced contracts, tendering and public
procurement offered by Professor Dr. Sairam Bhatt, Professor of Law and coordinator of
CEERA, NLSIU. Now together we will look at what are government contracts, what are the
different parameters that need to be borne in mind before government contracts can be
entered into, and what are the different prerequisites of entering into a government contract.

With the aid of case laws, we will also see what happens if these criteria are not met. We will
also try and see what the consequences of a breach of a government contract are. Now, if we
look at government contracts, the most important entity in government contracts is
necessarily the government. Now the modern state has expanded its role beyond the
customary role of performing sovereign duties. That is to say, it is no longer limited to just
governance of its territory, or the maintenance of law and order.

The modern state today is a key player in the commercial arena, and it engages in different
activities, such as trade and commerce, either as a procurer or a supplier of goods and
services. It also adopts a larger societal role in the performance of public duties or also as the
protector of public resources, such as natural resources. The government is considered to be
the trustee of natural resources. In doing so, the government is required to enter into a diverse
range of contracts and these contracts are entered into not only with individual entities but
also with business enterprises.

This brings us to the most obvious question, and that is whether the government as a
contracting party should be treated any differently than a private contracting party. If we look
at this from the perspective of contract law, the government should not be treated any
differently than a private party.

But considering the important role that the government discharges in so far as the protector or
the guardian of public resources, or as a body which is responsible to fulfill a number of
public duties, the Constitution very clearly delineates the powers and responsibilities of the
government in so far as its role in contracting or its power in entering into different kinds of

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contracts concerned. That is to say, the Indian Constitution clearly circumscribes the role that
the government as a contracting party can play.

(Refer to Slide Time: 03:39)

What are Government Contracts?

Now, let us go back to the basics and ask ourselves, what are government contracts? It is any
contract where at least one party is the government. It can either be the central or the state
government or both. The contract must fulfill all the basic requirements of a valid contract
under the Indian Contract Act of 1872.

Now, we will see in the subsequent slides, that there are certain specific constitutional
provisions that apply to any contract that a government wants to enter into. But irrespective
of the constitutional provisions, all government contracts have to adhere to the basic
prerequisites that have been laid down under the Indian Contract Act for entering into a valid
contract.

What are these requirements? That is, first of all, there has to be an offer, there has to be an
acceptance of that offer, there must be consideration involved, the capacity to contract, the
free consent of the parties, the legality of the object and consideration. In government
contracts offer and acceptance are generally taken in the form of tenders which are floated,
and bids which are submitted in response to those tenders, and bids which become successful
are usually ones that are accepted and then there is a binding contract that is entered into.

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There must be a consideration. The parties that enter into a contract with the government
must have the capacity to contract. That is to say, it must be done by an individual who is of
sound mind, and has attained the age of majority; in the case of institutions or business
enterprises, they must not have been blacklisted, or they must fulfill all the other criteria that
have been laid down by the government which is entering into the contract.

The contract must be entered into, with the free consent of the parties. Just because it is a
contract that the government is entering into, there cannot be any undue influence or
coercion, or any kind of fraud that is involved. The very fact that the government discharges
public functions, and most of the contracts that the government enters into, are in pursuance
of the public duty that it discharges, government contracts call for a very high level of
transparency.

And this makes it all the more important to ensure that there is no force or undue influence or
anything that vitiates the free consent of the parties, is involved. And ultimately, the object
and consideration of entering into a government contract must be legal. No government
contract can be entered into for any illegal object or consideration. So these are the basics of a
government contract.

(Refer to Slide Time: 06:59)

From where does the government get the power to enter into contracts?

A fundamental question from the perspective of contract law relates to the capacity of
persons who enter into contracts. Now, when we talk about persons, we do not only mean
natural persons but also juristic persons like corporations or companies, including the

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government. Now, as per section 11 of the Indian Contract Act, a natural person is free to
enter into a contract or rather has the capacity to enter into a contract, if he has attained the
age of majority, according to the law to which he is subject, if he is of sound mind, and if he
is not disqualified from contracting under any other law to which he is subject.

So, this relates to a natural person. Now, what about the government? From where does the
government get the power or the capacity to enter into contracts? The answer to this question
lies in Article 298 of the Indian constitution. Now, let us see what Article 298 says. The
executive power of the union and each State shall extend to the carrying on of any trade or
business and to the acquisition, holding and disposal of property, and the making of contracts
for any purpose.

So, when we look at the three organs of the government, the executive, the legislature and the
judiciary. So, the legislature is given the task of drafting and enacting legislations, the
executive has to take necessary steps to enforce those legislations and the judiciary has the
power to adjudicate on matters that come before it, which more or less relate to these
legislations that have been drafted by the legislature or have been executed by the executive.

So, when we look at the power of contracting or the power of entering into contracts, it seems
quite logical that it is the executive which has been given the power to make contracts. Now,
it would be extremely inconvenient if the executive had to wait for legislative approval every
time it wanted to enter into a contract. Because considering the diverse range of activities that
the executive engages in, it would be extremely cumbersome, that the executive would have
to wait for a law to be enacted and only then it would get the power to enter into a contract.

Hence the constitutional scheme is such that it has given the executive the power to enter into
contracts for the purposes of carrying on trade and otherwise. But there are certain
restrictions on the power of the executive to enter into the contract and these restrictions are
laid down under the proviso to article 298. There are two provisos-proviso A and proviso B.

The essence of these provisos is basically that, whenever the union government or a state
government is trying to enter into a contract, it would first have to see that the subject matter
on which it is entering into a contract is a matter that features in the Union list or the State
list. Now, why are we talking about these lists? We know that Schedule 7 of the Indian
Constitution distributes powers of enacting laws between the central and the state
governments.

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So, if I have to explain this with the help of an example, suppose in a state, there is a law that
has been drafted by the state government on water, because water is a state subject. Now the
central government wants to enter into a contract on something to do with the water in that
particular state. The power of the state government to enter into a contract on a matter that
relates to water would be subject to the legislation that the state government has already
enacted on the subject. So, it is only in this respect, that the power of the Union government
would be curtailed.

Similarly, if a state government wants to enter into a contract on a matter that pertains to the
Union list or on a matter where there is already a central legislation in place, the power of the
state government to enter into the contract would be restricted to such an extent, insofar as
the law that has been drafted on the central matter relates. So, this is in essence, defines or
talks about the provision from where the government gets the power or the capacity to enter
into contracts. So, the power lies or the source of this power to enter into contract lies in
Article 298 of the Indian constitution.

(Refer to Slide Time: 12:37)

Are contracts with PSEs Government Contracts?

Before we delve into the finer nuances of government contracts, let us first try and understand
a few other important aspects. Are contracts with public sector enterprises government
contracts? Now, what do I mean by public sector enterprises? PSEs or PSUs that are public
sector undertakings are companies or corporations, which are funded or controlled by the

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government. To give an example, it could be SAIL-Steel Authority of India Limited or HAL-
Hindustan Aeronautics Limited or Bharat Heavy Electricals Limited.

So, these are different PSUs and or public sector enterprises, so the question is whether any
contract that these enterprises enter into would be considered to be a government contractor
not. To answer that question, we need to first see whether PSEs are State under Article 12 of
the Constitution. The answer is yes, they fall under ‘other authorities under Article 12. So,
what could be the implication of being qualified as state? ‘

So, what exactly happens if a public sector undertaking is understood as State under Article
12 and if they enter into a government contract, so, what could be the implications of it? The
implication is that there is public accountability in entering and performing the contract. So,
these contracts would not be considered as any contract that two private entities enter into,
because here there is a public purpose or a public good that is involved.

So, there is public accountability. By this, I mean that these entities would be answerable to
the public, just like the state, or just like the government, when they are performing their
obligations under any government contract that they have entered into. So, what does public
accountability with regard to government contracts mean?

So, by public accountability, what we generally mean is that the actions that these public
sector undertakings take under the contracts or the government contracts that they enter into
are amenable to judicial review before the High Court or the Supreme Court for violation of
fundamental rights.

To again, give you an example here, suppose any contract or government contract that the
public sector undertakings have entered into, is resulting in the violation of say the right to
equality, or the right to life, so, in these circumstances, these government contracts can be
placed before the High Court or the Supreme Court for judicial review, under Articles 32,
226 or 227 of the constitution.

So therefore, contracts with public sector undertakings are government contracts, they would
be answerable to the public in performing their obligations and they could also be amenable
to judicial review before the Supreme Court or the High Court if any action that they take
under these government contracts result in the violation of fundamental rights of the citizens
or group of citizens in the country.

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(Refer to Slide Time: 16:29)
Formation of Government Contracts

Juristic persons such as the state, the government or a corporation do not act on their own. So,
they necessarily act through natural persons. In terms of contract formation, a crucial
question that needs to be answered is under what circumstances can a natural person, such as
a government official bind the government and a third party into a contractual obligation so
as to create contractual rights, to bind the government and the third party?

This would essentially depend upon whether the government official who was acting on
behalf of the government was even authorized to enter into the contract, to create binding
obligations and rights with a particular third party. Under these circumstances, what we need
to look at is Article 299 of the Constitution because Article 299, prescribes a set of
formalities that need to be complied with before a government contract can be entered into so
as to ensure that the government is not made liable for any kind of contract that it did not
authorize in the first place.

Since the government acts through natural persons in the form of officials, it has to lay down
certain criteria to ensure that it does not become responsible for unauthorized acts of these
officials. And this is where Article 299 of the Constitution becomes relevant. Article 299
essentially talks about contracts.

And it says that all contracts made in the exercise of the executed power of the union, or of a
state shall be expressed to be made by the President, or by the governor of the state, as the
case may be, and all such contracts and all assurances of property, made in the exercise of

469
that power, shall be executed on behalf of the President or the Governor, by such persons and
in such manner, as he may direct or otherwise.

So, all government contracts have to be made in exercise of the executive power of the Union
or of the state, they have to be made by the President or by the Governor of the state as the
case may be. Neither the President, nor the Governor shall be personally liable in respect of
any contract or assurance made or executed for the purposes of this constitution, or for the
purposes of any enactment relating to the Government of India in force, nor shall any person
making or executing any such contract or assurance on behalf of any of them, be personally
liable in respect thereof.

So, from Article 299, we gather that these contracts or the government contracts have to be
made by the President or by the governor or by any other person who is acting on their
behalf. But interestingly, Clause 2 of Article 299 clearly lays now that neither the president
nor the governor or any other person who is executing a contract on behalf of Governor or the
President is personally liable.

So, it is obviously the office of the president or the Office of the Governor, that is liable, but
not them as individual entities or as individual persons. So, Article 299 lays down certain
fundamental parameters or certain fundamental criteria for the formation of government
contracts that we would be dealing with in greater detail in the subsequent slides.

(Refer to Slide Time: 20:51)

Pre-requisites of a Government Contract

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To reiterate the prerequisites of a government contract, or the conditions that need to be
fulfilled for a contract to be entered into by the union or a state, as laid down under Article
299 of the Constitution are: that these contracts must be expressed to be made by the
President or by the Governor of the state, as the case may be, the contracts must be executed
and such execution must be on behalf of the President or by the Governor, by such persons
and in the manner as they may direct.

In the subsequent slides, with the aid of different judicial decisions, we will try and see what
the finer aspects of Article 299 are and how Article 299 has been interpreted. So we will be
learning a lot more about the formation of government contracts with the help of a few case
laws in the subsequent slides.

(Refer to Slide Time: 22:02)

The courts have generally taken a view that the provisions of Article 299 (1) of the
Constitution are based on public policy, and for the protection of the general public. In a
number of cases, the Supreme Court has adopted a very strict view of Article 299 (1), that is
to say, the Supreme Court has time and again held that the prerequisites laid down under
Article 299 (1) are mandatory and not directory and they cannot be dispensed with. So, if
there is any contract that is entered into between the government and another third party,
where the conditions laid down under Article 299 (1) are not met, then there is no contract to
be enforced in the first place.

So that is to say, the contract is null and void. Such a contract cannot be enforced either by
the government, nor can the government be held liable to compensate the third party on the

471
basis of such a contract. So, Article 299 (1) is mandatory, and all conditions laid down under
it have to be complied with. To explain this further, I can give you the example of this case,
State of West Bengal v. B.K. Mondal and Sons It was decided in 1962.

So, in this case, the respondents were a firm of building contractors. They were doing
construction work for the provincial government and they had done certain additional
construction work on the request of officials of the provincial government for which they had
not been paid. So, they had definitely made a claim before the government and the provincial
government had denied the claim.

So, their claim was on the basis of the contract that they had entered into between the officers
and themselves. And secondly, they had said that even if they leave the contract aside, they
said that their claim fell under Section 50 of the Indian Contract Act. So, they had said that
they had lawfully done some construction work. There was no intention to do the work
gratuitously. And since they had done the work, and the officials had enjoyed the work that
they had done, they were entitled to be compensated.

The provincial government denied this claim. To give you further details of this case, it was
in February 1944, so this is a case which predates independence and the drafting of the Indian
constitution. What was in operation back then was the Government of India Act of 1935,
which is pari materia to the Indian constitution, particularly section 175 of the Government of
India Act.

So, the respondents at that time had mentioned that in February of 1944, they had offered to
put up certain temporary storage godowns in Arambag, in the district of Hooghly for the use
of the civil supplies department of the state of Bengal. And this offer was taken up by the
department by a letter, and the work was done and eventually, the payment for this work was
also done in the month of July 1944.

In the meantime, sometime in the month of April, there was a similar request, which was
made by the Sub Divisional Officer of Arambag to construct a kutcha road, a guard room, a
storage room, a kitchen, a clerk office for the Department of Civil supplies. The respondents,
B.K. Mondal and Sons, alleged that the additional deputy director of civil supplies had visited
Arambag and they had instructed the constructors to go ahead with the construction.

So, they had gone ahead and done this work. Similarly, a few days down the line, there was
another similar request, which was made by the sub-divisional officer to come up with

472
another storage shed and that work was also completed. And the outstanding bills for these
two subsequent works, that is the second and the third work were not paid. And when this
claim was made, the provincial government denied it.

And they said that the request on the basis of which B.K. Mondal and Sons had gone ahead
and made these constructions were, unauthorized. So, the provincial government defended
itself by stating that it had not authorized its officers to go ahead and make these
constructions. So, there was no authorization given to them. And since there was more
authorization that was given to them, there is no contract under Section 175 (3) of the
Government of India Act, as it then existed.

So, the entire issue of this case was whether Article 299 is a directory provision, or is it a
mandatory provision, the court ruled that the word shall, which is used in making the
provision is intended to make the provision itself obligatory, and not directory. So, it is not
something that the government may or may not do, it is a mandatory provision. The
Parliament intended that the state should not be burdened with liability based on unauthorized
contracts. And the plain object of the provision, therefore, is to save the state from spurious
claims made on the strength of such unauthorized contracts.

So, if the subsequent construction orders that were given to B.K. Mondal and Sons were
authorized by the provincial government, then there would not have been a problem. But the
provincial government denied that and they said that look, the sub-divisional Officer of
Arambag and their additional and Deputy officers, had just gone ahead and given this
construction order, but we had not authorized it and hence, there is no contract and hence, we
cannot be asked to compensate B.K. Mondal and Sons. So, from this case, we learn that there
is no valid contract, if the prerequisites of Article 299 (1) are not met.

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(Refer to Slide Time: 29:10)
There can be no Implied or Oral Government Contract

To reiterate, as per Article 299 (1) of the Indian constitution, a contract made in the exercise
of the executive power of the Union or the state must necessarily fulfill three mandatory
conditions. First, it must be expressed to be made by the President or the governor of the state
as the case may be. Second, it must be executed on behalf of the President or the governor.
And third, it must be executed by such person and in such manner as the President or the
Governor may direct or authorize.

So, one word that appears repeatedly in Article 299 (1) is the word ‘executed’. So, how
exactly has the court interpreted the word executed? So, what do we mean by an executed
contract? We can try to answer this question through this case law that is State of MP v. K.P.
Chowdhury is whether there can be an implied or an oral government contract. We will be
taking the help of this case because in this particular case, a notice was issued by the
Divisional Forest Officer of Jabalpur division for auction of various contracts in July 1959.

So, these contracts all pertained to contracts related to forest and timber. So, in this particular
auction, Mr. K.P. Chowdhury was the successful bidder because he had the highest bid, and
he managed to secure two contracts. So, because the divisional forest officer of Jabalpur
division was not in a position or rather he was not authorized to enter into a contract of the
amount that Mr. K.P. Chowdhury had actually bid.

So, the contract amount was quite high, and the divisional forest officer was not authorized to
accept that contract, the contract had to be signed by the Chief Conservator of Forest from the

474
side of the government. But as far as Mr. K.P. Chowdhury was concerned, he had already
signed the contract form and he also ensured that there was a surety who signed the security
bond.

So, he did his part of the transaction, and this contract form of the auction form was sent to
the Chief Conservator of Forest. But before the Chief Conservator of Forest could put in his
signature and send back the contract form, Mr. K.P. Chowdhury raised certain objections
with respect to the markings on the trees that had been advertised in the auction. And the
answer that the Divisional Forest Officer gave him, did not satisfy him.

And hence, since his dispute was not settled, he did not pay up the first installment of the
contract. So eventually, he failed to pay up. And because he failed to pay up the Chief
Conservator of Forest cancelled his contract. On his contract being cancelled, he was asked to
forfeit the earnest money deposit, which was already a part of this transaction and he was also
informed that his contracts would be re-auctioned.

So eventually, his contracts were re-auctioned and whatever was the balance amount of the
contract after it had been re-auctioned, were to the tune of around five lakh rupees was to be
paid up by Mr. K.P. Chowdhury. So, Mr. K.P. Chowdhury again failed to pay up this amount.
So, the divisional forest officer of Jabalpur directed the Tehsildar of Jabalpur division to
recover this money from Mr. K.P. Chowdhury as arrears of land revenue.

So, now the question was, whether or not there was an implied contract resulting from the
appellants, that is Mr. K.P. Chowdhury, accepting the conditions of the auction, and whether
or not such an implied contract was hit by Article 299 (1) of the constitution. So, the ruling of
the Supreme Court was that there can be no implied contract between the government and
another person; it must be expressed in writing.

So, whenever the word executed appears, what the government basically, rather what the
supreme court said, is that executed does not necessarily mean an oral or an implied contract,
but it has to be expressed in writing. So since there was no contract between K.P. Chowdhury
and the government before the bid of the auction, nor was there a contract between him and
the government, after the auction was over, there could not have been a binding contract as
for Article 299 (1) of the Constitution and since there was no valid binding contract, as per
Article 299 (1), there could not have been any question of recovering this money as arrears of
land revenue.

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So, Mr. K.P. Chaudhary was relieved of this requirement of having to pay up the sum of
rupees five lakh as arrears of land revenue, because the court ruled that there was no contract
in the first place and since there was no contract, there could not have been any obligations
that flowed from it. So, from this particular case, we learn that there can be no implied or oral
government contract. The word executed implies that there has to be an expressed contract,
which is produced in writing.

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 Advanced Contracts, Tendering and Public Procurement
Dr. Madhubanti Sadhya
Assistant Professor of Law
National Law School of India University
Government Contracts-Part 02

(Refer to Slide Time: 00:15)

Should the contract be executed through a Formal Document?

In the previous case that we discussed, State of MP v. KP Chowdhury, we learned that the
term executed in Article 299 (1) specifically means that a government contract must be
expressed in writing, but should the contract be executed in the form of a formal document?
So, is there any particular form that the contract should adhere to? We will try and answer
this question with the help of this case, Union of India v. A.L. Rallia Ram. This was decided
in 1963 by the Supreme Court.

So, the case dates back to 1946, when the chief director of purchases, the Food Department,
Government of India, invited tender for purchasing war, surplus American cigarettes. So,
whatever was there leftover as a result of a surplus was auctioned out. So, the respondent
Rallia Ram, submitted a tender offer to purchase the entire stock. So, the tender was accepted
by a letter signed by the Chief Director, which was enclosed with a form containing the
general conditions of the contract, including a clause of arbitration.

This tender was accepted via a letter and the letter had another form, which had the general
terms and conditions of the contract, including an arbitration clause. Rallia Ram took delivery
of nearly 30 lakh packets of American cigarettes and on inspection, he found that some were

477
unfit for use and the government agreed to cancel the contract with respect to the undelivered
packets. Rallia Ram accepted, but he also reserved the right to claim incidental charges; so,
anything that he could have incurred as a result of this contract. When the matter went to
arbitration Rallia Ram was awarded damages for loss suffered, and also the other incidental
charges that he had incurred. And the government claimed that the arbitration award was not
binding, as there was no valid arbitration agreement in the first place. The question before the
Supreme Court was whether the letter of acceptance of tender which was signed by the
Director of Purchase could amount to a valid execution of a binding contract and if so,
whether there was a valid arbitration agreement.

The court ruled that Article 299, which resembles Section 175 of the Government of India
Act, does not require that a formal document executed on behalf of the dominion of India and
the other contracting party should be executed. A valid contract may result from
correspondence. So any kind of correspondence that happens between a government-
authorized official and the party which is entering into the contract with the government.

And if the requisite conditions prescribed therein are fulfilled, the correspondence between
the parties ultimately resulting in the acceptance note, in our judgment, amounts to a contract
expressed to be made by the government. The Supreme Court ultimately ruled that since
there was a valid contract, there was a valid arbitration agreement, and the government could
not shirk its responsibilities of being bound by, the arbitration agreement.

(Refer to Slide Time: 04:36)

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The observation of Justice Bose is particularly relevant in the context of our discussion, and
he noted that: “it would, in our opinion, be disastrous to hold that the hundreds of government
officers who have daily to enter into a variety of contracts often of a petty nature and
sometimes in an emergency cannot contract through correspondence and that every petty
contract must be affected by a ponderous legal document couched in a particular form…”

In the absence of any specific direction by the Governor General, prescribing the manner or
mode of entering into contracts, a valid contract may result from the correspondence between
the parties. So, through this case, what we learn is that the emphasis of the Supreme Court
has been more on the content of the contract and the form of the contract.

Justice Bose has very rightly observed that, if every time a government contract has to be
entered into, all the legal formalities of a particular form would have to be adhered to, it
could lead to a lot of cumbersome formalities that would have to be abided by, and this in a
way would lead to a loss of valuable time of the government in fulfilling its public functions.
So, the emphasis here has been more on the content of the contract, the purpose for which the
contract is being entered into and not so much on the form in which the contract is being
entered into.

(Refer to Slide Time: 06:37)

The contract must be executed by authorized person

We have learned that an important requirement of a government contract is that the contract
must be executed by a person and in such manner, as has been authorized by the president or
the governor of the state, as the case may be. So, with the help of two cases, we will try and

479
see how exactly this authorization is done or rather, in what manner is a particular official
authorized to act on behalf of the President or the governor.

The first case that we will be looking at is Seth Bikhraj Jaipuria vs Union of India. In this
particular case, certain contracts were entered into between the government and the firm of
Seth Bikhraj. No specific authority had been conferred on the divisional superintendent of the
East India Railway, to enter into such contracts. And in pursuance of the contract, Seth
Bikhraj’s firm had basically supplied a large quantity of food grains and this was accepted by
the railway administration.

But after some time, the railway administration refused to take delivery of the goods. And it
was contended by the government that the contract was not in accordance with the provisions
of Section 175 (3) of the Government of India Act which is basically similar to Article 299 of
the Indian constitution, and therefore it was not valid and binding on the government. The
ruling of the Supreme Court was that it appreciated the evidence and held that the divisional
superintendent acting under the authority that was granted to him could enter into contracts.

And it was not necessary that such authority could be given only by rules, expressly framed
or by formal notifications, issued on that behalf. The other case is that of State of Bihar v.
Messrs Karam Chand Thapar and Brothers which was decided in 1962, the same year as the
previous case. So basically, the plaintiff had entered into a contract with the government of
Bihar for the construction of an aerodrome, and other work.

After some work, a dispute arose with regard to the payment of certain bills, and it was
ultimately agreed to refer the matter for arbitration. So, the agreement was expressed to have
been made in the name of the governor and was signed by the executive engineer. After the
award was made, basically after the arbitration award was made, the government contended
before the civil court that the Executive Engineer was not a person who was authorized to
enter into a contract under the notification issued by the government, and therefore the
agreement was void.

The matter went up in appeal before the Supreme Court and after considering the
correspondence produced in the case, the Court held that the executive engineer had been
specifically authorized by the government to execute the agreement for reference to
arbitration and the court again ruled that section 175 (3) of the government of India Act does
not prescribe any particular mode in which authority must be conferred.

480
And that where authorization is conferred ad hoc on any person, the requirements of the
section must be held to be satisfied. Just to reiterate, most of these cases were filed or the
facts of these cases arose before the Indian Constitution was drafted and adopted. And
therefore, you will see that in these cases, a reference has been made to Section 175 (3) of the
Government of India Act, but as we have already learned, that Section 175 (3) of the
Government of India Act is pari materia to Article 299. So basically, the contract can be
executed by the authorized person. And we have learned through these cases, that there is no
express form in which this authorization has to be given.

(Refer to Slide Time: 11:28)

The contract must be expressed in the name of the President or the Governor

The last requirement of forming a government contract is that the contract must be expressed
in the name of the President or the Governor. Now, this is an extremely important provision,
because even if the contract is executed by an official, who has been authorized by the
government, it would not be a valid and enforceable government contract, if it is not
expressed in the name of the president or the governor.

Now, let us look at a case law which helps us to further understand this. So, Mulamchand v.
State of MP decided in the year 1968. In this case, Mulamchand had basically purchased the
right to pluck, collect and remove forests produce like the tendu leaves, and lac from different
Malguzari jungles.

So, Malguzari jungles or Malguzari land was a kind of land tenure system that existed during
the time of the Marathas, and people who were in charge of these lands were called

481
Malguzars. It was similar to the Mahalwaris, the Rayatwari system, and the old revenue
collection systems that had continued to be during the British period.

So, in this case, the deputy commissioner of Bhalaghat had issued a written permit, requiring
Mulamchand to deposit rupees 3000 to prevent the leaves from being sold to others. And
Mulamchand paid the deposit, but later he claimed that the deposit should be refunded to him
because he felt that there was no valid contract under Article 299 (1) of the constitution. So,
the question was whether or not there was a valid government contract.

And the court ruled that no, the contract was not valid, because it was neither expressed to be
made by the Governor, nor was it executed on his behalf. So, the contract, the court laid
down had to be expressed explicitly to be made in the name of the Governor of the state. It
was held by the court that the provisions of Article 299 are mandatory and the contract was
therefore void and not binding on the union, which was not liable to pay any kind of damages
for the breach of the contract. So again, if a contract is not expressed in the name of the
President or the Governor, then it cannot be held to be a binding government contract.

(Refer to Slide Time: 16:54)

Effects of Non-Compliance

When questions about the validity or enforceability of contracts under Article 299 of the
Constitution come before the judiciary, the judicial attitude has generally been to balance two
different kinds of motivations. On the one hand, the effort of the judiciary is to ensure that the
government is not made liable for any unauthorized contracts and on the other hand, the

482
judiciary is also responsible to safeguard the interests of those persons who were unwary, or
who were unsuspecting of the government officials who may have acted unauthorizedly or
who may have entered into a government contract without fulfilling all the formalities laid
down in the constitution.

So, these are the two different interests that the courts always try to balance. But what
happens when the different conditions that we have spoken of are not complied with? What
could be the effect of the non-compliance on the two different parties? So, the effect is pretty
clear as laid down under Article 299 (1). The contract would not be legally binding and a
legally enforceable contract.

But in such circumstances, to protect innocent persons, who were not aware of any kind of
unscrupulous motives that government officials may have had when they were entering into
the contract, courts have applied the provisions of Section 70 of the Indian Contract Act, and
have held that the government would be liable to compensate the other contracting party on
the basis of quasi-contractual liability.

So, what section 70 essentially provides is that if goods delivered or accepted or the work
which has been done, is voluntarily enjoyed, then the liability to pay compensation for the
enjoyment of the same goods or the acceptance of the work arises. So, a claim for
compensation is made by one person against the other under Section 70, not on the basis of
any subsisting contract between the parties, but on the basis of the very fact that something
was done by one party and the other party had enjoyed the benefits of that particular work
and accepted the service which was rendered.

Section 70 tries to prevent any kind of unjust enrichment. So even if in cases, the courts hold
that the contract is not a legally binding or a legally enforceable contract, they may give
remedy under Section 70 of the Indian contract act to prevent any kind of unjust enrichment.
But there are a few conditions that need to be fulfilled, before section 70 can be applied. And
they are, the person must have lawfully done something for another person or delivered
something to him, he must not have intended to do such act gratuitously, that is he should not
have intended to do that work free of cost.

And the other person must have accepted the act or enjoyed the benefit of the service
rendered, or the act done. And if all these three conditions are fulfilled then section 70 enjoins

483
the person who has received the benefit to pay compensation to the other party. And this
provision could also be applied against any government in a government contract.

(Refer to Slide Time: 20:51)

Doctrine of Promissory Estoppel

When we are talking about different kinds of remedies that are available to persons who
fulfill their part of the obligations in a contract, one doctrine of contract law, which deserves
a mention more than any other doctrine would be the doctrine of promissory estoppel. So, it
is also known as equitable estoppel, quasi estoppel or new estoppel. And it is an equitable
doctrine to avoid any kind of injustice caused.

So, there are certain prerequisites to invoke this doctrine and what are they? First, a party to a
contract must make a clear or unequivocal promise or representation. The promise must be
made by words or conduct. There must be an intention to enter into a legal relationship and
the promise or the other party must have acted upon that promise.

Here we are talking about two contracting parties. One of them has made every intention to
fulfill his part of the obligation, and he has acted on the promise based on the representation
that the other contracting party has made. So whether in such a circumstance any kind of
remedy would be made available to the contracting party who has acted justly and has tried to
fulfill the obligations under the contract.

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(Refer to Slide Time: 22:27)

Now, we will try and see whether this doctrine has any application to government contracts.
Motilal Padampat Sugar Mills v. State of UP and others is a landmark case in the field of
contractual law or contractual liabilities. And the facts of this case very briefly are - In
October 1968, the State of UP issued a notice which offered tax exemption for 3 years under
section 4A of the Uttar Pradesh Sales Tax Act to all new modern units in the state.

So, MP sugar mills expressed their intention to avail of the exemption taking into account the
business charge occasion reported by the administration. And they wanted to set up a plant
for the production of Vanaspati, which is a kind of a ghee and looked for affirmation of the
exception. So, the Director of Industries of the state of UP, affirmed the position and an
affirmation of similar impact was also given by the Chief Secretary of the Government of UP.

So, taking into account these confirmations or affirmation formations, MP Sugarmill

proceeded to set up the processing plant. But in May 1969, within less than a year, the state
administration changed its policy and announced that the sales tax exemption will be given at
varying rates over 3 years. So, MP sugar mills contended that they had set up the plant and
had faced huge loans only due to the assurance which was given by the government. So,
would it even be fair for the government to change their policy at this time?

So, the question was, how far and to what extent is the state bound by the doctrine of
promissory estoppel? In this landmark ruling of the Supreme Court, it was held that where
one party has by his words or conduct made to the other party, a clear and unequivocal
promise, which is intended to create legal relations or affect, a legal relationship is to arise in

485
the future knowing or intending that it would be acted upon by the other party to whom the
promises made and it is, in fact, so acted upon by the other party, the promise would be
binding on the party making it and he would not be entitled to act upon it, if it would be
inequitable to allow him to do so having regard to the dealings which have taken place
between the parties, and this would be so irrespective whether there is any pre-existing
relationship between the parties or not.

So, in this case, the court held that the doctrine of promissory estoppel would also apply
against the government. So, we see that unsuspecting or unwary persons or contracting
parties who enter into contracts with the government do have some relief provided to them by
the court. And this is evident from the different cases that we have discussed.

(Refer to Slide Time: 26:17)

Liability of the Governor or President

Whenever there is a question of a breach of a government contract, or whenever a claim is

raised by a contracting party, other than the government in a government contract, the
obvious question is, what is the nature of liability of the governor or the president? Do they
attract any kind of personal liability for the breach of a government contract? This is
something that we had discussed right at the beginning, under Article 299 (2) of the
Constitution.

Now, Article 299 (2) lays down that the President or the Governor cannot be held personally
liable for the non-performance of the contract. They are immune to any personal liability for
the breach of contract, because the contract is made in their name only, but they themselves

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do not perform the contract. So basically, it is the Governor or the President as ex-officio
members of the government, who are supposed to enter into these contracts, they do not
attract any kind of personal liability.

The immunity is purely personal and does not immunize the government from any
contractual liability. And here we see that Article 300 comes to our rescue because we see
that Article 300 provides that the government of India or of any state may be sued or may sue
in the name of the Union of India, or in the name of the respective state for any dispute
arising from its contracts. So, we have also seen a number of public interest litigations that
have been filed against the Union of India or the state of Bihar.

If you remember, in this very module, we have discussed how there are so many cases which
have been initiated by the state of Madhya Pradesh or the state of Bihar. So, we see that it is
always in the name of the government that these cases are filed. And it is never in the
personal capacity of the President or the Governor or the person who is holding the position
of the President or the Governor. So, to put it very simply, the answer is that the Governor or
the President do not attract any kind of personal liability for the breach of a government
contract.

(Refer to Slide Time: 28:56)

We have come to the last slide, or the last section of our discussion on the introduction to
government contracts. In this part, we studied what government contracts are, the different
provisions of the Constitution from where the state derives the power to enter into

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government contracts, what are the essential elements of government contracts and what
could be the consequences of the breach of a government contract.

Now, to wrap up this part, let’s go back to the topic that we addressed right at the beginning
of this module. That was the purpose for which government contracts are entered into. If we
were to agree that government contracts are primarily aimed at public welfare or at the public
good, should government contracts be addressed or be judged on the touchstone of fairness
and non-arbitrary behavior?

So, that is to say, whether governments are expected to behave in a particular manner when
they are entering into a contract, and whether the standards that apply to a private party could
be applied to the government when it is entering into contracts? So, to discuss this further, I
will be looking at the case of Kumari Shrilekha Vidyarthi v. State of UP. This is a 1991
decision. And in this case, the matter was with regard to the appointment of Government
Counsels, or rather advocates who fight cases or who defend cases on behalf of the
government.

The facts were simply that the state of UP had issued a circular terminating the appointment
of all government counsels in 1990, irrespective of whether the term of the contract had
expired or not. The state claimed that the relationship of the appointees to these offices of
government counsels was purely contractual depending on the terms of the contract, and is in
the nature of an engagement of a counsel by a private party, who can be changed at any time
at the will of the litigant, with there being no right in the Counsel or the advocate to insist on
the continuance of this engagement or of this contract.

So, the argument was that just like a private party or a private litigant may change their
lawyers at any time, even the government reserves the right to change their lawyers or the
people who are defending them in court, or the advocates who are fighting in their favor to
change them if they deem fit. The ruling of the court was that the state has to act justly, fairly
and reasonably even in a contractual field.

In the case of contractual actions of the state, the public element is always present, so as to
attract Article 14. Article 14 of the Constitution talks about the right to equality. And the
court held that whenever the state is performing any kind of public function, Article 14 would
be attracted. Entering into a contract is an executive of action of the state. Hence, it is subject
to the touchstone of Part III, which deals with fundamental rights.

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The State acts for the public good and in the public interest and its public character do not
change merely because the statutory or contractual rights are also available to the other party.
The Court has held that the state action is public in nature, and therefore, it is open to judicial
review, even if it pertains to the contractual field. Thus, the contractual action of the state
may be questioned, as arbitrary in Proceedings under Article 32 or 226 of the constitution.

So, in this case, we see that the courts have clearly laid down that it is not only the executive
functions or the administrative functions of the state, or the government that can be
questioned in a court of law under Article 32 or Article 226. But it is also the contractual
functions of the state that can be questioned in a court of law for violating Article 14 or any
of the fundamental rights under Part 3 of the Constitution. Therefore, government contracts
will have to be fair and non-arbitrary.

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 Advanced Contracts, Tendering and Public Procurement
Ms. Lianne D’Souza
Research Fellow, CEERA
National Law School of India University
Government Contracts and the Law - 03

(Refer to Slide Time: 00:15)

Hello, everyone. I am Lianne D'Souza and I am currently engaged as a research fellow at the
Center for Environmental Law, Education, Research and Advocacy (CEERA), National Law
School of India University, Bangalore. In today's segment on the course on advanced contracts,
public procurement and tendering, I will be taking the discussion on government contracts
forward by delving into the legal compliances on government contracts under the laws,
legislations and guidelines in India. As we know, and as has been discussed in the earlier
sessions, the primary legislation governing contracts in India is the Indian Contract Act of 1872.

However, in the context of government contracts, as there is an increased need for public
accountability and transparency since public money is involved, there are many other legislations
and guidelines that are applicable in terms of governing government contracts. So, let us have a
look at the various laws applicable to government contracts in India.

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(Refer to Slide Time: 01:20)

Government Contracts and other Legal Compliances

When you look at the overarching legal framework governing government contracts in India,
there is a plethora of legislation governing the same as we have state legislation in this regard. As
might have been discussed earlier, and in the previous sessions, contracts are a subject matter of
legislation for both the centre as well as the state.

This means that the parliament, as well as the state legislatures, has the power to make legislation
or laws on government contracts as well. If we look at the constitution, entry 7 of list 3, or the
concurrent list, as we call it, in schedule 7 clearly specifies that contracts are a matter of
legislation for both the parliament and the state legislature.

Therefore, a couple of states have made specific legislations governing processes for public
procurement, tendering or even government contracts in that given state. A few states have made
legislations in this regard including Tamil Nadu, Karnataka, Rajasthan, Assam and Punjab. For
instance, in the state of Tamil Nadu, the Tamil Nadu Transparency Tenders Act 1998 was
formulated.

Similarly, in other states, a couple of other legislations include the Karnataka Transparency in
Public Procurement Act 2000, Rajasthan Transparency in Public Procurement Act 2012, the
Assam Public Procurement Act 2017 And the Punjab Transparency in Public Procurement Act

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2019. As can be seen, these legislations have territorial application. In other words, they are only
applied within the boundaries of that particular state and they do not apply to government
procurement, or public procurement in any other state.

Besides these specific state legislations, there are other regulations, rules and guidelines
formulated by certain institutions, as well as the government for the purpose of governing the
processes of public procurement. For example, all public procuring entities are required to
comply with the regulations of the Comptroller and Auditor General of India. As we know, the
Comptroller and Auditor General is responsible for ensuring transparency, accountability and
good governance in public resources.

Therefore, as this office is vested with the power of ensuring independent and credible auditing
and accounting of government resources, all government contracts are subject to the regulations
formulated by the Comptroller and Auditor General. Similarly, another set of rules which are
applicable to government contracts is the general financial rules 2017, along with the state
financial rules, or state delegation or financial power rules, which are applicable in specific
states. The GFR, as it is colloquially called, has been formulated by the Department of
Expenditure for ensuring the effective and efficient utilization of public resources, specifically
public money. What is interesting about the GFR is that it is applicable to central government
departments and central government ministries.

Besides this, it is also deemed to be applicable to certain autonomous bodies unless and until
there are specific bylaws providing that these rules will not be applicable. An important point to
note is that the terms regulation and rules imply that these rules or laws are binding on the
entities who are engaged in public procurement. This means that there is a mandate to comply
with the provisions of the rules and regulations specified there.

Besides this, the Central Vigilance Commission (CVC) has also formulated guidelines from time
to time to ensure basic requirements which are to be followed in government contracts or
processes of public procurement. To ensure transparency, promote healthy competition, and
provide fair and equitable treatment to all parties and public procurement, the CVC guidelines
serve as guiding documents.

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As we know the central vigilance commission is an agency endorsed with the responsibility of
ensuring good governance. It oversees and acts as an impartial monitoring agency of government
activities. There are three manuals formulated, which serve as guidebooks for public
procurement, and they serve as guiding principles or operating procedures in the processes of
public procurement.

(Refer to Slide Time: 06:00)

Scope of the Manuals

One may wonder why there are three separate manuals formulated by the Central Vigilance
Commission for public procurement. As can be seen, the three manuals cover three different
areas or three different subject matters of procurement. Therefore, as the scope of these manuals
is different, the procedure in these manuals may differ or vary.

For example, in the Manual for Works, when the subject matter is any work, which can be civil
or mechanical or electrical work, then the manual for works will be applied to the same and the
meaning of works as given under clause 36 of the manual includes any activity which is
sufficient in itself to fulfill any economic or technical function involving construction,
fabrication, repair, overhaul or renovation. Interestingly, the term work includes a combination
of goods as well as services.

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Similarly, when we look at the Manual for Goods and the manual for services, the scope is
restricted only to goods or only to services. For example, under the manual for goods, when the
subject matter of procurement is any goods, in other words, in any, is any article, material,
commodity livestock, medicine or any other such commodity provided in the definition, which is
Clause 11 of the manual for goods, then in such instances the manual for goods will be invoked.

Similarly, when the subject matter of procurement is any service within the definition of clause
33 of the manual for services and consultancy services, then the Manual for Services and
Consultancy Services will be attracted. Therefore, this clearly goes to show that the law is
applicable to the procurement of goods services or works will depend on what is the subject
matter of procurement.

(Refer to Slide Time: 08:13)

CVC Guidelines and General Financial Rules

Over the laws and guidelines that are applicable to government contracts, let us go a little bit in
depth into the CVC guidelines as well as the general financial rules. As government contracts are
largely financed by public money, the basic aim of any law pertaining to government contracts is
to ensure that there is a right balance struck between the costs of a particular contract and the
returns that may arise from public procurement.

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(Refer to Slide Time: 08:50)

Therefore, when we look at the CVC manual, these manuals comprise 5 basic aims, which are
colloquially referred to as the 5 R's of procurement. As we can see, these 5 R's pertain to the
subject matter of the contract or procurement. These include the right quality, right quantity,
right price, right source and the right time and place.

So, what do we mean by the right quality? The concept of quality in a contract or public
procurement resonates with the concept of utility value or utility management for the money that
has been spent in procurement. This means that the procuring entity must bear in mind what is
precisely required in a particular contract and from a particular contractor.

This implies that the procuring entity must have a clear understanding of the functional value to
cost, the bidder’s quality system as well as particular specifications that pertain to the subject
matter of procurement. So, in the event, the contract pertains to the procurement of a particular
good, the procuring entity must have a clear understanding of the kind of quality of the good
required, and specifications such as technical specifications, and design specifications, in that
context to ensure that they get the value of money for the same.

Now, let us look at the right quantity. The notion of right quantity implies the need to accurately
calculate the quantum of goods and services being procured by a procuring entity. This means
that the procuring entity must bear in mind all systemic overheads and extra costs that may be

495
incurred in availing certain goods, services or works in a given contract. For example, in a goods
contract, the number of goods being procured has a direct correlation to the amount of costs that
may be incurred.

Therefore, the right quantity of goods and services being procured has to be accurately estimated
to avoid any extra expenditure or costs. When we look at the right price, the right price
essentially involves looking into maintenance costs, operational costs, disposal costs, and various
other costs where the determination of price must take into consideration the quality and quantity
of a given product or service. When we say the right price in a given contract, this means that the
procuring entity must avoid any excessive expenditure.

Since public money is usually involved in a government contract or any process of public
procurement, it is essential to ensure that the right price has been pre-estimated to avoid any
extra costs on the government or the public exchequer. The price that is being set for a given
contract may not necessarily be determined entirely before the contract is issued. However, the
price cannot be excessively high or abnormally low, so as to vitiate the contract.

Now, let us look at what the right time and place stipulates. When we use the term the right time
in place in a government contract, we are essentially hinting at ensuring public accountability
and this means that there is a need to ensure timely completion of contracts. In government
contracts, time is of the essence, this means that from the stage of auctioning or tendering to the
completion or delivery of services or goods in a given contract, time must be borne in mind so,
as to ensure that there is an effective conclusion of a given contract.

An unrealistic time or place of delivery of a given contract may simply reduce the contract to
redundancy or futility. Hence, it is very crucial, especially in long-term contracts, that the time
and place of a given contract or the source or place of delivery is very crucial in terms of
executing the contract and formulating the contract. In the last limb of the aims of government
contracting, we look at the right source. Now, the right source means that the contracting party
who is ultimately going to be the source of delivery of either goods, services or works in a given
contract must necessarily possess the financial as well as technical capacity to perform the
contract.

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As has been discussed earlier, since public money is involved in government contracting, it is
essential to avoid any unnecessary expenditure that the financial and technical capacity of a
contract must necessarily meet the demands or requirements of a given contract.

These clearly go to show that when it comes to government contracting, the aims of the
government contracts must necessarily ensure that both the contracting party as well as the
procuring entity, bear in mind essential requirements such as quality, quantity, time, place and
price of a given contract.

(Refer to Slide Time: 14:20)

Model of Government/Public Procurement

When we look at the manual in which contracts in the government sector are concluded, an
important question arises with regard to the mode of public procurement of government
procurement. It is important to understand how government contracts should be invited or even
concluded in the first place. It is a well-settled principle of law that government contracts are
typically to be concluded or even entered into first by inviting bids from eligible contractors or
eligible candidates.

So, the question is, should all government contracts be granted through public auctions or public
tenders by inviting bids from eligible candidates, as per the principles of law decided by the
courts, as India follows a common law system where we follow principles of precedence that is a

497
principle of law that has been recognized by a superior court of law, government contracts are
typically to be given by public auction. It was well-settled way back in the year 1985 by the
Supreme Court in the case of Ram and Shyam company v. State of Haryana, which was further
reiterated in a plethora of cases, and was strictly and vehemently reiterated in the case of S.
Selvarani v. The Commissioner Karaikudi Municipality in 2005 by the Madras High Court,
where the court stated that the law is very well settled that a state including its corporations,
instrumentalities, and agencies, and as has been discussed earlier, basically any institution that is
considered to be a state under Article 12 of the Constitution of India, such institution must
necessarily grant its contracts through public auction or public tender by inviting tenders from
eligible persons.

Why is this done, so, the award of contracts through public auctions of public tenders is
essentially to ensure transparency, and public accountability to maximize economy and
efficiency in government procurement, to promote healthy competition among eligible bidders,
and also to provide a fair and equitable chance to all tenders and to avoid any sort of
irregularities. As government contracts are unnecessarily tested on the touchstone of Part 3 of the
Constitution, it is important that the process of public procurement has to abide with Article 14
of the Constitution, which provides for equality before the law.

However, this being said, there are certain exceptional situations where government contracts
can be concluded by direct procurement or direct negotiation and this has been held by the court
of law courts of law as well, where in this case, the court has clearly stated and has an as has
been displayed on the screen in only rare and exceptional cases, such as natural calamities,
emergencies declared by the government, where procurement is only from a single source or
supplier, where the supplier or contractor has exclusive rights in respect of goods and services, or
where there is no other better or best alternative, or even where the auction was held on several
dates and there were no bidders then only in such situations can government contracts be given
either through direct procurement or direct negotiation and it need not necessarily go through the
process of public auctions or public tenders.

Similarly, under state legislations, you have certain exceptions which are explicitly carved out
under specific provisions. For example, under the Karnataka Transparency Public Procurement

498
Act, Section 4 clearly provides exceptional situations where government contracts can be entered
into without necessarily going through the process of auctions or tendering.

For example, in the course or in the case of any national calamity, or any emergency declared by
the government, or in case the goods and services can only be procured through a single source,
the process of procuring goods and services or any works through auctions or tenders, need not
necessarily be abided by.

Similarly, under the Punjab Transparency and Public Procurement Act 2019 certain exceptions
have been carved out and explicitly provided under Section 4 of the act. For example, in the case
of certain emergency procurement for management of any disasters under the Disaster
Management Act, or procurement of any goods or services for assembly or parliamentarian
elections, or procurement of any goods or services for any security purposes or strategic
purposes of the state then in such situations, public auctions or tenders need not necessarily be
resorted to. However, the well settled principle of law is that government contracts in order to
ensure transparency and accountability must necessarily go through the process of public
auctions and tenders.

(Refer to Slide Time: 19:30)

Exceptions: Case Laws

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Let us look at a couple of case laws where exceptions to this process of public tendering and
auctioning were invoked. The first case is Hemogenomics Private Limited v. State of Andhra
Pradesh, a 2021 judgment. The factual matrix of this case is such that the state of Andhra
Pradesh had awarded a contract for equipment placement to respondent number 4 in this
particular case for collecting and testing blood samples by RT-PCR method and this was done so
after the state had conducted a very detailed inquiry on a pan India basis of their requirements
and the kind of equipment that they would want in this particular instance.

After conducting such inquiry, the State came to the conclusion that the equipment by the name
Conbas S 21, which was being provided or offered by respondent 4 in this case, was actually
manufactured exclusively only by this respondent, and it was the most appropriate and most
suitable equipment for testing in the state's laboratory. Therefore, the state entered into a direct
negotiation with respondent 4 and after conducting such an inquiry the award the contract was
awarded to respondent number 4.

However, the petitioner in this case Hemogenomics had questioned or challenged this particular
award of the contract on the grounds that they had not followed the mandatory requirement of
public auctioning or public tendering. It was alleged that this particular action of the government
was clearly violative of the constitutional principle of equality and such action was being
challenged as being void arbitrary and irregular.

However, in this particular case, the court looked into the exceptional situation that was claimed
by the respondents and the court stated that whether ther is a single source of supply or where the
supplier has exclusive rights of adopting negotiation, then in such a situation, the procedure of
public auction need not necessarily be followed.

And in this particular case, since there was only one supplier of the equipment and the source
who and the source being the supplier who had an exclusive right in respect of this goods being
the equipment, the answer is there was no other alternative available after conducting a market
survey the court was of the opinion that this case completely fits the definition of an exceptional
case and therefore, the court held that such award of the contract was valid and was not an
arbitrary exercise of power by the government.

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(Refer to Slide Time: 22:17)

The second case that we are going to discuss where an exception to the process of public
auctioning was invoked in the case of Shankar V and Ors. v. Secretary, Urban Development
Authority and it is a case decided by the Karnataka High Court in the year 2015. Now, the
factual matrix of this case was such that in 2014, the government of Karnataka sanctioned a
project for the construction of a commercial complex in a small Municipality by the name of
Srinivaspura in the Kolar district.

And this was sanctioned on the basic condition that procedures under the Karnataka
Transparency and Public Procurement Act (20) 2000 was to be followed. However, in this
particular case, owing to a drought, the municipality had passed a resolution stating that instead
of going for public auction and owing to the urgency of the matter, the government ought to
enter into a private negotiation and grant the construction the project for the construction of the
commercial complex to the seventh respondent in this particular case.

The government of Karnataka had initially rejected such a resolution however, on the basis of
recommendations given by an MLA, the government had passed an order and sanctioned such
regulation, or resolution passed by the municipality, stating that the government could enter or
award a contract or to the seventh respondent in this particular case.

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Therefore, in this situation, the government thought it fit and because of the interests of the
public at large, the work was sanctioned to the seventh respondent, which is Kolar Nirmithi
Kendra, through a notification, and this was done so without calling for an open tender. This
action of the government of Karnataka was challenged by the petitioners on the grounds that it
was valid, and arbitrary, and it was not authorized by law, specifically under the Karnataka
Transparency and Public Procurement Act.

The Karnataka High Court after delving into the provisions of the act, had stated that section 4
of the Act clearly allows certain exceptional situations when public auction or public tendering
need not be resorted to. So, the court allowed the government to notify exemptions for specific
procurements.

In this particular case, the Court held that the notification passed by the government was based
on a certain emergency or urgent situation in the interest of the public and therefore, in light of
such public interest, it was imperative for the government to allow raising such construction by
entering into a contract directly with the seventh respondent. Therefore, the Court held that since
this was clearly an exceptional case carved under Section 4 of the Karnataka Public
Transparency in Public Procurement Act, the work was sanctioned and the court upheld the
move by the Karnataka government.

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(Refer to Slide Time: 25:24)

Types of Bidding Systems

Let us look at the types of bidding systems that are usually prevalent in the processes of public
procurement or government contracting. There are various systems of issuing bids based on the
technicalities of a particular contract or also based on the kind of procedures required to be
followed in a particular procuring system.

The first type of system which is the most simple and quickest form of bidding systems is a
Single Stage Single Envelope bidding system. In this kind of system, all bids are usually invited
in a single envelope, where the technical requirements are very simple, they are very clear and
the source of supply is not very critical.

In these kinds of contracts, the value of the contract is typically low, and they are usually small-
term or short-term contracts. What happens in a single stage-single envelope bidding system is
that all financial technical details are to be submitted by the contractor in a single bid or in a
single envelope to the procuring entity.

This means that all their information pertaining to the technical requirements, the technical
qualification and the financial quotations are to be provided in one document in one envelope to
the procuring entity.

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Now, this kind of system is said to be the most simple and quickest bidding system because the
price is usually low and the technicalities are quite simple. In this kind of bidding system, the
lowest price bidder here who meets the technical qualification or who qualifies the commercial
or technical aspects or requirements of the procuring entity will usually be declared as the
successful contracting party.

The other form of a bidding system is a Single Stage Double Envelope system. Now, as provided
under the General Financial Rules, rule number 163 as well as the Central Vigilance
Commission manuals, this kind of bidding system is usually followed, where there are
specifications for technical criteria as well as financial requirements. In this kind of system, there
are two envelopes that are to be submitted by the bidder or by the contracting parties.

So, the first envelope usually contains the technical qualifications or technical requirements and
the second envelope contains the financial requirements. When these envelopes are submitted to
the procuring entity within the given time frame, the technical bid shall be evaluated on the basis
of the technical or techno-commercial qualifications of the bidder and once they qualify, the
financial bids or the envelope containing the financial information will be open.

Now, this system is generally followed, where the technical criteria are a little moderate, or it can
also be high, and they are usually preferred in situations where the works contracts require
specialized qualifications by the bidder.

The next type of bidding system is a Pre-qualification bidding system. Now, as the name
suggests, in this kind of bidding system, the bid documents are not circulated to the public or to
eligible bidders in advance. Rather, there is a pre-qualification criterion list which is circulated to
the public and those interested bidders may submit this form or submit the list of their
qualifications to the procuring entity before the bid has been submitted.

Now, this kind of bidding system is usually adopted in complex contracts, where the procuring
entity wants to filter out bidders who probably do not have the requisite qualifications or
requisite capabilities to meet the requirements of the contract. This system of a pre-qualification
bidding system can also be done along with a single stage multiple on the envelope system.

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Now, what is the difference between a pre-qualification bidding system and a single-stage
multiple-envelope bidding system with a pre-qualification stage? The difference is simply this in
the latter form of the bidding system the bid document has been provided to the bidders however,
the bidders are submit required to submit three envelopes.

One envelope should necessarily contain their bidding requirements or eligibility criteria to meet
the bid. Once those bidders, who qualify the preliminary bidding requirements, they will be
filtered out, and only those qualifying bidders will be then taken to the next stage in terms of
evaluating their technical and financial bids.

So, the basic difference is that in a pre-qualification bidding system, the bid is not issued unless
and until the qualified bidders have been segregated. And in a single stage multiple envelope
system, the bid, and the pre-bidding qualification list has been provided along with the technical
and financial bids however, the technical and financial bids will only be opened once the pre-
qualification bids have been qualified.

Another type of bidding system is a Single Stage Multiple Envelope bidding system with post
qualifications to be submitted by the contractors or possible bidders. Now, where the
procurement is moderately complex or complex, and generally involves a lot of time, effort and
money on the thought of the bidders, then the procuring entity will provide a list of criteria where
a clear-cut pass or fail qualification of the bidders are to be submitted.

Now, this is usually submitted as the first envelope in a multiple-envelope system. And upon
opening this particular envelope on the bidding date, the post-qualifications are evaluated and
only those bidders who qualify these post-qualification requirements are then proceeded to the
next stage where get technical and financial requirements are evaluated.

The last stage or the last kind of bidding system is a two-stage bidding system with an expression
of interest. Now, there may be specific instances where the subject matter of procurement is very
complex and is of a highly technical nature and the procuring entity itself may not have complete
knowledge of the nature and extent of the technical requirements or technical solutions. So, in
such situations, a two-stage system is followed.

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Now, in these stages, the first stage generally involves an invitation to expression of interest by
bidders all over. Now, these bidders are required to comply with certain objectives, and technical
and financial requirements and only those bidders who qualify these preliminary requirements
will qualify for the next stage.

So, what happens in the intermediate stage between the first stage and second stage of expression
of interest? Interestingly, in this kind of bidding system, all those bidders who have qualified for
the first stage in providing their expression of interest will be shortlisted and invited for a
technical discussion with the procuring entity and other stakeholders and preceding this
discussion the procuring entity can modify the terms of the bid documents or modify the terms of
the tender and reissue the same, the same tender or revised terms of procurement will be further
issued or an invitation for expression of interest will be further issued to all those bidders who
are not rejected in the first stage of bidding.

Such qualified bidders will then in the second stage be required to again submit their expression
of interest based on the modified terms of the procuring document and those bidders who
qualify, the financial and technical requirements will then be granted the contract or awarded the
contract. So, the advantage of a two-stage bidding system is to eliminate all those kinds of
bidders who probably will not be able to handle the technical capabilities required of complex
contracts or even long-term contracts.

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 Advanced Contracts, Tendering and Public Procurement
Ms. Lianne D’Souza
Research Fellow, CEERA
National Law School of India University
Government Contracts and the Law - 04

(Refer to Slide Time: 00:15)

Modes of Tendering

As we have looked into the different kinds of bidding systems in our previous slide, in this
segment of our discourse, we will be looking into the different modes of tendering that are
permitted under the CVC manuals, as well as the General Financial Rules. There are 5 primary
modes of tendering which are permissible under the law. The first and the most resorted to
method is the Open Tender Enquiry Method.

This is a default mode of tendering, which can be done either through E-procurement on a
specific procuring entities website, through the procurement portal, through traditional methods
of auctioning, or tendering, through newspapers, journals, or any other such print media. Now, to
attract the widest possible competition by eligible candidates the notice in writing tender is
generally published on the websites of the procuring entity or in any press or print media.

The second kind of or second mode of tendering is a global tender inquiry. Now, as the name
suggests, it is usually followed in those kinds of contracts, where one of the contracting parties is

507
a foreign entity. This is usually in cases where the payment is made in foreign currencies through
letters of credit, and it is aimed at inviting participation from foreign firms or global participants
who are not Indians.

Typically, in high-value contracts, which are generally rupees 100 crores or more, especially in
terms of works contracts or where there is an insufficient number of domestic bidders, Global
Tender Enquiry is the preferred mode of tendering. Under the GFR rules rule 161 pertains to
global tender inquiry, and it provides court procedures in this regard.

The third mode of tendering is a Limited Tender Enquiry or LTE for short. As the name
suggests, it is a restricted or limited competition procurement, where a certain pre-selected list of
bidders are directly approached for bidding, and these bids are usually taken up for evaluation or
scrutiny. Bids from uninvited bidders are generally treated as unsolicited and are not entertained
except in certain special cases.

The other mode of tendering is a Single Tender Enquiry or what may be called direct
procurement. In this kind of this mode of entering the selection is done through direct tendering
or direct negotiation or nomination and is called a single tender. In case of emergency or urgent
need for work. Work represents a natural continuation of previous works. In cases of strategic
national security or national defense, the single tender inquiry is generally the preferred mode.

The last mode of tendering is an Award through Quotation. Now, the award through quotation is
generally used for goods contracts, and these quotations are generally a preferred mode of
tendering, where the value of the contract or where the value of the subject matter being
procured is up to rupees 5 lakh.

So, as you can see, the value of the tender or the value of the contract is quite small or quite
limited. In such instances, they are usually made available for readily available goods that are not
specially produced and are usually made available for certain particular specifications of the
contract. The award for quotation is also generally given out by procuring entities for certain
goods, where there is already an established market.

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Furthermore, award through quotation as a mode of tendering is usually adopted where the
procurement of readily available goods is not specially produced or where there is no established
market for such kind of goods that is being availed by the procuring entity.

(Refer to Slide Time: 04:35)

Types of Contracts

Moving on, let us look into the type of contracts that are generally permitted, or are generally
followed or entered into by procuring entities and are also recognized by the Central Vigilance
Commission. As you can see on the screen, the types of contracts vary in terms of the subject
matter of a given contract. It can depend on whether the contract is for a works contract, a
services contract or a contract for goods.

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(Refer to Slide Time: 05:04)

1. Work Contracts

In the context of works contracts, there are preliminary 6 contracts which are typically entered
into by procuring entities in the government. The first kind of contract is Lumpsum contract.
Now, as the name suggests, this form of contract is typically used for work in which the
contractors are required to quote a lump sum fixed price figure for completing the work in
accordance with the given descriptions in a tender document. So, this can include the designs,
specifications, and technical and functional requirements of a given contract. The bidder’s price
is deemed to include all elements of the cost and there is no arithmetical correction or any price
adjustment that is allowed during the course of evaluation, or even execution of the contract.
Now, lumpsum contracts are generally easy to administer, because there is a fixed price that is
quoted for a given scope and the scope also is a fixed scope of a contract. And when it comes to
making payments, the payments are clearly linked to specified outputs or specified milestones.
So, therefore, lumpsum contracts are usually the preferred mode of contract for any works that
are being allotted by government entities.

The second kind of contract or in works contract is an Item Rate contract. Again, as the name
itself suggests, for item rate contracts or item rate tenders, the contractors are required to quote a
rate for each and every individual item of work on the basis of the bill of quantities provided in a
given bid document. So, there might be possible variations at some point in time, based on price

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escalation. However, this will be decided at the time of executing the terms and conditions of the
contract. Item rate contracts are usually preferred in those instances, where the inputs or where
the variables are generally subject to certain changes or price escalations.

The third type of contract in works contracts is Percentage Rate complex. Now, percentage rate
contracts are usually employed or usually utilized, where the contractors are required to quote
rates as an overall percentage over and above or below the total estimated cost. Now, this type of
contract usually works best when the contract or the work does not involve any major design
processes or directions from the contracting agency and just simple directions in the form of
drawings are sufficient to execute the contract. The benefits of such kind of contract are usually
that it is always time-saving, and it does not involve or does not require too much effort in terms
of detailed designs. So, usually, in the case of construction contracts, this type of tender is
preferred. Now, this type of tender can also be used in respect of small and routine types of
original works, where the estimates can be based on certain schedules of rates which are pre-
estimated.

(Refer to Slide Time: 08:18)

The next kind of contract is Piecework contract. These are usually used in those cases, where it is
necessary to start work in anticipation of any formal acceptance of a contract or in any agreement
on a piece of piece work contracts that may be drawn up and then later on the contract may be
cancelled as soon as a regular contract is signed. So, piecework contracts are usually considered

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to be temporary contracts and they provide for payment of stipulated rates only when it refers to
such quantity of time and also stipulates that the procuring entity may put an end to the
agreement at his option at any time. So, piecework contracts are technically short-term contracts,
which are usually entered into when there is any intermediate work involved.

The next and most important kind of contract is EPC or Engineering, Procurement and
Construction contracts, which are also called Design and Build contracts. Now, these types of
contracts generally rely on assigning the responsibility of right from investigation designing and
constructing a given work to the contractor for a lump sum price, which is determined through
competitive bidding processes. The objective of these kinds of contracts is to ensure complete
implementation of the project or the work so assigned to ensure specified standards of a fair
degree of certainty relating to the costs and times at the time of transferring the construction risks
to the contractor. So, EPC contracts are generally considered to be holistic kinds of contracts
where the contractor is generally vested with higher responsibility under the terms and
conditions of the contract.

The last kind, and which is most prevalent in a long-term and large construction contracts are
Public Private Partnerships. Now, PPP generally means an arrangement between a government
or statutory entity or a government-owned entity on one side, which is generally called a
sponsoring authority and on the other side, there will be a private sector entity. Usually, a legal
entity in which 51 per cent or more of the equity is with private partners or private
concessionaires.

Now, these types of contracts are generally for the creation or management of public assets or
public services through investments which are being made or managed or undertaken by the
concessionaire or in this case, a private entity for a specific period of time. And here there is a
well-defined allocation of risks between the government entity or the authority and the
concessionaire or the private entity.

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(Refer to Slide Time: 11:08)

2. Service Contracts

Now, let us look at the kinds of contracts within the context or category of service contracts. The
first category of service contracts is Lumpsum contracts. In this type of fixed price contract, the
consultant’s proposal is usually deemed to include all prices of the contracts and there is no
correction of any sort either arithmetical or price corrections that are allowed during the scope of
evaluation or even scrutiny of the tenders. Now, lump sum consultancy contracts are usually
easy to administer because there is a fixed price for a given fixed scope and the payments are
also clearly linked to specific outputs predetermined in the contract.

The second category of service contracts is Time-Based contracts. As the name suggests, in these
kinds of contracts, the payments are usually paid on an agreed hourly, daily, weekly or monthly
rate. And this clearly shows that the payments are linked to a time-based pre-agreement. And
these payments are usually made for staff and reimbursable items using actual expenses or unit
prices. They are also called retainership contracts as a consultant or the service provider is
retained for a pre-agreed or pre-decided period. The rates for staff usually include their salary,
their wages, their social costs, any overhead costs, any fees or profits and in case of any special
exemptions or special allowances carved they might also be entitled to certain kinds of
emoluments.

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A percentage contract, which is the third category, third category of contracts directly relates to
the fees that are paid to the consultant or the service provider to the estimated or actual project
cost. And this can also be in relation to the estimated cost of the goods procured or the goods
inspected. In these kinds of contracts, since the payment is made after the successful completion
or realization of all the objectives, it is also called a success fee contract, because it is directly
linked to the success of the execution of the contract. So, the final selection in this kind of
contract is typically made among very technically qualified consultants, or technically skilled
service providers who have quoted the least percentage while the notional value of the assets has
been fixed.

(Refer to Slide Time: 13:50)

The next type of service contract is Retainer cum Success Fee contracts. Now, in these kinds of
contracts, the remuneration of the service provider or the consultant generally includes a retainer
fee, which is either based on a time period or monthly payment of a fee and this is accompanied
by a success fee. So, the success fee is usually expressed as a percentage of the pre-estimated
project cost. Therefore, this type of contract is a combination of both your time-based contracts
as well as your percentage-raised rate contracts.

The last category of service contracts is the Indefinite Delivery contracts. Now, these contracts
are used when procuring entities I need to have “on call” specialized services. So, it is for

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technical or special talents required, and the extent and timing of such contracts usually cannot
be determined or defined in advance.

So, there is no commitment per se from the procuring entity for the quantum of work that they
would require from the consultant or I would say contracting agency or contracting entity, and
there is no commitment in terms of the work that may be assigned to the consultant or the service
provider.

So, the procuring entity and the firm both agree on unit rates to be paid and these payments are
usually paid on a time basis or on the basis of the amount of service that is rendered by the
service provider. In these kinds of contracts, because they are indefinite delivery, the consultant
or service provider is usually selected on the basis of the unit rate quoted by them for providing
the services. So, service rate contracts, or indefinite delivery rate contracts are usually on a
continuous basis, and they are judged on the basis of certain unit rates quoted by the service
provider.

(Refer to Slide Time: 15:55)

Stages of Bidding

In this segment of our discourse, we will be looking into the stages of bidding before a contract
has been executed with a contracting party. We will be dealing with each of these stages in detail
in the coming slides. But just to give you an overview, the typical stages in the bidding of the

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government procurement process generally start with the preparation of standard bidding
documents.

This is followed by the publication of bid documents on given websites on Central Public
Procurement Portals or the State Public Procurement portals or through print media and the
press. Following this, the tender documents are issued to eligible candidates. This is followed by
gathering information on the eligibility or qualification requirements of bidders.

Once the documents have been submitted by the bidders, clarifications of tender documents are
sought. This is followed by any amendment of tender documents, after which a pre-bid
conference is typically held and then the final bids are submitted to the procuring entity. After
the bids have been submitted, the procuring entity will have to follow the required procedures of
receiving and opening the bids in a given format. This is accompanied by a bid security. Lastly,
in order to secure the entire bid process, a performance guarantee is typically required to be
provided by the procuring entity.

(Refer to Slide Time: 17:36)

a. Standard Bid Documents

Let us look at the first stage of the bidding process. The first stage generally involves issuing
standard bid documents, which typically contain every possible comprehensive information to
the bidders that pertains to the contract at hand. The standard bid documents may be devised

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according to the discretion of the procuring entity however, typically, standard bid documents
generally involve the following information. It is pertinent to note that, in order to ensure
transparency, the procuring entity must provide all information necessary for the bidder to
provide their technical and financial qualifications.

Therefore, as per the CVC manual, the standard bid documents generally involve the following
information. In Volume 1, the standard bid document necessarily involves the notice inviting
tenders, which gives information pertaining to the scope and objective of the given contract. This
is followed by specific instructions to the bidders accompanied by general conditions of the
contract and special conditions of the contract.

Now, special conditions of a contract generally refer to those conditions which are over and
above the general conditions, special conditions generally override the general conditions in the
context of certain technical requirements. Following this Volume 2 specifically provides for
technical specifications, if the contract relates to certain complex techno-commercial matters,
technical specifications, either in terms of design, in terms of technical requirements, must be
necessarily provided to the bidders in the bidding documents.

Following the technical specifications, certain information that the bidders might find necessary
in providing their technical bids or financial bids must be given in the form of certain standard
documents. These generally include forms of bids, bills of quantities, and certain standard
formats required to be adhered to, in terms of either the bid security or performance security or
any advance payment.

And when there is certain additional information such as supplementary information relating to
highly technical matters schedules for supplementary information can also be included and
sometimes, sample forms for updating certain additional qualifications may also be provided.
Where the contract or where the tender document requires certain especially works contracts
where they require certain specific information relating to certain outlines or designs or drawings
may also be required.

In the case of especially construction of works contracts, drawings of a given contract or

drawings of a given scope of work are also provided. Lastly, documents to be furnished by the

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bidder such as their income certificate, incorporation certificate, certificate of insolvency,
declaring that they are not insolvent as such other documents are required to be furnished by the
bidder.

(Refer to Slide Time: 21:01)

b. Publication of Bid Documents

The second stage relates to the publication of bid documents. Typically, the notice inviting
tenders is required to be published through certain print media such as newspaper
advertisements, E-procurement portals of the government, or the concerned procuring entity’s
websites such as the ministry or department’s website.

Now, in the case of newspaper advertisements, the advertisement should consist of a link to the
website from where the details of the advertisement or the bidding documents can be secured or
can be seen and downloaded. Furthermore, individual cases where confidentiality is required, for
various reasons such as national security or any strategic purposes of the state, such cases would
be exempted from mandatory E-publishing requirements.

Now, in the case of bid documents and their publication for central government departments and
ministries of the central government, it is mandatory for all such ministries and departments and
their attached subordinate offices including autonomous and statutory bodies to publish their
tender inquiries including bid documents or the corrigenda to the same in specified formats on

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the central public procurement portal, such a mandate has been specifically and explicitly
enshrined within the General Financial Rules under Rule 159.

As per the notifications issued by the Department of Expenditure, if a department has its own
website or E-procurement portal, for instance, the Government of Karnataka may have its own
state E-procurement portal, then in such cases, bid documents have to be necessarily published or
advertised on such websites or portals as well.

(Refer to Slide Time: 22:58)

c. Eligibility of Bidders

When we look at providing eligibility criteria for bidders, it is crucial for the procuring entity to
provide specific information or specific requirements, which meet the eligibility criteria. Now,
the criteria for eligibility are typically provided in the notice inviting tender, and the criteria or
qualifications to be met by the bidders generally include requirements such as minimum level of
experience, past performance, technical capacity or capability, their manufacturing facilities,
financial position, and the like.

For procurement of services eligibility criteria typically include their core business strategies,
their core business functions, years of business and experience qualifications in the field of
assignment, and any technical or managerial experience. In the context of procuring goods, the
eligibility criteria should not indicate a requirement for particular brand names, trademarks, trade

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names, or any such indication that hints at a particular organization, institution, supplier, or
provider.

Now, this has been specifically enshrined under the general financial rules under Rule 144. This
means that when procuring entities call for bidders or issue notice inviting tenders, there should
be no discrimination by providing specific information requiring a particular brand name,
trademark or trade name. Under the general financial rules, there are specific rules for setting
eligibility criteria and this includes the fact that the eligibility criteria must ensure transparency,
competition amongst (())(24:50) fairness in the bidding process, and non-arbitrariness.

(Refer to Slide Time: 24:55)

To give you an example of what constitutes an arbitrary eligibility criterion let us look into a
case law. In the case of Resource Telecom and another v. Navodaya Vidyalaya Samithi, the court
looked into the importance of defining eligibility criteria in a very comprehensive manner. The
factual matrix of this case is such that Navodaya Vidyalaya Samithi, NVS for short, had issued
an invitation for tender for the supply of about 68,940 tablets on the online trading portal.

The essential eligibility criteria were that the bidder should necessarily have the stipulated past
experience in providing or dealing with the same or similar category products. Other conditions
also included the supply of at least 60 per cent of the required tendered quantity or units in a
given financial year in the preceding 3 years from the date on which the tender has been issued

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and this tender should have been given to any government or public sector undertaking,
specifically in the context of same or similar category products as that of your electronic tablets.

Furthermore, the tender document also stipulated that 35 per cent of the tender quantity units
must necessarily have been executed as a single order in 1 financial year. Now, the petitioner had
claimed that its past experience also included supplies made by it in the context of mobile
phones, laptops and other such gadgets to various governments and public sector units.

So, by its interpretation of the term same or similar category products, the petitioner had believed
that it had come within the eligibility criteria provided by NVS. However, in this case, the bid of
the petitioner was rejected for a certain technical mismatch on the grounds that it did not qualify
past performance criteria as the work orders of smartphones, laptops, power banks, and other
such products were not deemed to be considered as same or similar category products as that of
electronic tablets.

Now, this decision made by NVS was challenged by the petitioner. And when this matter had
come before the court of law, the issue was whether the resource telecom had fulfilled the
eligibility criteria in terms of past experience. So, what did the court hold in this particular case,
the court held that the exclusion of tablets from the category of same or similar category of
products is unreasonable against the principles of fair play.

Now, applying a beneficial interpretation, the court held that NVS cannot exclude from its
consideration the past performance of the petitioner in respect of same or similar category
products, such as tablets, and mobile smartphones or laptops and the court held that smartphones,
laptops and such avail electronic gadgets would also fall within the category of same or similar
category products as that of tablets and therefore, the court held that the bid by Resource
Telecom must necessarily qualify and fulfill the tender invited by NVS.

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(Refer to Slide Time: 28:25)

d. Clarification and Amendment to Bid Documents

Once the bid documents have been published on the portal or through printed media, the next
question that probably arises is whether the bidders are allowed to see any information in the
form of clarifications or queries pertaining to the bid documents. Now, the General Financial
Rules, as well as the CVC manuals clearly provide for a procedure whereby bidders can seek
clarifications or queries pertaining to the bid documents.

Now, all clarifications with respect to the bid documents or the tender documents must be sent
by the bidders before the date specified in the tender document. So, typically, the procuring
entity generally provides an expressive date before which all bidders are required to submit their
queries in the form of clarifications or seeking information.

Now, responses must be sent in writing regarding the clarifications sought, and they should be
sent prior to the date of opening the tenders. Copies of the query of any bidder and clarifications
issued must necessarily be sent to all prospective bidders who have received the tender
documents and this is to ensure that there is parity of information and no information asymmetry.
As government documents or government contracts unnecessarily tested on the touchstone of
equality, every prospective bidder must necessarily be provided with all information including
clarifications relating to bidding documents.

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Now, procuring entities may either on your own initiative or in response to any clarifications
sought by prospective bidders amend the bid documents by issue a document called as a
corrigendum. Now, the corrigendum must be notified in writing and must be sent either by
registered post, speed post, courier, or email, or it can be uploaded on the portal or the respective
website of the procuring entity or the respective department or ministry of the government. The
next question that arises is with respect to the time at which the corrigenda can be published or
issued.

Now, any changes modifications, amendments or additions made to tender documents or bid
documents in the form of a corrigendum or through multiple documents such as corrigenda can
be made only after the issue of the tender documents, but before the opening date of the tender.
Now, this is to ensure that all prospective bidders are given adequate time to make certain
submissions or seek clarifications before the bids are submitted and the bids are open.

(Refer to Slide Time: 31:13)

As we have seen in the previous slide, a corrigendum can be issued after the notification of the
tender documents but before opening the bid documents, a question may arise as to whether the
procuring entity can specify a stipulated time period for the issue of corrigenda. At this juncture,
the case of M/s Pratham Granite v. Mysore Minerals Ltd. may bear relevance. The factual matrix
of this case is such that Mysore minerals limited had issued a tender notification in June 2014, in
respect of raising a granite quarry from Mudgal through an e-tender process.

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Mysore Minerals issued a letter of intent on 6th September 2014, while accepting the bid of
Pratham Granite in this respect, however, on 18th February 2015 Mysore Minerals issued a
corrigendum to modify the conditions in the letter of intent, intent, stipulating that if these new
conditions were not adhered to, then the letter of intent could be cancelled, and the submissions
made by Pratham Granite would not be considered. This was naturally challenged by Pratham
Granite.

So, the issue that came before the court was whether Mysore minerals was right in issuing this
corrigendum at that particular stage by modifying the tender conditions. By looking into the
factual matrix of this case, the court relied on the words used in a tender document itself, which
clearly stipulated that any amendments or corrigendum in the tender documents or it is annexure,
schedules, forms or such other attachments, shall be done at any time by Mysore Minerals
limited during the period between publication of notice and submission of bids of the tender on
website.

So, here, it is very important to note that as for the stipulations themselves, corrigenda were to be
issued between the time period from publication of notice and submission of bids of the tender
on the website. So, in this particular case, the court said that the clause would operate prior to the
issue of the letter of intent and it is accepted. So, in other words, the respondent was able to
modify or alter any tender conditions before the submission of bids by the bidders in between the
publication of the notice and submission of bids by the bidders on the website.

In this particular case, as the letter of intent was issued in favor of Pratham Granite after
accepting his bid, and further as Pratham Granite had submitted his acceptance of the letter of
intent, Mysore Minerals did not have the power to modify or alter the tender conditions through
the corrigendum. Therefore, in this particular case, it can be seen that it is very crucial that when
it comes to issuing corrigenda in respect of the tender notifications or tender documents, it is
very important for the procuring entity to ensure that such corrigenda are issued before accepting
any tender documents or before the bids have been opened.

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 Advanced Contracts, Tendering and Public Procurement
Ms. Lianne D’Souza
Research Fellow, CEERA
National Law School of India University
Government Contracts - Part 05

(Refer to Slide Time: 00:15)

Stages of Bidding (Contd.)
e. Pre-Bid Conference

The next stage in government procurement or public procurement is a Pre-bid Conference or as it

is called a pre-bid meeting. Now, as per the General Financial Rules, Rule 173, in case of
contracts of any special nature or complex nature, as we have seen in two-stage bidding
processes or procurement, especially for procurement of sophisticated and costly work or
services or equipment, and where there is a need for specialized expertise and deliberation by the
procuring entity, a suitable provision is kept in the bidding document itself for inviting bidders or
their official representatives to attend one or more big conferences or meetings at a particular
time and place and this is done so for the purpose of clarifying issues and clearing doubts
pertaining to the bid documents itself. Since this conference is conducted before the bids are
evaluated, this is called a pre-bid conference.

Now, the date, time and place of the pre-bid conference should be clearly indicated in the
bidding document, and this date should be sufficiently ahead of time of the bidding opening date.
This is to ensure that the bidders get sufficient time to evaluate the contents of the bid

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documents. And the records of such conference shall also be intimated to all bidders and shall be
exhibited on the website or the portal of the procuring entity where the tender was published.

Now, bidders should also be asked to submit written inquiries or queries in advance of the
conference. This is to ensure that the procuring entity is given sufficient time to answer these
queries in detail. Now, after the conference, the minutes of the pre-bid meeting should include all
discussions including questions and replies, and shall be prepared and approved by the
competent authority of the procuring entity and shall be shared along with all the other revised
bid documents with the prospective bidders.

Now, in the case of techno-commercial requirements, such requirements may also be revised if it
is considered necessary by the procuring entity and this shall be issued by way of a corrigendum
to the same. An issuance of a corrigendum relating to techno-commercial requirements must
necessarily follow the rules and requirements stipulated for the issue of corrigendum under the
General Financial Rules.

Now, after the issue of clarifications or modifications to the bid documents, which is consequent
to the pre-bid meeting, at least two weeks should be given to the bidders to submit their bids.
This is clearly to give a sense of time to the bidders to ensure that they can make an informed
decision while submitting their technical and financial bids.

(Refer to Slide Time: 03:11)

f. Submission of Bids

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Let us look into the process of submitting bids by the tenders or the bidders. As has been
discussed earlier, in the stages of bidding, every bidder or every tenderer is required to submit
two bids that is, one which is a technical bid stipulating technical qualifications and
requirements, and the financial bid which generally includes the financial cost or overheads and
the price quoted by the bidder.

So, the various stages involved in submitting a bid until the stage of opening a bid are as follows.
When a bidder is required to submit a particular bid, the tender document must necessarily
specify the total number of copies that a bidder must submit which can either be in a single
envelope, in duplicate or in triplicate. Now, in case the bids are asked to be submitted in multiple
copies, then the bidder or tenderer is required to seal the original copy along with each other
copy in separate envelopes and duly mark them before posting them.

In case the tenderer wishes to withdraw the bid after submitting the tender, they are permitted to
do so, and they are permitted to do so along with any substitutions or modifications in writing
without for feature of the bid security. Now, this can be done provided these are received duly
sealed and marked in original and they are up to date and time of receipt of the tender. Now any
such requests received after the prescribed date or time of receipt of the tenders will not be
considered by the procuring entity.

What happens in the case of delayed submissions? Now, the tender received by procuring entity
after the deadline stipulated in the tender documents should not be opened at any cost and shall
be returned to the bidder or the contractor that submitted it. Now, in the case of e-procurement,
no submission is allowed after the deadline and the portal shall provide a lapse in terms of the
submission of bids.

When we look at the process of opening bids, now, bids are typically opened by a bid opening
committee that is specifically allotted and set up for the purpose of receiving bids by a procuring
entity. In case of public bid openings, a record of opening the bids shall be maintained, including
the signatures of any bidders present. A bid opening report containing the names of the tenderers,
and any salient features of the tenders should necessarily be prepared by the bid opening
committee or by the tender opening officers and it shall be duly signed by them along with the
date and time. This is to ensure transparency and accountability in the entire process.

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(Refer to Slide Time: 06:07)

In many a case, along with the submission of bids, the bidders are also required to submit or
provide something called bid security or earnest money deposit. So, what exactly is bid security?
Now, as the name suggests, bid security is a form of security to safeguard against a bidder’s
withdrawal or alteration of its bid during the bid validity period in case of advertised or limited
tender inquiry. This goes to show that in the event any bidder wishes to withdraw its bid to avoid
any administrative technicalities or administrative glitches and to ensure security for bids
submitted, the bidders are required to give a security which is pre-estimated in the bid
documents.

The amount of bid security should ordinarily range between 2 per cent to 5 per cent of the
estimated value of goods or services to be procured. The amount of bid security should also be
determined accordingly by the ministry or department or the procuring entity and it must be
indicated in the bidding documents. Bid securities of unsuccessful bidders should be returned to
them at the earliest after the expiry of the final bid validity.

The bid security may be accepted in the form of an account payee demand draft, fixed deposit
receipt, a banker's cheque or even a bank guarantee. The mode of paying a bid security must be
provided clearly and explicitly in the bid documents.. A bidder’s bid security can be forfeited in
any of the following situations.

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One, if the bidder withdraws or amends his tender before the bid validity period expires, if it
impairs or derogates from the tender in any respect within the period of validity of the tender, if
the bidder does not accept the correction of his bid price during the evaluation process, or if the
successful bidder fails to sign the contract or furnish the required performance security within the
specified period, then in such situations the bid security can be forfeited. This means that the bid
security amount will not be returned to the bidder at any cost.

(Refer to Slide Time: 08:37)

When we talk about forfeiting with security or encashing bid security, a question may arise as to
the circumstances where such an amount may be encashed. In this regard, the case of the
National Highways Authority of India v. Ganga Enterprises and Anr may be pertinent.

In this particular case, the facts were such that the National Highway Authority of India issued a
tender notice inviting tenders for the collection of tolls on a portion of a highway running
through the state of Rajasthan. There were two types of securities to be furnished by the bidders.
One was a bid security amounting to rupees 50 lakhs and the other one was a performance
security for the contract by way of a guarantee amounting to rupees 2 crores. Now, both of these
bids were to be issued in the form of bank guarantees.

As per the tender documents or the bid document, the stipulations were such that the bid security
may be forfeited if the bidder withdraws his bid during the period of the bid validity or in case
the successful bidder fails within the specified period to furnish the required performance

529
security and sign the agreement. So, there were two specific and clear stipulations provided in
the bid documents. Furthermore, it was also stipulated that the bid shall remain valid for a period
of 120 days after the last date of the bid submission.

Now, in this particular case, Ganga Enterprises gave the bid but withdrew the same before the
expiry of 120 days. Now, the contract was not concluded and the National Highways Authority
of India proceeded to encash the bid security. Aggrieved by this, Ganga Enterprises challenged
this move by the National Highways Authority of India. So, the issue before the court was
whether the forfeiture of the security deposit was within the authority of law or was binding on
the contracts between the parties.

(Refer to Slide Time: 10:43)

In this case, the court held that it was a settled principle of law that a contract of guarantee is
complete and a separate contract by itself. So, the law regarding the enforcement of any demand
bank guarantee is clear and if the enforcement in terms of the guarantee, then the courts did not
interfere with the enforcement of the bank guarantee. So, what does this mean in this particular
case?

In this case, it was stipulated that if the bid was withdrawn within 120 days or if the performance
security was not given or if an agreement was not signed, the guarantee could be enforced. The
bank guarantee was to be enforced before the bid was withdrawn within a period of 120 days.
Therefore, in this particular case, it could not be said that the invocation of the bank guarantee

530
was against the terms of the bank guarantee itself. This meant that the National Highways
Authority of India was entitled to forfeit the bid security and to encash the same as it was clearly
against the expressed and explicit stipulations in the tender document.

(Refer to Slide Time: 11:46)

CAG Guidelines

Now, that we have looked at the general financial rules and the guidelines provided by the
Central Vigilance Commission, in the final segment of our discourse on the laws and guidelines
applicable to government contracts and processes of public procurement, we will be delving into
the guidelines formulated and provided by the Comptroller and Auditor General.

531
(Refer to Slide Time: 12:09)
The Role of CAG in Government Contracts

Before delving into the guidelines and regulations formulated for the Comptroller and Auditor
General, let us look at what the role of the Comptroller and Auditor General is in the context of
government contracts. As discussed earlier in the previous slides, we have seen that the CAG has
been entrusted with the sole responsibility of providing independent and credible assurance in
the context of public resources and public money.

Therefore, under the General Financial Rules, there has been a specific mandate for every
procuring entity that is governed under such rules to ensure the credibility of finances used in
public procurement. As per the General Financial Rules, Rule 21, there is a mandate to ensure
the efficient utilization of public funds and public money.

It explicitly and specifically states that every officer incurring or authorizing an expenditure from
public monies for any process of public procurement must necessarily be guided by high
standards of financial proprietary. This means that every officer should also enforce financial
order and strict economy and ensure that all relevant financial rules and regulations are observed
by his or her own office, including subordinate dispersing officers.

Now, to ensure transparency, accountability and ethical standards in every transaction in the
entire course of government procurement the General Financial Rules also provide certain
responsibilities to procuring entities. As per Rule 175, no official of a procuring entity or a

532
bidder should act in contravention of the code of integrity. Now, this code of integrity includes
the following activities which are prohibited.

This may include offering, soliciting or accepting bribes in the context of government contracts
or government tendering, misrepresentation or misleading any information, collusion, bidding or
anti-competitive behavior, improper use of information by procuring entities, financial
transactions between bidders, officials or any other officers of the procuring entity in relation to
the tender, coercion, threat or impairment or harm caused to any bidder or officer. The final may
also include obstruction to any investigation or auditing of government contracts or processes of
government tendering.

533
(Refer to Slide Time: 14:42)

While there are specific duties for procuring entities and officers of procuring entities, the
Comptroller and Auditor General is also vested with certain responsibilities to ensure
transparency and accountability in government expenditure and government funding. So, where
do these responsibilities instabilities arise from? Under the Comptroller and Auditor General,
Duties Powers and Conditions of Services Act 1971, the CAG is vested with certain
responsibilities and duties to ensure that there is a mindful expenditure and receipt of all
transactions in the context of government contracts.

As per Chapter 3 of the Act, the Comptroller and Auditor General is regarded to be the sole
authority prescribed particularly under the constitution with the responsibility of ensuring proper
audit of accounts of the union as well as the states. Therefore, it is the duty of the Comptroller
and Auditor General to audit all expenditures, all receipts and all transactions of the government
of the union and of the states and union territories.

Now, this includes government corporations, public sector undertakings, government companies,
and any other such institution, which may be regarded as a state under Article 12 of the
Constitution of India.

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(Refer to Slide Time: 16:02)

As we have seen that the Comptroller and Auditor General is vested with certain duties for the
purpose of ensuring transparency and accountability in government contracts and public
procurement, let us look at the duties and responsibilities of procuring entities vis-a-vis the role
of the Comptroller and Auditor General.

The Comptroller and Auditor General, Regulations on Audit and Accounts Regulations 2020
specifically applies to procure entities in the context of transactions incurred or transactions
carried out for processes of public tendering, public procurement or executing government
contracts. So, to whom do these regulations apply?

These regulations apply to officers and staff of the Indian Audit and Accounts Department and
all ministries and departments of the central government, the state governments and the union
territory governments as well as bodies, authorities and enterprises to which audit and accounts
jurisdiction of the CAG applies. This means that all institutions that are regarded to be a state and
are regarded to provide information of their receipts, their expenditure and transactions involving
public money coming out of the public exchequer are required to be, are required to comply with
the regulations on audit and accounts.

535
(Refer to Slide Time: 17:26)

So, how do the procuring entities comply with these regulations in providing their audits?
Simply put, as per Regulation 5 of these regulations, there are three kinds of audits required to
provide, to be provided by procuring entities, and they are financial audits, compliance audits,
and performance audits.

So, what are financial audits? Financial audits typically relate to whether an entity's financial
statements are properly prepared and whether disclosures are made in accordance with
prescribed formats given by the Comptroller and Auditor General's office. As the name suggests,
financial audits relate to finances and financial transactions incurred or carried out by procuring
entities.

The second category of audits is compliance audits. As the name suggests, these audits pertain to
compliance in relation to given transactions. So, they relate to whether a given subject matter
complies in all material respects with applicable laws, rules, regulations, courts, and general
principles governing public financial management and the conduct of public officials.
Compliance audits specifically relate to the manner in which certain transactions are required to
be carried out under a given law or guideline.

The third category of audits is performance audits. Now, performance audits are independent and
objective and reliable examinations of whether certain government entities, institutions,

536
operations, programs, funds or activities are operating in accordance with principles of economy,
efficiency and effectiveness and whether there is room for improvement.

So, performance audits generally relate to the efficiency, efficacy and economy of the manner in
which transactions relating to government contracts are carried out. As we have seen in the 5Rs
of the CVC manual, it is pertinent for every procuring entity to comply with the right quantity,
right quality, right source, right price and the right time and place of carrying out government
contracts. So, performance audits generally relate to whether such 5Rs parts have been complied
with.

(Refer to Slide Time: 19:47)

In the final limb of our discussion on the compliances under the regulations pertaining to the
Comptroller and Auditor General, let us look at the duty of procuring entities in relation to the
regulations on audit and accounts. As per Regulation 33 of the 2020 Regulations, every
procuring entity is duty-bound to provide certain information to the Comptroller and Auditor
General in the context of certain transactions or certain expenditures and receipts pertaining to
public procurement or tendering.

Under Regulation 33, auditable entities are compulsorily required to provide complete access to
all IT systems, platforms or documents used for budgeting, accounting, procurement and other
such aspects of financial management to ensure complete access to financial transactions of the

537
government or procuring entity, including all sanction orders, appropriations, re-appropriations,
surrenders, book adjustments, receipts, bills, vouchers, grants, so on and so forth.

This should ensure complete traceability of each transaction up to the ultimate spending unit that
is to the final transaction and this shall be made available for audits including financial
performance and compliance audits. In addition to this, quarterly statements of all contracts
entered into by procuring entities in the preceding quarter need to be sent or made available to
the Comptroller and Auditor General's office by the auditable entity within the first fortnight of
the next quarter.

So, this goes to show that every procuring entity must necessarily provide quarterly statements
over and above the annual statements required to be provided in context or in the backdrop of
transactions relating to certain tenders. With this discussion, we come to an end to our discourse
on the laws, guidelines and general legal framework relating to government contracts, tendering
and public procurement in India.

538
 Advanced Contracts, Tendering and Public Procurement
Ms. Gayathri Gireesh
Advocate, Bengaluru
National Law School of India University
Bank Guarantee

(Refer to Slide Time: 00:15)

Hello, everyone. Welcome to the class on Advanced Contracts, Tendering and Public
Procurement. Today's class is about Bank Guarantees.

(Refer to Slide Time: 00:25)

Bank Guarantee

539
In this section, we will deal with different aspects of bank guarantee, law, rules and regulations
and guidance. It is important to know that bank guarantee is a legal and financial instrument to
have a stable trade, business and infrastructural activities for the robust economic profit.

(Refer to Slide Time: 00:44)

What is the legal framework of bank guarantees? Let us try to understand the different laws
applicable to the bank guarantees. First and foremost, Indian Contract Act of 1872 deals with the
contract of guarantees and the bank guarantees as applicable in specific areas. The Indian
Constitution, particularly Article 299 and Article 300 deal government contracts and public
procurement.

The next is Banking Regulations Act of 1949. This Act empowers the RBI and banking
institutions to make rules and regulations for obtaining the bank guarantees for the smooth
economic growth of the country.

RBI rules and notifications: RBI is empowered by the banking regulations act, and therefore, is
the Central Bank of India which regulates the entire banking system in the country.

General Financial Rules of 2017: it is important to know that all the government procurement
and contracts follow the General Financial Rules as Rules are made for procuring bank
guarantees in government contracts.

540
CVC Guidelines: Central Vigilance Commission determines important guidelines to be followed
regarding bank guarantees as the government is accountable because of public procurement.

CAG Guidelines: the public procurement is audited by the office of Comptroller and Auditor
General and therefore makes essential guidelines for governments to be accountable in matters of
bank guarantees.

(Refer to Slide Time: 02:19)

Contract of Guarantee

We next move on to Indian Contract Act. What is a contract of guarantee? There are three
objects in the contract of guarantee. There are principal debtor, surety and creditor. And as such,
the bank guarantee also has three important components. They are principal debtor, surety and
creditor. And it is important to know that the banks always act as a surety in the matters of bank
guarantees.

(Refer to Slide Time: 02:49)

541
So, there are two types of bank guarantee, one is limited and one is continuing bank guarantee.
In a limited bank guarantee, a guarantee extends to a single transaction, which has a limited
period of time and a limited liability, which is between the principal debtor and the creditor, a
guarantee which limits the transaction to a certain amount or to certain duration of the
transaction is a simple limited bank guarantee.

And what is a continuing bank guarantee? A guarantee, which extends to the series of
transactions between the principal debtor and the creditor, the guarantee has several distinct
transactions. For example, in a government contracts which involves high value infrastructure
projects, the continuing back guarantee is applicable.

(Refer to Slide Time: 03:40)

542
Let us look into what exactly a bank guarantee is. As the word says, a bank guarantee is a
promissory legal instrument. Promissory means the bank guarantees the lender that the debtors,
liabilities of the debtors are catered to in a timely manner. In a bank guarantee, the bank offers to
stand as to guarantor on behalf of the business customer in a financial transaction.

Bank guarantees are very commonly used among business entities, because they help businesses,
as creditors get reassurance to the repayment of a loan if the business is for various reasons
unable to repay the loan. When a bank signs a bank guarantee, it promises to pay any amount
according to what is prescribed in the terms of the contract.

543
(Refer to Slide Time: 04:38)
Types of Guarantees

Other important types of guarantees are direct and indirect bank guarantees. Direct guarantees
are in foreign or domestic business and are usually directly beneficial to the beneficiaries. For
example, in a financial guarantee, the bank acts as a surety and guarantees the payment to the
creditor, which is to be given by the principal debtor. And an indirect guarantee is used often in
international trade, which is not directly given to the beneficiaries but is given to any government
agency or any other financial institution. For example, the bank acts as a surety to a foreign bank
in an international transaction.

544
(Refer to Slide Time: 05:22)
Classification of Bank Guarantees

Other important classifications of a bank guarantee are the financial guarantee and performance
guarantee. A financial bank guarantee is a debt owed, from the debtor to the creditor. The bank
guarantees that the buyer will repay the debts owed to the seller. So, when the buyer fails to do
so, the bank shall repay the debt to the beneficiary.

And what is the performance guarantee? The terms and conditions of a performance guarantee
are specified in the contract. The contract is dependent on the execution of a performance as
mentioned in the terms of the contract. The business entity when unable to provide the services
as promised, the beneficiary claimed from the guarantor which is actually a back.

(Refer to Slide Time: 06:17)

545
There are various advantages of bank guarantees. As such, the bank guarantee reduces the
financial risks involved in the business transaction. Because of the nature of low risk,
beneficiaries are encouraged to expand their business on a credit basis. So, banks generally
charge some interest for guarantees, which is beneficial and affordable to small-scale businesses
like MSMEs.

Bank guarantees are also an important way to analyze and certify the financial stability of the
business. The very reason that the bank guarantees are regulated by RBI, due diligence is
conducted by the banks and it increases the creditworthiness of the business houses. Bank
guarantees to cover all the liabilities as prescribed in the contract. When the bank guarantee is
exercised or invoked, the beneficiaries receive payment from the bank. The courts have time and
again emphasized that timely payment of a bank guarantee when invoked is the right of a
business house. A bank guarantee is advantageous for long-term projects or continuing
guarantees.

546
(Refer to Slide Time: 07:33)
Challenges of Bank Guarantees

So, let us also look into what the challenges of a bank guarantee are. For certain guarantees
involving high-value or high-risk transactions, banks require collateral security to process the
guarantee. And therefore, along with the security deposit, the banks require additional collateral
security to be maintained so that there is a low risk involved. The strict assessment of banks, and
the due diligence by banks since that the bank the creditworthiness of the business houses is
increased, but sometimes the strict assessments take a long time.

A financial guarantee is considered to assume more risk than a performance guarantee. Hence,
the fee for a financial guarantee is higher than the fee charged for a performance guarantee. A
continuing guarantee extends to a series of transactions, and therefore, the banks require
collateral as well as charge high interest. This makes the working capital and a certain amount of
working capital to be deposited in the bank.

547
(Refer to Slide Time: 08:44)
Bank Guarantee and Indian Contract Act

Now, what are the sections applicable under the Indian Contract Act, Section 128, Section 133,
Section 134 and Section 141. It is important to note that in a bank guarantee, since the bank acts
as a surety, all the rights and liabilities of the surety are attached to the bank. And therefore, all
these sections are applicable to the banks as surety.

(Refer Slide Time: 09:12)

In an important case by the Supreme Court of India, Maharashtra Electricity Board, Bombay
Official Liquidator and the High Court of Ernakulum and Anr, it was held that when a bank

548
guarantee is invoked the banks have to repay the amount and in a categorical statement the
Supreme Court held that the bank guarantee is an independent and separate contract. The liability
of the bank is not dependent on any underlying contract.

(Refer to Slide Time: 09:46)

Judicial Observations

The Delhi High Court in its several judicial interventions has stated that banks must promptly
honor the commitment of guarantees when invoked. In the words of the Delhi High Court, a
bank guarantee is a contract between the beneficiary and the bank. When the beneficiary invokes
the bank guarantee and the ledger invoking the same is sent to the bank, it is obligated for the
bank to make payment.

In another important case, UP Cooperative Federation Ltd. v. Singh Consultants and Engineers
Private Ltd, Supreme Court said that “we are, therefore, of the opinion that the correct position
of law is that commitment of banks must be honored free from interference by the courts. And
only exceptional cases where the court can intervene is the case of fraud.”

549
(Refer to Slide Time: 10:42)
Payment of Invoked Guarantees: RBI Rules

And because of such High Court and Supreme Court interventions, the RBI has made such
influence the payment of invoked guarantees. When guarantees are invoked, payment should be
made to the beneficiaries without delay. An appropriate procedure for ensuring such immediate
honoring of guarantees has to be laid down by every banking institution in the contract. There
shall be no delay on the pretext that legal advice or approval is required.

Delays on the part of banks in honoring the guarantees when invoked tend to erode the value of
bank guarantees. This RBI observation has led the RBI to make rules, specific rules for invoking
bank guarantees and payment. It also provides an opportunity for the parties to take recourse to
courts and obtain injunctions, which is actually a legal entanglement.

550
(Refer to Slide Time: 11:42)
RBI Master Circular on Guarantees

Let us look into what is an RBI Master Circular on Guarantees. The Reserve Bank of India on
November 9, 2021, consolidated all the instructions and guidelines issued to the banks till June
30, 2015. The circular is applicable to all the scheduled commercial banks and this circular is
available on the RBI website.

Now, it is a statutory directive issued by the RBI in the exercise of powers conferred by the
Banking Regulation Act of 1949. Since, as a part of business, banks issue guarantees, it is
important that the RBI regulate the conduct of business in case of bank guarantees.

551
(Refer to Slide Time: 12:25)
General Financial Rules 2017

The General Financial Rules of 2017 is an important set of rules in government procurement.
There are two latest amendments regarding the bank guarantees they are acceptance of
‘Electronic Bank Guarantees’, which is in tune with the Make in India initiative and the IT
development of the country and that surety bonds are now accepted in lieu of the bank
guarantees.

(Refer to Slide Time: 12:47)

Surety Bonds

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Let us look into what are surety bonds. Since the Union Budget ‘22 and ’23, in order to reduce
the indirect cost, surety bonds can be used. An indirect cost is around 20 per cent to 30 per cent
of the working capital given to the banks as a security deposit or as collateral, makes the
suppliers and the work contracts increase their cost, and therefore, the government has come to a
decision that to ease the liquidity the surety bonds are accepted as a substitute for bank
guarantees.

The important types of surety bonds are as same as bank guarantees. They are advanced payment
bonds, bid bonds, contract bonds, performance bonds and retention money.

553
(Refer to Slide Time: 13:35)

So, today surety bonds are accepted in lieu of bank guarantees an amendment to General
Financial Rules was made to ease the business transaction, and therefore, the Insurance
Regulatory and Development Authority of India made guidelines, because the insurance sector
has come to the financial market, which results in improved liquidity as bank guarantees required
nearly 20 per cent of the working capital.

Since the involvement of the insurance company increases private investments and it also
diversifies the risks as insurance bodies act as an alternative to banks. Revenue and capital
market access is given to the insurance companies as such there is more credit flow and liquidity
into the financial market. Now, it also has access to increased project opportunities, and
therefore, because of high infrastructure projects having high value and high risks, insurance
company acts as a surety.

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(Refer to Slide Time: 14:41)
Essential Features of Safety Insurance Contract

The essential features of the surety insurance contract are as follows:

It is a contract of indemnity. But when it becomes a surety insurance contract, it becomes a

contract of guarantee and shall be a contract of guarantee under Section 126 of the Indian
Contract Act.

It is a contract to perform the promise or discharge the liability of a third person in case of
default. The person who gives the guarantee is called surety and the person in respect of whose
default the guarantee is given is called the principal debtor. The person to whom the guarantee is
given is called the creditor.

555
(Refer to Slide Time: 15:22)

It is important to know that insurance when it is an indemnity contract has two parties and
insurance when it becomes a guarantee has three parties under tripartite agreement. So, what are
the types of surety contracts? They are advance payment bonds, bid bonds, contract bonds,
customs and court bonds, performance bonds and retention money bonds.

(Refer to Slide Time: 15:45)

Bank Guarantee and Surety Bonds

So, now, let us look into what are the, what are the differences between bank guarantees and
surety bonds. Bank guarantees are accompanied by collaterals and a high amount of security

556
deposits, whereas surety bonds are collateral free. A bank guarantee is a tripartite agreement and
as such surety then as insurance when is an indemnity is a two-party agreement, when the
insurance becomes a surety contract, it becomes a three-party agreement.

The bank guarantees are payable on demand, which means when invoked, the banks are obliged
to pay the guarantee. And surety bonds are issued by the insurance company for the tenure of the
project and it is reimbursed like an insurance policy. Bank guarantees have to be renewed
periodically and the duration is determined by the RBI. RBI regulates the bank guarantees,
whereas IRDA regulates the surety bonds.

(Refer to Slide Time: 16:38)

Letter of Credit

Let us also learn what a letter of credit is. A letter of credit is a contract wherein a bank
guarantees the payment of a supplier. It has the essential features of a bank guarantee. The
supplier meets the conditions agreed upon in the letter of credit. In the letter of credit of a sales
contract, the important entities are the buyer, the issuing bank and an advising bank. The feature
of a letter of credit is that it is an indirect bank guarantee; it is usually an international trade. And
since it is applied in international trade, the banks should comply with the directions, and
regulations issued under the Foreign Exchange Management Regulations as amended from time
to time.

557
(Refer to Slide Time: 17:22)
Validity of Bank Guarantee

What is the validity of a bank guarantee? Bank guarantees are issued as per the Indian Contract
Act of 1872 and the Limitation Act of 1963. The statutory limitation period for invoking the
bank guarantee is three years for individuals, 30 years for government contracts and 12 months
over and above the expiry date of the bank guarantee. And 12 months over and above the expiry
date of a bank guarantee is called the grace period and is also recognized by the higher courts.

The banks have automatic extension and renewal clauses in the contract. As per the RBI
guidelines, the bank guarantee should normally have a maturity of up to 10 years, which can be
renewed from time to time as per the RBI regulations. Therefore, when the bank extends long-
term guarantee, it has to look into the impact on the asset-liability and management.

We are seeing that since post-COVID the economy requires more liquidity, and more infusion of
capital in the market for infrastructure projects and government projects or for government
procurement. As such, bank guarantees plays a vital role in the economic growth of the country
and also surety bonds and letter of credit.

558
(Refer to Slide Time: 18:42)

That is about bank guarantee and its legal framework. I hope this video was educative to all the
learners. Thank you.

559
 Advanced Contracts, Tendering and Public Procurement
Mr. Jaibatruka Mohanta
Research Fellow, CEERA
National Law School of India University
Writ Reliefs in Government Contracts - Part 01

(Refer to Slide Time: 00:15)

Hello, and welcome to another session on Advanced Contracts. Today's session we will be
dealing with the topic of Writ Reliefs in Government Contracts. In this entire session, we would
understand what a writ is, what a government contract is, what different kinds of writ reliefs are
and why writ reliefs are important specifically in government contracts.

560
(Refer to Slide Time: 00:45)

Now, as we move ahead, we will understand why writ jurisdiction is required in government
contracts. First of all, we need to understand that every contract that the government enters into
is entered on behalf of the public. Now, all these contracts whether it is for the building of roads,
for bridges, hospitals or for any other purpose, it is for the welfare of the society at large.

In order to ensure that all these contracts that are entered by the government are fair, they are
free from an element of any kind of arbitrariness and without an element of bias involved in it, a
writ remedy becomes crucial and important, because every contract that is entered, it must be
absolutely fair from any kind of leniency to any particular individual or a group.

Therefore, in order to ensure that the contracts entered by the government are fair, and to ensure
that all these steps have been followed in that contract, and if suppose there is an element of
biasness involved in it, or the contract entered was not through fair means and unfair means were
used the invocation of writ remedies become crucial under Article 226 and Article 32 of the
constitution, respectively.

Now, Article 226 relates to the jurisdiction of the High Court and Article 32 relates to the
jurisdiction of the Supreme Court. We would be dealing with Articles 226 and 32 in the slides
going further ahead.

561
(Refer to Slide Time: 02:26)
Government Entity

In order to understand a government contract, it is very essential for us to understand what

actually a government entity is. And to our surprise, the Board of Cricket Control in India, the
BCCI, interestingly, is not a government entity. BCCI, just for everyone's knowledge, is the
richest Cricket Board in the entire world. It is richer than the International Cricket Covenant as
well, the ICC. Now, why is this not a government entity?

The Supreme Court in a landmark judgment held that, because BCCI is not financially,
functionally or administratively dominated by the government; nor is under the control of the
government, and therefore, it is not a state. Why did the court use the term state and not a
government entity?

In order to understand why the court uses the word state and not government entity, we need to
look into Article 12 of the Constitution. This brings us to the most important question that BCCI
is not a government entity. Why, because it does not relate its function to the government. It is a
private body that is not financially or functionally or administratively dominated by the
government nor is it under the control of the government.

That means the government does not have any say over the working of the Board of Cricket
Control for Cricket in India. BCCI is free to conduct its own charter, its own constitution in
order to ensure its functioning. Therefore, we need to understand why did the court not use the

562
term government entity in its ruling and instead use the term state. The central government and
state governments are these only considered states or is there anything more to it?

(Refer to Slide Time: 04:44)

Understanding Article 12

Let us understand Article 12 of the Indian Constitution in more detail. Article 12 of the
constitution states that unless otherwise, it requires the State to includes the government and
Parliament of India and the government and the legislature of each of the states and all local or
other authorities within the territory of India are under the control of the government of India.

Now, what does this mean when it says that the state will include the government and the
parliament and the government and the legislature of each state and all local authorities and other
authorities as and when required or under the control of the government of India? Article 12 is
that article of the constitution that goes on to explain what actually the meaning of state is.

As we just read, every government and every government in every state will be considered as
part of Article 12. Every legislature and every legislative council in each state will also be
considered under Article 12. Article 12 also uses the word local authorities. When we say local
authorities that means the municipal corporations, other bodies such as the PWD (Public Works
Department), all these authorities are under the control of the Government of India, the Central
government or the state government somehow and the other. And therefore, they are considered
as a government entity.

563
Therefore, in order to understand Article 12, we need to understand that an entity that is funded
by the government or that is functionally under the aegis of the government or takes its command
from the state government or the central government will be a state and eventually a government
entity. And any of these entities if they enter into a contract, that would be a government
contract.

It is not defined by government departments and legislatures. By defined, it means that

government departments and legislatures are not the only entities that will be considered as state
under Article 12, but it extends to the administrative, judicial or quasi-judicial folds that violate
the fundamental rights of individuals. In our constitution, there are fundamental rights that are
guaranteed to every citizen in India.

Administrative bodies such as IAS offices, the District Magistrate or the Collector, would come
under the purview of Article 12, judicial or quasi-judicial bodies. For example, the consumers,
the consumer redressal forums, would also be considered as state under Article 12. State Bank of
India is a government entity as per Article 12, because it is under the aegis of the Government of
India. A children’s aid society will also come under Article 12.

However, a cooperative society will not come under Article 12. And the reason a cooperative
society will not come under Article 12 is because it is not financed or governed by the state or
the central government. A cooperative society is a coming together of different residents in a
society and for the welfare of the society, they come up with a cooperative in order to ensure that
the living of the society happens in a proper and ambient manner.

Now, interestingly, United Nations being a global body also does not come under Article 12.
And the reason the United Nations does not come under Article 12 is that it is not financially or
functionally dependent on the Government of India or the government of any of the Indian states
or the union territories.

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(Refer to Slide Time: 09:25)

This brings us to one of the most important principles which is how do we determine what is a
government entity and against whom will a writ remedy actually lie. There are around six to
seven principles that have been incorporated by our honorable courts in order to understand
against to which entity a writ remedy will lie.

Justice Bhagwati around the years 1980 and 1981 in the landmark judgment of Ajay Hasia v.
Khalid Mujib, enshrine the principles under which we can understand that what are the important
and crucial factors that we need to understand in order to decide whether a writ remedy will lie
against that particular entity or not.

The first is the entire share capital of the corporation is held by the government. That means a
body that is completely financed by the government against such a body a writ remedy will
definitely lie. For example, the Defense Research and Development Organization, is a body
whose entire share capital is held with the government, and therefore, against organizations like
the DRDO or other state entities against these corporations, a writ remedy will definitely lie.

The second principle, a financial assistance is almost meeting the entire expenditure of that
cooperation. Now, in order to ensure that a writ remedy lies against this, it needs to be
understood that an institute or an organization that is partly or more than partly assisted by the
government in terms of finances to meet their expenses, for instance, the JNU, the Jawaharlal

565
Nehru University or the Indian Oil Corporation, all these entities they enjoy financial assistance
from the government, and therefore, a writ remedy will lie against them.

The third principle that was enshrined by honorable Justice Bhagwati was the corporation enjoys
monopoly statutes in a particular sector, for example, the Indian Oil Corporation. The Indian Oil
Corporation enjoys a monopoly in the petroleum sector. In the crude oil sector, it enjoys a major
monopoly. Then ISRO enjoys a monopoly in the space sector in India. So, all these sectors have
a monopoly in their particular sector and they are also financed by the Indian Government, either
wholly or partly, and therefore, a writ remedy will lie.

The next principle that was enshrined, a deep-rooted state or government control, for example,
all the municipal councils, the municipal corporations in all the states across India, have a deep-
rooted state control within them. And therefore, all these entities will also be liable to a writ
remedy if they enter into a government contract that is of an unfair nature.

The fifth principle that was enshrined was that the functions of this entity are closely related to
the government functions. Now, there are some entities, for example, the Water Department in
our state, their work is to ensure that proper and safe drinking water is provided to every
household. In order to ensure this responsibility, they are categorizing and they are implementing
a duty a function of the state, and therefore, a writ remedy will also lie against them.

And the last principle that was enshrined was if an arm of the government is transferred to a
corporation, for example, the Delhi Transport Corporation or the Karnataka Transport
Association, all these functions are government functions that have been transferred to a private
entity or a semi-private entity in order to ensure that they run the business. For example, in
Meghalaya, there is the MTDC, the Meghalaya State Transport Corporation and the Meghalaya
Tourism Corporation.

So, these corporations are carrying out a duty of the government. The government has given
them a duty that you ensure that the transport department in the state is run by you, the tourism at
major attractions or in smaller attractions you build a hotel and then earn revenue out of it. So,
this entire tourism arm of the government is transferred from the government’s deep-rooted
handle to private or semi-private entity.

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And therefore, if any of these six criteria if either or, or even one of the criteria are met a writ
remedy will lie against the government or against such a corporation who is indulging in any one
of the activities if they fall in one of the six categories.

567
 Advanced Contracts, Tendering and Public Procurement
Mr. Jaibatruka Mohanta
Research Fellow, CEERA
National Law School of India University
Writ Reliefs in Government Contracts - Part 02

(Refer to Slide Time: 00:15)

Now that we have understood the principles to determine government entity and against whom
writ remedy will lie, let us understand what are writ remedies.

(Refer to Slide Time: 00:23)

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Simply put, a writ remedy is a constitutional remedy available to any person to bring his or her
complaint, concern or grievance against an administrative action before the notice of the court.
An administrative action may be an action taken up by the executive body of the government
while awarding a contract while forming the principles of the various structures in which a
government contract would be awarded.

And to understand better what are writ remedies, there are two articles in the constitution that
give individuals the scope to invoke a writ remedy against a particular government organization
or a state that is Article 222. Article 222 relates to the jurisdiction of any and all the high courts
in the country and Article 226 has a broader jurisdiction, because it is only under Article 226 that
a writ remedy will lie.

Under Article 32, which is the writ jurisdiction of the Supreme Court, a writ remedy will lie
under Article 32 only if there is a breach and also a breach of fundamental rights that have been
violated. So, in order to invoke Article 32, a fundamental right also should have been violated.
However, with respect to Article 226, that is not the case. In case there is fraud or there is any
breach or the principles of natural justice have not been followed while awarding a contract, the
jurisdiction under Article 226 that is any person can approach any of the High Court in order to
get a remedy and in order to invoke a writ remedy.

Therefore, as a general rule, writ petitions generally are beyond the domain of contractual
matters since they are largely concerned with private law because contractual matters are
generally governed by the Indian Contract Act of 1872 which is a private law between two
parties. However, they become crucial when the state entity or government entity becomes
involved or enters into that contract. Therefore, we say when an element of state and a public
element is involved in a matter, writ remedies come in handy in a way that they can be invoked.

Therefore, the broad principle that could be culled out is that if a government executed exercises
its power in an arbitrary manner, which leads to an element of unfairness, then that would be
amendable to writ jurisdiction. In an interesting case, in Haryana, in Ram v. Sham Company
versus the state of Haryana, a writ petition was allowed against the government in the matter in
which the Chief Minister of the Government of Haryana had accepted a secret bid in a contract
made to him personally via the tendering process.

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In this case, a writ jurisdiction under Article 226 was exercised. For the proper enforcement of
Article 226, there has to be a breach in the case in which we just saw that the Chief Minister had
accepted a bid personally and not through the tendering process, which was actually advertised
by the government. Generally writ remedies of matters that are entered prior to entering the
contract that is pre-contract period, where the tender process is out, where people are giving in or
bidding for the process.

And therefore, for the execution of a writ remedy, there has to be a violation of any of the
principles of natural justice when a writ remedy is being invoked.

(Refer to Slide Time: 05:12)

Kinds of Writs

What are the kinds of writs in the Indian constitution? While there are many kinds of writs in the
Indian Constitution that are defined under Article 32, there are around five clear types of writs
that are written in the Indian Constitution as per Article 32. The first type of writ is a writ of
Habeas Corpus. The literal meaning of this writ is ‘you may have the body’. In case a person is
kidnapped or has been confined not via a legal process, that person or any of his close kin or
legal representatives, they may approach the court with a writ of habeas corpus to release such
person who has been detained unlawfully in prison or in private custody.

The next writ that is of crucial importance generally in government contracts is the writ of
Mandamus, which literally translates to ‘we command’. The purpose of this writ is to secure the

570
performance of public duties by a lower court tribunal or public authority. So, by virtue of this
writ, any person can approach the High Court or the Supreme Court and the High Court or the
Supreme Court will command the lower court tribunal or public authority to ensure that this duty
is carried out by that public organization, government entity or state entity.

The next kind of writ is the writ of Certiorari which is ‘to be certified’. This writ is also issued by
a higher court to a lower court in order to quash the order already passed by an inferior court,
tribunal or quasi-judicial authority. This is generally done when the decision of the lower courts
or the tribunal or quasi-judicial authorities is not in line with the principles of justice.

The next writ is the writ of Prohibition which literally translates to halt the proceedings. So, this
is again issued by a higher court when an inferior court over a lower court from continuing the
proceeding in a particular case where that particular lower court does not have the jurisdiction to
entertain that matter.

The next type of writ is the writ of Quo Warranto. This literally translates to ‘what is your
authority?’ In this writ also a higher court sends an order or a question to a particular individual
holding government office that by virtue of what authority are you entitled to hold this office.
Apart from these five writs, writs can be concluded or they can be mixed. For example, they can
be a writ of habeas corpus plus mandamus, a writ of mandamus plus certiorari.

In this way, there are many kinds of writs in the Indian constitution. However, the focus of
today's session is on the writ of mandamus, because this comes very handy in case of
government contracts.

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(Refer to Slide Time: 08:27)
Writ of Mandamus

As we just learned about it, a writ of mandamus is a writ issued by a higher court to a public
authority to perform legal duties which it has not or has refused to perform. This writ can be
issued by the court against a public official, against a public corporation, against a tribunal,
against an inferior court or the government. So, a person approaches the court seeking a writ of
mandamus when a particular legal duty has not been carried out by a public authority that should
have been carried out.

It is important to note that a writ of mandamus cannot be issued against a private individual or
body. Individuals like you and me in a personal capacity against us, a writ of mandamus cannot
be issued. Further, a writ of mandamus cannot be issued against the President or the Governor or
against the Chief Justice of India or the Chief Justices of any of the Indian states.

It is also crucial for us to note that it cannot be issued in the following circumstances. For
instance, a writ of mandamus will not be issued if the duty in question or the person who has
gone to the court is asking or invoking the writ of mandamus against a duty that is discretionary
in nature and not mandatory.

It means that it is not mandatory for the government to ensure that you have a beautiful garden
and that you have 10 types of trees in your garden. So, if a person invokes the writ of mandamus

572
and approaches the court by saying that I should have 10 types of trees in my garden, this is not
a duty of the government and against this, a writ of mandamus will not lie.

For the performance of a non-statutory function; that is if there is a function that is not mandated
by any of the statutes or in any of the legislations, then a writ of mandamus will not lie. Third,
the performance of duty involves rights of a purely private nature. Something that is purely
private in nature, for instance, painting your house if it has undergone a lot of wear and tear or in
order to ensure that your house remains in habitable condition, is a purely private matter and
against this writ of mandamus will not lie.

The fourth point is where such discretion involves any violation of any law. If you approach the
court with the writ of mandamus and you are asking a duty in which if the court grants you that
there will be a violation of a law. So, in this case, also a writ of mandamus will not lie. The next
point is where there is any other remedy available under the law. So, we need to understand that
to invoke a writ of mandamus it should be the last resort that should be there.

For instance, if there is a tender that has been floated by the government and the last date to
receive all bids is the tenth of August, and one bid was received on the eleventh of August. So, in
this case, the person who submitted his tender on the eleventh of August if he gets the contract,
so in this case there is no other remedy involved because this is the last chance. And if a writ of
mandamus is not invoked in this particular matter, that person would go ahead with the contract
and out here there is no other remedy involved under the law, and therefore, a writ of mandamus
will lie.

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(Refer to Slide Time: 12:41)
Understanding Government Contracts

We have understood what a state entity is, what a government entity is, we also understood the
writ of mandamus will lie against a public authority, against a public official, and so on and so
forth. But it will only lie when there is a government contract. A government contract is a
contract in which one of the parties is the government.

For example, a contract entered between the Indian Oil Corporation and Reliance Industries.
Now, Reliance Industries is a private entity. On the other hand, Indian Oil Corporation is a
government entity. So, this contract is a government contract.

Second, the state as well as the central government may be the party in a government contract.
For example, in the construction of a road, a road that is connecting interlinking between cities,
there is a contract between the Municipal Corporation and gold developers. So, gold developers
is a private entity. On the other hand, the Municipal Corporation that has actually tendered the
contract, process the tendering process, it is a government entity. So, this also becomes a
government contract.

It is essential for us to note that all government contracts are made in the name of the President
of India. It cannot be made against, it cannot be made without the President of the government of
any state. Now, this is not the case that the government, that the President of India will come and

574
execute every contract. The President has delegated powers to various organizations, to various
individuals, and they are carrying out the contract on behalf of the President.

575
(Refer to Slide Time: 14:42)
Government Contracts: Provisions in the Indian Constitution

There are a few provisions in the Indian Constitution that are of vital importance in order to
understand the government contract. Article 298 is the power of the government that confers
power on the government to make contracts. It gives the power to any government entity to carry
out trade, etcetera. So, this is the executive power of the state and the central government that is
helping the entity to enter into contracts.

Similarly, there is Article 299. Article 299 specifically deals with contracts. It specifically deals
with all contracts made in the executive power of the union or the state that must be expressed to
be made by the President. There are some essentials that Article 299 states. Article 299(1)
actually states the essentials of a government contract. First the government that the contract
entered should be entered on behalf of the President or the governor. And then there is Article
299(2) that is, which states that no personal liability with regard to any contract will lie against
the President or the Governor under the contracts entered.

Article 73 and Article 162: Article 73 of the Indian Constitution deals with the extent of the
executive power of the union and Article 162 deals with the executive power of the state. So, by
virtue of these articles, the government entity enters into the contract, because these are the
governing articles that actually give power to a government entity to enter into a government
contract.

576
(Refer to Slide Time: 16:42)
Understanding Courts & Government Contracts

It is very crucial to understand courts and government contracts. Now, firstly, when there are two
entities, for example, if there is a contract between Reliance and Tata, both are private entities, so
the remedy will not fall under a writ. This will be governed by private law, and the private field
will operate in this contract. For example, Arbitration can be a way to solve disputes. This relates
what is the scope of the contract.

However, in order to ensure that a government entity against whom a writ of mandamus will lie,
in such a scenario in a contract one of the parties should be an entity as per Article 12 of the
constitution. Only when a party is a government entity, the court will entertain a writ relief in
that matter.

When one party is the government or state, things change. Why is it so important when a party
becomes a government and a writ remedy will lie in that matter? Firstly, as we had already
discussed in the first slide a government contract is a representation of the people.

That means a minimum standard of fairness should be taken care of while such contracts are
being entered, because the government office or a government position is always handled for a
particular time period. That is we as people are giving that power to that entity or to that officer
to carry out a duty that is for the welfare of the individual.

577
Next, a writ jurisdiction can be invoked by demonstrating that a public law remedy is being
taken. In the construction of roads, it is for the people. If there are bad roads, people will suffer.
If there is a bridge or a flyover is being constructed; all of these are public duties. When an
institute of public importance is being constructed, for example, a Central University is
constituted by the government.

Now, the way in which the Central University after it comes into the picture starts its
construction, starts building its quarters, its classrooms, and administrative buildings, all these
will come under the purview of the government contract because even if a contractor is involved,
on the other hand, there is a public duty by the Central University to ensure that all the contracts
are entered in a free and non-coercive atmosphere.

Now, since the decision of the government under Article 298 is an executive decision that is
subject to Part III, (Part III relates to the fundamental rights of the Indian Constitution), and
therefore, the principles of fairness come into the picture. That is Article 14 comes into picture.
And therefore, all contracts involve an element of fundamental right when it is being executed or
being awarded to a particular individual. And therefore, Article 226 and Article 32 which is the
jurisdiction of the Supreme Court become handy.

(Refer to Slide Time: 20:30)

Judicial Review: Two Spheres

578
There are two spheres in understanding government contracts and when will a judicial review lie.
Very simply judicial review means, the court entertains a review of a particular matter. There are
two broad areas in a government contractual matter. The first is before or during the matters of
awarding a contract on the grounds.

First, when the tender is floated, if during that time, there is illegality in the manner in which a
contract is being awarded, if there is irrationality, or if there is a procedural impropriety that
means illegality, irrationality and procedural impropriety. When there is a foul or an element of
biasness that has been going on while awarding a contract to a particular individual, for instance,
if there are five people in a bidding contract wherein they have to construct an administrative
building for the Government of India.

There are five people and L5, the person who got the bid quoted the highest amount that it is 200
crores and the person who quoted the lowest amount which is 100 crores, did not get the
contract. So, this is somewhere that irrationality has taken place that you have awarded a contract
to a person who has quoted 100 crores more price. So, this is an irrationality with respect to the
prices.

Coming to illegality. Illegality could be forged papers or forged documents have been used to
award a contract to a particular individual. Therefore, judicial review will lie in this particular
matter. Third, the procedural impropriety, now if every contractor or every bidder had to follow
five steps to submit their bid, and there is one person who directly submitted his bid without
completing the five steps, there is a procedural impropriety that has taken place. And these are
matters before awarding a contract and the judicial review will lie in such a matter.

Post-award matters: Generally post-award matters become the realm of private law because it
deals with the interpretation and implementation of a contract, discharge of contractual
obligations, breach, novation, etc. Now, generally, it is a writ jurisdiction that lie only in point A
that is amenable to writ restriction on the well-established grounds of fairness, justice, equity,
and so on and so forth. However, post-award matters generally fall within the purview of private
law. Therefore, they being amenable to writ jurisdiction depend on a case to case basis and on
the facts and circumstances of every case.

579
(Refer to Slide Time: 24:15)
Principle followed by Courts

Now that we have seen the matters and the aspects of when a judicial review will take place or
when the court will take interest in a matter, let us proceed ahead and understand the principles
by which the courts have come down to this proper point. Now, there are a few things that we
need to keep in mind.

The first, in modern trends, the case laws that have evolved in recent years, as we will discuss in
the next few slides, point to judicial restraint in administrative action. That is only in
administrative action when there is an element of administrative or executive action involved,
proper judicial restraint will take place in that matter.

Now, we need to understand that these courts do not sit the High Court or the Supreme Court in
government contractual matters. They do not sit as a court of appeal. However, they just review
the decision that has been taken by the government entity or the state entity that whether or not
they follow the principles of justice, have they followed the pillars of Article 14, that is the
element of fairness.

The government must have freedom of contract. And this is well recognized by our courts. And
therefore, they do not interfere in every matter only and unless it is very important and if a
principle is not being followed, only then do they enter the domain of the contract that the

580
government has entered into. And the decision must be free from arbitrariness and not affected
by bias or actuated by any mala fide intent.

This is the only thing that the court considers before taking up a matter that the decision that the
government entity took with respect to a particular contract is free from arbitrariness and no
element of biasness was involved in it or any mala fide intent that is any bad intention was
involved in that particular decision.

The last point relates to the judicial approach and manifests a very simple point that where the
dispute is within the contractual field, pure and simply a writ petition cannot be moved under
Article 32 or 226. For instance, if there is a contract for the supply of sugarcane, and the supply
of sugarcane in the contract was 100 kgs, but only 80 kgs of sugarcane came and 20 kgs was not
delivered.

So, this is an element in a contract that is of a purely contractual nature. This is not something
where an administrative action took place, and so on. And therefore, in this case, a contractual
element of private law gets involved and a writ petition cannot be moved under Article 226 or
32.

(Refer to Slide Time: 27:24)

Recent Judicial Pronouncements

Now, let us look into a few case laws, the most recent being of the year 2022 in Prakash Singh v.
Union of India and Anr. In this a very interesting story actually took place. The appeal was filed

581
before the division bench of the Delhi High Court in this matter against the order of the single
judge that had dismissed the petition filed by the petitioner laying allegations of racial
discrimination and harassment against Agence France-Presse against him. Now, the court
dismissed the petition as not being maintainable. A writ, a petition under Article 226 invoking
the writ of mandamus was invoked in this particular case.

The division bench the Delhi High Court ruled that a writ of mandamus is not a remedy against
private firms as we have just seen in the previous slides. In addition, courts cannot interfere with
the internal management of a private body in a writ of mandamus. It further went on to observe
that Agence France-Presse was neither created by any law passed in India nor was it entrusted
with the function which can be termed as governmental or closely associated therewith having
public importance of or being fundamental to the life of people.

Agence France-Presse does not fall under Article 12 of the constitution. Since it is not a
government body, it has not been created by a governing body and it does not carry out any of
the function that is delegated or legislated by the government and is not even an arm of the
government. Therefore, it is a private entity, not governed by any of the governments in India or
local governments. And therefore, a writ petition will not lie against a body such as Agence
France-Presse because it is not a government entity.

(Refer to Slide Time: 29:49)

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Next, in Hari Krishna Mandir v. State of Maharashtra (2020), the Supreme Court was hearing the
case related to a private road in Pune being declared as being owned by the Pune Municipal
Corporation. While in the property records, there was no private road. The issue at hand was the
owner might obtain restoration of possession by proceeding for mandamus against the
government.

The court held interestingly that there is a duty to issue a writ of mandamus for the enforcement
of public duty where the government or public authority has failed to exercise or wrongly
exercised discretion conferred upon by a statute or rule or a policy decision of the government or
has exercised such discretion malafide or an irrelevant consideration.

In this case, the Supreme Court issued the writ of mandamus because it was for the purpose of
construction of a road that is a public duty of the government to ensure that its citizens have a
proper and safe road in the country.

(Refer to Slide Time: 31:09)

The next case is Gujarat State Financial Corporation v. Lotus Hotels Private Limited. The broad
issue in this case was the appellant, that is the Gujarat State Financial Corporation, did not
disburse the loan to the respondent in terms of the agreement entered. Second, the appellant
contended that the dispute was within the realm of contract, and therefore, breach of contract and
therefore mandamus cannot be issued.

583
The Supreme Court very interestingly held that if the appellant entered into a contract in
discharging the performance of its statutory duty and the respondent acted upon it, the statutory
cooperation that is the Gujarat State Financial Corporation cannot be allowed to act arbitrarily so
as to harm and injure flowing from its unreasonable conduct with respondents. In this situation,
the court is not powerless from holding the appellant to its promise and it can enforce a writ of
mandamus directing it to perform its statutory duty which is to disburse the loan amount that had
been agreed between the two entities.

(Refer to Slide Time: 32:31)

In the case Mahabir Auto Stores v. Indian Oil Corporation, the respondent is Indian Oil
Corporation which is a statutory body and the appellant Mahabir Auto Stores is a partnership
firm. Now, the appellant is engaged as a lube distributor of the respondent that is Indian Oil
Corporation and was selling all kinds of lubricants since 1965 of the Indian Oil Corporation.
Now, they were receiving continuous supply ultimately it randomly stopped on May 27, 1983.

A writ of mandamus was filed in the High Court by Mahabir Auto Stores and the High Court
held that the writ is not maintainable. Now, eventually, Mahabir Auto Stores went to the
Supreme Court and the Supreme Court held the respondents under Article 12 said, whether a
public or private law is involved depends upon the facts and circumstances of the case and set
aside the High Court’s judgment.

584
The Supreme Court held, the Indian Oil Corporation when without informing the parties
concerned herein of the alleged change of policy and on that basis action to seek to bring an end
to the course of transaction over 18 years involving large amounts of money is not fair action,
especially in view of the monopolistic nature of the power of the respondent in this field.

Now, this monopolistic nature was held and was promulgated by Justice P.N. Bhagwati in Ajay
Hasia’s case as well. We discussed in the previous slides that when an entity is having a
monopolistic nature in a field, it cannot act in an arbitrary manner. And the party whose rights
and powers are affected or sought to be affected must be taken into confidence during such
decisions.

So, as we saw in this case that Mahabir Auto Stores was distributing the lubes that is being
generated by Indian Oil Corporation, all of a sudden IOC stopped the continuous supply to
Mahabir Auto Stores. And therefore, the Supreme Court held that when a party like the Indian
Oil Corporation that has held a monopolistic nature in this field cannot take decisions without
taking the other party that is Mahabir Auto Stores into confidence during the enactment of such
decisions.

(Refer to Slide Time: 35:11)

Essence of Mandamus in Government Contracts

This brings us almost to the end of the session. And very interestingly let us delve into the
essence of mandamus in a government contract. Now, the most crucial aspect for getting the writ

585
of mandamus enforced is, in government contracts the court’s jurisdiction under Article 226 or
32 never gets ousted completely. The court will only examine a matter if it has an element of
public law or character attached to it and this varies from case to case and upon the interpretation
of the court’s understanding of the matter.

When there is a construction of a road, the writ of mandamus will lie. When there is the element
of constructing a hospital, a government hospital, the element of, the writ of mandamus will lie.
So, when there is a public duty, public law or a public responsibility that is involved, in such
scenarios the writ of mandamus will lie.

(Refer to Slide Time: 36:19)

Thank you for your time.

586
 Advanced Contracts, Tendering and Public Procurement
Ms. Aparna S
Research Fellow, CEERA
National Law School of India University
Arbitration Clauses in Government Contracts

(Refer to Slide Time: 00:15)

Hello, everyone. Welcome to another session on advanced contracts. In today's session, we will
be looking into Arbitration Clauses in Government Contracts. We will begin by having a brief
understanding of the arbitration process in India. We will then proceed to understand how
arbitration clauses are drafted in government contracts.

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(Refer to Slide Time: 00:37)
Stages in Arbitration

First, let us look into how the arbitration process is conducted in India. So, as you might know,
arbitration is an alternative dispute resolution mechanism, wherein parties agree to have their
dispute resolved to a neutral third party. This neutral third party called the arbitrator is chosen by
the parties themselves.

So, the first stage in an arbitration process would be the parties entering into an arbitration
agreement. And then, through this arbitration agreement, they submit their dispute to be resolved
through arbitration. Thereafter, there is a hearing before the arbitrator, and finally, the arbitrator
pronounces the award which is called the arbitral award. It is pertinent to note that this arbitral
award is legally binding and is enforceable through the courts, like any other ordinary judgment
that is pronounced by the courts.

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(Refer to Slide Time: 01:32)
Stages in Conciliation

We also have conciliation, which is another alternative dispute resolution mechanism involving a
neutral third party, who helps the parties to arrive at a settlement. The neutral third party in this
case is called the conciliator. Like arbitration, the parties enter into an agreement called a
conciliation agreement, and the conciliator can meet the parties either individually or together.
Once the meeting with the conciliator is over, the conciliator formulates the terms of settlement
and submits it to the parties.

The parties can ponder upon it and decide whether they want to adhere to these terms of the
settlement. If they are not satisfied with it, they can request a reformulation of the terms of
settlement to the consultant. So, as such the conciliator’s report alone would not be binding on
the parties. However, once they sign the final terms of the settlement, based on the conciliator’s
report, then it will become binding like an arbitral award.

So, now that we have looked into arbitration and conciliation, how do these two forms of
alternative dispute resolution mechanisms differ from each other, and what are the points in
which they diverge.

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(Refer to Slide Time: 02:49)
Arbitration v. Conciliation

The main difference between arbitration and conciliation lies in the nature of dispute resolution
that has been followed in both of these mechanisms. In arbitration, it is adjudicatory in nature.
So, once a matter is referred by the parties for arbitration, then the final settlement that is arrived
at is much like a formal judgment of the court. So, it can be challenged only on very few selected
grounds that are laid down in the Arbitration and Conciliation Act, such as violation of natural
justice principles, fraud, violation of public policy, etc.

Conciliation, on the other hand, is negotiated in nature. So, even if the parties fail to arrive at a
settlement amongst themselves, the matter automatically goes back to the court for final
resolution. Secondly, when it comes to arbitration, it is very crucial that the parties enter into an
agreement with each other before the dispute commences. So, once the arbitration agreement is
in existence, then only the dispute can be referred for, being resolved through arbitration.

However, on conciliation, it is not necessary that there has to be an agreement before the dispute
arises. There has to be a conciliation agreement between the parties. However, these agreements
can be entered into even after the dispute has commenced. So, even if the litigation or arbitration
is already underway, you can opt for conciliation, even though it is impendence.

Now, coming to arbitration, it can be availed, both for existing as well as future disputes.
However, conciliation can be availed only for existing disputes. Then the decision of the

590
arbitrator, as we saw earlier, is automatically binding on the parties and is enforceable through
the courts. Conciliator’s report, on the other hand, could not be per se binding. It becomes
binding and legally enforceable only when the parties sign the final settlement agreement.

(Refer to Slide Time: 04:59)

Types of Arbitration

Arbitration itself can be of two kinds, ad-hoc and institutional.

(Refer to Slide Time: 05:04)

In ad-hoc arbitration the parties themselves determine the procedure that is to be followed, the
number of arbitrators who have to be appointed, the manner in which the arbitrators are to be

591
appointed etc. And since the procedure, as well as the appointment, is determined by the parties
themselves, there is greater flexibility in ad-hoc arbitration, and it is more cost-effective as
compared to institutional arbitration.

In institutional arbitration, the disputes are referred to institutions such as the Indian Council of
Arbitration or the Delhi International Arbitration Center, or Mumbai Center for International
Arbitration, etc. And the rules of the arbitral institution would govern the procedure that is to be
followed and the manner in which the arbitrators are to be selected, etc.

So, since there are well-defined rules that have been laid down, institutional arbitration is more
likely to be time-bound when compared to ad-hoc arbitration. And in institutional arbitration, the
rules may have provisions for appointing experts as arbitrators. But since it involves a lot of
administrative and legal expenses, it can be quite expensive when compared to ad-hoc
arbitration.

(Refer to Slide Time: 06:25)

Powers of an Arbitrator

Now, we would be looking into the powers of an arbitral tribunal under the Arbitration and
Conciliation Act. Firstly, an arbitrator has the power to order interim measures under Section 17.
So, this section stipulates that if either of the parties makes an application in this regard, then the
arbitral tribunal or the arbitrator has the power to order interim measures, such as the
appointment of a guardian.

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If there is a party who is a minor or who is of unsound mind, then the arbitral tribunal can order
the preservation or sale of the goods or property that are the subject matter of the dispute. It can
make orders that are necessary for securing the amount that is in dispute. It can make similar
orders for the appointment of a receiver. So, these interim orders that are pronounced by an
arbitral tribunal are enforceable just like the interim orders that are passed by ordinary courts. So,
it can be enforced under the Code of Civil Procedure.

Now, the second power of an arbitral tribunal is the power to proceed ex parte. This has been
mentioned under Section 25. So, this power is exercisable when one of the parties to the
arbitration fails to turn up or does not provide sufficient evidence before the arbitral tribunal. In
such cases, if it is a party who has failed to show up, then the arbitral tribunal can make an award
in the absence of that party, or if there has been no proper furnishing of evidence, then the
arbitral tribunal can proceed with the evidence that is presented before it. So, this is referred to as
the power to proceed ex parte.

Now, under Section 26, the arbitral tribunal has the power to appoint experts for rendering an
opinion on specific issues that it refers to such experts. It is just like taking an expert opinion.
Perhaps the most important power of an arbitral tribunal is the power to make awards. This can
be seen under Sections 31 and 31A of the Arbitration and Conciliation Act.

So, the power to make awards includes the power to make an interim award before terms in the
final award. And it also includes the power to impose costs, the costs that are involved in the
arbitrary proceedings, such as the fees of the arbitrator, the expenses incurred in producing the
witnesses, then other legal and administrative expenses and the arbitral tribunal has the power to
determine the amount of costs that will have to be paid and which of the parties has to pay it, in
what manner it has to be paid, etc.

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(Refer to Slide Time: 09:20)
Appeal from an Arbitral Award

There are very few grounds on which an appeal can be preferred from an arbitral award once it
has been pronounced. And these grounds have been laid down under Section 34 of the
Arbitration and Conciliation Act. If at all an appeal has to be preferred, it has to be on any one of
these grounds then only the courts will consider setting aside an arbitral award.

So, subsection 1 of Section 34 lays down seven grounds on which an arbitral award can be
challenged before the ordinary courts. The first ground is that if the party to an arbitration is
under some incapacity, say that person is a minor or that person was of an unsound mind, etc. If
that party has some incapacity, then it can be challenged on that ground. The second round is that
the arbitration agreement that has been entered into between the parties themselves is invalid
under the law.

Thirdly, if no proper notice is given to one party about the appointment of the arbitrator, then
that party can prefer a challenge of the arbitral award before the courts. The fourth ground is that
the arbitral award that is pronounced by the arbitrator contains matters, which is beyond the
scope of what was submitted to the tribunal. The fifth ground is that the composition of the
arbitral tribunal or the arbitral procedure that was followed in the proceeding it is different from
what was envisaged by the parties under the arbitration agreement.

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Then the sixth ground is that the subject matter of the arbitration, the subject matter of the
dispute in itself is incapable of being settled by arbitration. We will be looking into such subject
matters which are non-arbitrable in subsequent slides. And the last ground is that the arbitral
award is in conflict with the public policy of India. So, the statute itself lays down three grounds
on which it can be said to be conflicting public policy of India.

The first is if there is any fraud or corruption, the second is if it contravenes any fundamental
policy of Indian law, and the third is if it conflicts with the most basic notions of morality or
justice. If any of these three conditions are met, then it can be said that the arbitral award is in
conflict with the public policy and it can be challenged on that ground.

(Refer to Slide Time: 11:55)

The grounds public policy of India under Section 34 has been interpreted by the Supreme Court
in a significant number of judgments. In ONGC v. Saw Pipes, for instance, the Supreme Court
has categorically laid out that the public policy of India under Section 34 would refer to matters
that concern the public good and public interest.

So, the court itself gave an illustration as to what would amount to a matter involving public
interest. Say, if any award or a judgment contravenes or fails to take into account any statutory
provision that is enforced, then that would be against the public interest. And consequently, it
would also be against public policy. And an arbitral award if rendered on these lines can be
challenged before the courts.

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Secondly, in Associate Builders v. Delhi Development Authority, the Supreme Court has stated
that the arbitral award if it has to be challenged before the courts has to be so unfair and so
unreasonable that it should be in a position to shock the conscience of the court. Now, apart from
these seven grounds that have been laid down under Section 34, clause 1, there is an additional
ground that has been mentioned under subsection 2A of Section 34, which is the ground of
patent illegality.

So, arbitral awards can also be set aside by the court if there is a patent illegality on the face of
the award. In Ssangyong Engineering and Construction Company Limited v. National Highways
Authority of India, the Supreme Court clearly laid down that, patent illegality refers to such
illegality which goes to the root of the matter. However, this is to be distinguished from a mere
error in the application of law to the facts of the case. It is a grave error which goes to the root of
the matter that makes an illegality a patent illegality.

Now, merely because a particular act of a party does not fall within any of the other grounds
mentioned under Section 34, the other party cannot bring it under patent illegality. Now, the
Supreme Court and various High Courts themselves have laid down what can amount to patent
illegality. So, to give you two examples, if perhaps the arbitral tribunal awards, an interest on the
damages and the interest that is so awarded is high and very exorbitant, then that would come
within the ambit of a patent illegality.

Then if the damages that are awarded by an arbitral tribunal that is based on some conjecture and
not on the basis of any reasonable quantifications, then that may amount to patent legality and
that can be challenged before the courts. So, these are the specific circumstances under which the
arbitral award can be challenged before the courts in India.

And Section 34 clearly specifies that a party cannot approach the courts by saying that there was
some error in the application of the law by the arbitral tribunal, or that if the court were to take a
look into the evidence once more, it would reach a different conclusion etc. So, an erroneous
application of law or a representation of evidence is not a ground for challenging arbitral awards
before courts.

596
(Refer to Slide Time: 15:32)

In two recent decisions, the Supreme Court has clarified the scope of the finality of an arbitral
award and the situations in which the Supreme Court can intervene with the decision of an
arbitration tribunal. So, in NTPC v. Deconar Services, as well as its decision in Indian Oil
Corporation v. Shree Ganesh Petroleum, the Supreme Court has clearly stated that it is not an
appellate authority from the decision of an arbitrator. It can intervene only in certain specified
situations that are laid down in Section 34.

Moreover, as long as the arbitrator has taken reasoning or has arrived at a conclusion that is a
possible one, then the court will not intervene. However, if the arbitral tribunal has, say, for
instance, failed to adhere to the terms of the contract or has ignored the specific terms of a
contract, then the award rendered is amenable to a challenge on the ground of patent illegality.

However, the sole fact that a different point of view could have been taken by the arbitrator or an
alternative interpretation could have been preferred by the arbitrator will not be a ground for
challenging an arbitral award before the courts, before the ordinary courts in India.

597
(Refer to Slide Time: 16:55)
Appeal from orders in arbitral proceedings

Appeals can also be preferred from the orders that are passed during the course of arbitrary
proceedings. So, certain orders may be passed by ordinary courts, and certain orders may be
passed by arbitral tribunals. With respect to these, Section 37 of the Act enumerates the
situations where an appeal can be preferred before the ordinary court. So, if the court refuses to
refer the parties to arbitration or if the court refuses to grant any interim measure under Section
9, then an appeal can be preferred against that order before the appellate court.

Similarly, if the arbitral tribunal refuses to grant an interim measure or there is a dispute with
respect to the interim measure that has been granted under Section 17, then an appeal can be
preferred before an ordinary court with respect to this. An appeal can also be preferred against an
order passed by an arbitral tribunal with respect to the setting aside or refusing to set aside of an
arbitral award under Section 34.

Lastly, if an arbitral tribunal accepts that it does not have jurisdiction or that it exceeded the
scope of its jurisdiction that was conferred on it by virtue of the arbitration agreement, an appeal
can be preferred against this order before the ordinary court.

598
(Refer to Slide Time: 18:16)
Scope of the Remedies under Arbitration

Now, that we have looked into the nuances involved in arbitration, let us also try to understand
the scope of the remedies that are granted under arbitral proceedings. Essentially, we will be
trying to look at how the remedies and release that are granted under arbitral proceedings are fair
when compared to the remedies that are granted by ordinary courts in ordinary adjudicatory
proceedings.

Firstly, what needs to be borne in mind is that an arbitral award once pronounced by an arbitral
tribunal is enforceable on its own, it need not be separately validated by the high courts or the
Supreme Court. Secondly, an arbitral award is binding only on the parties to a particular
arbitration agreement. It is not binding on third parties.

The third aspect that needs to be borne in mind is that an arbitrator is strictly bound by the terms
of the arbitration agreement. The procedure that has to be followed the manner in which things
are to be done all of that is strictly to be done according to the terms of the arbitration agreement.
He cannot go beyond the scope of the arbitration agreement.

Fourthly, the interim orders that are passed by an arbitral tribunal are at par with the interim
orders that are passed by an ordinary court. So, it is as legally binding and as legally enforceable
as an ordinary interim relief that is passed by the High Courts or the Supreme Court.

599
Lastly, the arbitrators at present can determine whether or not a party to a dispute is entitled to
punitive damages if the provision for that regard is specifically provided in the arbitration
agreement. The scope of granting of punitive damages by ordinary courts is yet in dispute.
However, as far as arbitrary proceedings are concerned by judgment of the Delhi High Court has
established that an arbitrator can award punitive damages if the arbitration agreement has a
particular clause mandating that.

(Refer to Slide Time: 20:29)

Challenges while drafting arbitration clauses

Before moving into the topic of the drafting of arbitration clauses, it is useful to understand some
of the challenges that are associated with the drafting of arbitration clauses. Firstly, a situation
can emerge when the parties to an arbitration agreement cannot agree on the appointment of an
arbitrator, or the parties may have nominated their arbitrators but there might be a deadlock with
regard to the appointment of the third arbitrator. In such situations, the commonly followed
procedure is that the Supreme Court or the High Courts intervene, and they may either appoint a
person to be the arbitrator or they may refer the matter to an arbitral institution.

Another common challenge that is associated with arbitration clauses is the issue of seat versus
place of arbitration. Now, this is more clearly observed with respect to International Commercial
Arbitration which is where one of the parties to an arbitration agreement is a foreign entity. In
such situations, it is very common for the parties to use phrases like seat, place and venue of

600
arbitration. However, each of these may not mean the same thing. They cannot be used
interchangeably, even though it is usually used like that.

So, in such situations, after a long series of judgments, the Supreme Court has categorically laid
down in Mankastu Impex v. Airvisual Limited that the mere usage of a place of arbitration or
seat of arbitration or venue of arbitration cannot clearly indicate where is the place of arbitration
that is intended by the parties. That has to be inferred by looking into the other terms of the
contract and the intention of the parties while they entered into the agreement.

So, the seat of the arbitration, that is the place where the arbitration will finally take place, that
has to be looked into by referring to the other terms of the contract as well. So, if a perusal of the
other terms of the contract as well as the intention of the parties revealed that a particular place is
the place where the parties intended as the final resolution of the dispute, then that would be the
seat of arbitration.

Another aspect that needs to be borne in mind is that there are certain aspects that are non-
arbitrable. That is, they cannot be settled by virtue of arbitration. The Supreme Court has laid
down the list of aspects that cannot be settled by virtue of arbitration in a case called Vidya
Drolia v. Durga Trading Corporation.

In this case, the court enumerated that matters regarding the sovereign functions of a state or
matters having a public interest element or matters with respect to actions in rem or matters that
have the potential to infringe on a third party's rights or matters that have been specifically
excluded from the purview of arbitration by any particular statute all of these non-arbitral, non-
arbitrable matters, and they cannot be resolved by virtue of arbitration proceedings.

601
(Refer to Slide Time: 23:51)
Arbitation Clause in Government Contracts

Now, let us look into how arbitration clauses are drafted in government contracts. So,
government departments usually publish a document called General Conditions of Contracts.
And in this document, there would be clauses stipulating how the arbitration of disputes is to be
conducted. And in a typical government contract, the arbitration clause may contain any of the
following stipulations. For instance, it may contain a stipulation that certain matters would be
non-arbitrable. In government contracts, it would be referred to as excepted matters.

Secondly, there may be a stipulation that the parties to the contract will have to first exhaust the
dispute settlement mechanism involving the government officer before they proceed to formal
arbitration. Thirdly, there may be a stipulation that disputes involving a monetary value of a
certain extent will be resolved by a sole arbitrator and disputes exceeding that monetary value
will be referred to a panel of arbitrators.

What is to be borne in mind is that, even if it is a sole arbitrator or a panel of arbitrators, they
would be chosen from the panel comprising of government offices. Let us see some practical
examples in order to understand this better.

602
(Refer to Slide Time: 25:16)

These are the general conditions for contract and construction works that have been published by
the Central Public Works Department in the year 2020. Let us look into the arbitration clause
that has been formulated in these general conditions for a contract. So, firstly, it can be seen that
there is a stipulation in this arbitration clause that the parties to the dispute have to first approach
a Disputes Redressal Committee, and only after 30 days have elapsed from the decision of this
Disputes Redressal Committee that parties can opt for arbitration.

Secondly, it clearly states that for disputes involving rupees 20 crore or less than that, there will
be a sole arbitrator and this sole arbitrator will be appointed by the Chief Engineer or Additional
Director General or Special Director General in this department. And if the dispute involves
more than 20 crores, then there will be a panel of three arbitrators. Each party would get an
opportunity to appoint one arbitrator and the two arbitrators who have been nominated like that
would appoint the third arbitrator.

However, the conditions for the contract also clearly stipulate that all the arbitrators have to be
experienced in handling public works engineering contracts, and should have worked with the
government at the level of chief engineer or above.

603
(Refer to Slide Time: 26:39)

Similarly, these are the general conditions of the contract that have been published by the Indian
Railways for the year 2022. If we look at the arbitration clause in the general conditions of the
contract, we can find that there is a list of matters that are excepted matters, which means that
arbitration cannot be preferred in these areas.

Secondly, the conditions of the contract also stipulate that if the matter involves less than rupees
1 crore, then there would be a sole arbitrator, who will be appointed by the General Manager.
This sole arbitrator would usually be a gazetted officer of the railway, who is not below the rank
of junior administrative grade. And if they matter, in dispute involving more than rupees 1 crore,
then the railway will send a panel of four names of gazetted railway officers.

And out of these four names, the contractor can nominate two names and out of these two
people, one person would be chosen as the arbitrator representing the contract. The remaining
members of the panel will be appointed by the General Manager, who will also be government
employees.

604
(Refer to Slide Time: 27:52)

After looking into the arbitration clauses that have been drafted in government contracts, do you
think there is a legal issue involved in the way in which these clauses have been drafted? Do you
think it can be challenged before the courts, if so on what ground?

As we saw, regardless of whether it is a sole arbitrator or whether it is a panel of arbitrators, it

comprises persons who have served in the government departments. So, naturally, the person
who enters into a contract with the government, who is the contractor, will feel that the arbitrator
would be biased against him, or that the arbitrator, because he is a government employee, would
be likely to favor the government, while resolving the dispute in arbitration.

Precisely on this ground which is called ‘apprehension of bias on the part of the arbitrator’, there
have been numerous challenges to arbitration clauses that have been drafted in government
contracts before the courts. In the subsequent slides, we will be looking into how the judiciary
has responded to these challenges.

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(Refer to Slide Time: 29:01)
Judicial Response

One of the earliest cases where the Supreme Court decided on the matter of bias on the part of
the arbitrator was Ace Pipeline Contract Private Limited v. Bharat Petroleum Corporation. In this
case, the arbitration clause that was entered into between the parties stated that in the event of a
dispute, the matter would be settled by arbitration and that the arbitration would be conducted by
a sole arbitrator. And this sole arbitrator would be the Director of the Marketing Division of
Bharat Petroleum Corporation.

So, Ace Pipeline Contract challenged this arbitration clause before the Supreme Court. And the
Supreme Court stated that, once the parties have entered into an arbitration agreement with full
knowledge and with entire information as to who the arbitrator would be and the manner in
which he is to be appointed, then the opposite party cannot challenge the appointment of the
arbitrator.

So, in this case, the court clearly stated that, if the Ace Pipeline Contract had an apprehension of
bias, they would have to apply for setting aside the arbitral award, and that they cannot challenge
the appointment of the arbitrator per se, as they had agreed to it with full knowledge before
entering into an arbitration agreement.

606
(Refer to Slide Time: 30:21)

In Indian Oil Corporation v. Raja Transport Private Limited also we find a very similar
arbitration clause. In this case also the arbitration clause stated that, in the event of a dispute, the
matter would be resolved by a sole arbitrator, who will be the Director of the Marketing Division
of Indian Oil Corporation. When this was challenged before the Supreme Court, the Supreme
Court stated that merely because the arbitrator is an employee of the government cannot lead to a
presumption of bias on the part of the arbitrator.

However, there can be an apprehension of bias if the arbitrator who is appointed stands in such a
relationship that he is a controlling authority or on the contrary he is subordinate to the
government officer who is involved in the dispute. So, in such cases, because of the nature of the
relationship, there can be an apprehension of bias. In the ordinary case, there cannot be such a
presumption of bias.

Moreover, it was also stated that as long as the arbitrator who is appointed is a senior officer of
the government, who has no association with the contract,he can be set to be an impartial and
independent arbitrator, and such cases can be permitted.

607
(Refer to Slide Time: 31:36)

We can see a direct impact of the decision of the Supreme Court in Indian Oil Corporation in this
case called Denel Proprietary Limited v. Bharat Electronics Limited. In this case, the Supreme
Court held that the arbitrator being a Managing Director of Bharat Electronics Limited might not
be in a position to be independent and impartial while resolving the dispute, because he is bound
by the instruction of the superior authorities who are involved in the government department.

So, the Supreme Court laid down the ratio that in such cases in exceptional situations, the court
can intervene and nominate the arbitrator, who is to resolve the disputes between a government
entity and a private entity in government contracts.

608
(Refer to Slide Time: 32:22)

We all know that transfers are very common in government departments. So, what would happen
if the arbitrator who is to resolve the disputes by constituting an arbitral tribunal has been
transferred, and no other person has been appointed to fill in that vacancy? In such situations, the
arbitral tribunal cannot be made redundant and the court will intervene in order to ensure that
arbitrators are appointed and that the arbitrary proceedings are being conducted smoothly.

So, in cases of inaction or delay on the part of government entities in nominating an arbitrator,
the courts will intervene and nominate the arbitrator who is to resolve the disputes. This has been
held in the case of Union of India v. Singh Builders. This case is also significant for another
reason, because the Supreme Court, in this case, made a very pertinent observation.

And it recommended that since the Arbitration Act places a lot of emphasis on the independence
and impartiality of the arbitrator, the governments should think of doing away with this practice
of nominating their own officers as the arbitrator and should come up with an alternate
mechanism. The court gave an opinion that this would help in ushering in a lot of
professionalism in the way in which arbitration is conducted in government disputes.

609
(Refer to Slide Time: 33:50)

A very similar recommendation can also be found in the Law Commission's Report that came
out in 2014. So, the International Bar Association has come up with certain guidelines on the
conflicts of interest in international arbitration and these guidelines have something called the
red and orange lists. These two lists enumerate the categories of the relationship between the
arbitrators and the parties, which can raise the presumption of bias on the part of the arbitrator.

So, the Law Commission in its report in 2014 proposed the inclusion of something similar to the
red and orange lists as scheduled to the Arbitration and Conciliation Act. And taking cue from
this report in 2015 an amendment was made to the Arbitration and Conciliation Act. And
according to this amendment, Section 12 Clause 1 states that the arbitrator has to disclose any
direct or indirect relationship with the parties, which may raise justifiable doubts about his
impartiality. And the kinds of relationships that will have the potential to raise such doubts about
impartiality have been enumerated in Fifth Schedule to the Arbitration and Conciliation Act.

Similarly, there is also Section 12 Clause 5, which states that if the relationship between the
arbitrator and the parties fall within any of the categories that have been specified in seventh
schedule that would also make the arbitrator ineligible. The difference between the categories
that have been enumerated in fifth schedule and seventh schedule is that the parties can choose to
waive the categories of relationship that are enumerated in the Seventh Schedule. So, if they

610
choose to waive that, then even if the relationship falls within the ambit of Seventh Schedule that
would not be the arbitrator ineligible to conduct the arbitral proceedings.

(Refer to Slide Time: 35:48)

Proscribed Relationships under Arbitration Act

One of the grounds that can be found in both the Fifth Schedule as well as the Seventh Schedule
is the arbitrator being an employee of one of the parties to the dispute. Another ground is the
arbitrator being a Manager, Director or part of the management or having any other similar
controlling influence over a party. These two grounds would make an arbitrator ineligible for
conducting arbitral proceedings.

So, how has this important change which has been effected through the 2015 amendment fair for
the government contracts, let us see.

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(Refer to Slide Time: 36:23)
Conditions of ineligibility for appointment as arbitrators post 2015

In Voestalpine Schien GMBH v. Delhi Metro Rail Corporation, this precise issue of hiring
retired government employees as arbitrators was challenged before the Supreme Court.
However, the Supreme Court went on to rule that the seventh schedule only prohibits persons
who are currently within the employment of any of the parties to the dispute from being
appointed as arbitrators. It does not prohibit retired government employees who have no
connection whatsoever with the party to the dispute from being roped in as arbitrators.

Moreover, the court also stated that it might be necessary to rope in retired government
employees as arbitrators because of the rich technical expertise that they have which might be
necessary for resolving the disputes that arise out of government contracts. At the same time, the
court also issued a direction to the Delhi Metro Rail Corporation to consider appointing persons
from diverse backgrounds such as lawyers, judges and accountants into the panel of arbitrators
so that the opposite party’s apprehension of bias can be reduced.

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(Refer to Slide Time: 37:30)

In a 2019 decision called Government of Haryana PWD branch v. G.F. Toll Road, the Supreme
Court extended this principle to Fifth Schedule as well. So, the court stated that the Fifth
Schedule bars only current employees from being employed as arbitrators. It does not prohibit
roping in a previous employee that is retired government servant as an arbitrator.

(Refer to Slide Time: 37:53)

In some cases, the arbitration clauses would state that the government officer would become an
arbitrator in the case of a dispute or that the government officer can nominate another person to
become an arbitrator. However, if the government officer himself becomes ineligible to be

613
appointed as an arbitrator on account of any conflict with the Fifth Schedule or Seventh Schedule
for instance, then his power to nominate another arbitrator would also stand desalt. This was laid
down by the Supreme Court in TRF Limited v. Energo Engineering Projects. In this case, it was
held that, if the Managing Director becomes ineligible because of conflict with any law, then he
cannot nominate another person as an arbitrator.

Another interesting interpretation that was put forth by the Supreme Court was in this case called
Central Organization for Railway Electrification v. ECI. So, in the case of railway contracts as
you may recall the contractor gets the option to choose two names out of a panel of four
arbitrators. And out of these two names which have been proposed by the contractor, the General
Manager of the Railways selects one arbitrator. This person shall be the representative of the
contractor. The remaining arbitrators in the panel shall be chosen by the government entity.

However, the Supreme Court in this case interpreted that as long as the contractor gets to choose
two parties out of the names of four parties, which counterbalance the power that the government
entity has in appointing the rest of the arbitrators in the tribunal. So, as long as the power of the
government officer to nominate arbitrators is counterbalanced by an equal choice that is given to
the contractor then there is no occasion for the arbitrator to become ineligible.

(Refer to Slide Time: 39:53)

In order to tackle the problem of apprehension of bias that arises out of government contracts,
the States of Maharashtra and Karnataka have proposed an alternate strategy. These states have

614
recommended conducting arbitral proceedings through arbitral institutions whenever there is a
dispute that arises out of government contracts.

This might be a better strategy because as we saw earlier, in institutional arbitration, there are
clearly laid down procedures that are to be followed while conducting arbitral proceedings. It
also has well-delineated rules with respect to the appointment of arbitrators. So, this will be a
more helpful way of resolving disputes that arises out of government contracts. And it is a
strategy that can be emulated.

(Refer to Slide Time: 40:39)

Department of Public Enterprises Guidelines

The Department of Public Enterprises has also come out with certain guidelines for resolving
disputes that arise out of government contracts through arbitration. These guidelines are
applicable only with respect to the commercial disputes that arise between different central
public sector enterprises or between one central public sector enterprise and another central
government department.

In certain cases, it can also be extended to disputes involving a central government department
on the one hand and a state government department on the other hand. It cannot be extended to
any other cases. And these guidelines have created a Permanent Machinery of Arbitrators
(PMA). The Legal Adviser-cum-Joint Secretary of the Department of Legal Affairs would be the
sole arbitrator in this machinery of arbitrators.

615
And this PMA stipulates that each of the parties has to deposit rupees 20,000 at the
commencement of the arbitration. This will not be refunded. However, it will be adjusted
towards the final cause that has to be bound by the parties. Although there is no strict monitory
limit that has to be adhered to, it states that it is advisable only to refer disputes wherein rupees
50,000 or more is involved only those kinds of disputes need to be referred to the Permanent
Machinery of Arbitrators.

And the guidelines stipulate that this dispute that has arisen under a government contract should
be resolved within two months. It also recommends that an arbitration clause that is stipulated
under the guidelines, an arbitration clause in the same format has to be included within the
general conditions of contractor each government entity.

(Refer to Slide Time: 42:26)

The time limit of six months has been prescribed under these guidelines before which the
arbitrator has to make an award. And the award of an arbitrator is binding, if at all an appeal has
to be made, it has to be preferred before the Law Secretary. In the year 2018, the Department of
Public Enterprises issued an office memorandum which repealed this permanent machinery of
arbitration. In the place of this permanent machinery, another mechanism was proposed. This is
called the Administrative Mechanism for Resolution of Central Public Sector Enterprises
Disputes or the AMRCD.

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So, now, all the existing as well as future commercial disputes between central public sector
enterprises and between central public sector enterprises and other government entities will have
to be resolved through this administrative mechanism for resolution or CPSE disputes.

(Refer to Slide Time: 43:23)

Dispute Resolution through AMRCD

The AMRCD envisages a two-step process for the resolution of disputes arising out of
government contracts. At the first level, the commercial disputes will be referred to a committee.
This committee would comprise the secretaries of the departments from which the dispute has
arisen and the secretary of the department of legal affairs.

The financial advisors of the departments which are involved in the disputes would be
representing the departments in the committee. And the first level of dispute resolution has to be
completed within three months. If at all an appeal has to be preferred, it has to be preferred
before the cabinet secretary who is the appellant authority. This is the second level.

And this appeal from the decision of the committee to the cabinet secretary has to be preferred
within 15 days. And the cabinet secretary’s decision which is the decision of the second level
shall be final and binding for the parties.

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(Refer to Slide Time: 44:23)

With that, we have come to an end of this session on advanced contracts. Thank you for
listening.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (D)r. Sairam Bhat
Professor of Law
National Law School of India University
Arbitration Clauses in Government Contracts

Namaste everyone, today we will be discussing more about the law of contracts. In
practice, contract law is implemented by drafting of a contract. Now while keeping
drafting of contracts in mind, there are a few general principles that you need to bear in
mind before going ahead. Firstly, let us understand what drafting is. And generally, what
do you mean that when a lawyer says that I engage into drafting of contracts, what does
he mean when he says so? Drafting in legal sense means the act of preparing certain
documents such as agreements, contracts, deeds, etc. What are the differences amongst
the three? Please note they are just a common phraseology which is used, and it bears the
same meaning.

So the division of what an agreement or a contract or a deed is has become more obscure
in today's era. But in the earlier times, generally documents where title has been
transferred were generally referred to as a deed. And certain aspects where services or
some other aspect has been engaged was called an agreement or a contract.

Now there is a particular premise which says, a contract is an agreement which is

enforceable by law. But there are certain agreements which cannot be enforced. For
example, a Memorandum of Understanding. An MOU is also something that can be
drafted. And you can have a particular premise that a memorandum of understanding is
not enforceable. And as such, even those aspects which are not contracts can be drafted.
That is the first premise that you need to keep in mind. Further, drafting is generally a
synthesis of law and fact in a language form. What do I mean by that? for example, if you
are going to sell a property, let us say a land which has a building affixed to it. Now what
is the fact? The fact is that there is a building attached to land.

What is the law? The law is that the title of the land and the building belongs to person X.
Now when you are drafting a contract, whereby X is going to transfer the property to Mr.
Y. That is where you are bringing a synthesis of both law and fact into a particular
documentation form. That is what drafting leads you to. Certain aspects or ingredients are
essential when you are looking to understand what is a good draft of a contract. First
thing is, and most paramount of everything is the understanding of the law. Because
anything that you draft contrary to the legal position or to the legal scenario is going to be
held to be void. So, I am sure you must have learnt about void agreements. Anything that
you do against the law is void have been issued. So, they cannot be enforced at all in the
first place.

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So as such, understanding of the law is very important. By understanding the law, what
do I mean? There are certain essential features like say for example, I use the concept of
bailment, pledge, lease and surety. You need to understand what is the concept of
bailment. You need to know what is the concept of pledge. For instance, pledge is a
form of bailment. But the only difference is that in case of a pledge, there is some
property that is used as security for a loan or a credit that is availed. That is the particular
premise as to the distinction. So you must clearly be aware as to what is the particular
law when you are drafting an agreement relating to such law.

Next, understanding the factual scenario is extremely crucial. Because a draft is nothing
but a synthesis of both law and fact put together. Like for instance, if you are going to say
Mr. X, son of Mr. Y, you need to know the entire history while you are putting it into a
particular draft. If you mention Mr. X son of Mr. Z, it becomes completely contrary to the
fact. And as such, the contract becomes unenforceable because of an ambiguity of both
factual scenario and the legal scenario that you created. So please bear in mind friends,
understanding the factual scenario is extremely crucial while going about it.

Next, it is also essential to use coherent choice of words or appropriate language and
punctuations. Now you may say, Sir, what is this? Is this an English grammatical class
that you are trying to tell us? But I will give you a scenario as to why it is very important
to use coherent choice of words, appropriate language and punctuation marks. What do
you see on the screen? You see that a particular man is holding a noose. What is he going
to do with this? It depends on how you are going to draft the particular sentence. Hang
him comma not let him free. What do you understand by this? It means that let him put
the noose around his neck and get hanged. Now please note, I am just making a point
over here with regard to the punctuation mark, which is a comma that is used in this slide.
Just by shifting the comma to next to not, what have I done? Hang him not, let him free.
Did you notice in one of the sentences his life is taken away, in the other his life is given
to him. So that is the importance of a punctuation mark while going about drafting.

Is conveyancing different from drafting? Now, you might have heard that few of the
practitioners say that I am into conveyancing only. I am not into any other particular areas
of practice. So, what does this conveyancing mean? Like I brought out the distinction
between a deed and a contract and an agreement initially, conveyancing differs from
drafting in the traditional sense alone. In the sense that, conveyancing is referred to that
form of drafting, where you are into drafting of contracts, which relate to sale or
transactions related to immovable properties and not otherwise. But nonetheless, it has
become more obscure today and conveyancing and drafting, the shade between them is
just a small thin line. And you can say that in common parlance, they mean the same.

With this, we move on to something called what is the importance of drafting? I have
already given you one particular instance as to the person being hanged. And I also told

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that we will introduce you to a particular case where the use of a punctuation mark
created a huge difference. Now, this is a particular clause that was there and in a contract.
So it said that there shall be no overtime wages for workers in the canning, processing,
preserving, freezing, drying, marketing, storing, packing for shipment or distribution of
perishable goods. Now, please note that in the first phrase, I have just highlighted the
aspect of shipping or distribution of perishable goods. In the second aspect, the same
clause is there with a punctuation mark, which is a comma. Now, what is the difference
between clause number one and clause number two, you may ask. So, it is the same
thing, there is just one comma that is added. But please look at it, my friends, this is a
particular provision that I have taken from a legislation. From the two clauses that we
have on the screen, there is a question that needs to be answered. The question is, are
workers in the distribution of perishable goods entitled to overtime wages or not? Please
read clause number one and clause number two separately before answering this
question. I will give you about 15 seconds. One of the reasons why I am giving you this
particular aspect is to understand how much of a difference a punctuation mark can do to
you. When I use a punctuation mark next to the word shipment on the aspect that is
highlighted, the difference is almost a sea change. If your answer to clause number one is
yes, then you are absolutely correct. And if your answer is no to clause number two, then
you are also correct again. Please note, the aspect of those involved in distribution of
perishable foods are entitled to overtime wages in the first clause because it is to be read
as packing for shipment or distribution. So, packing for becomes an additional word that
has to be read as a prefix to distribution. So, as such those in the distribution industry are
entitled to wages overtime, but because the word distribution of perishable foods is not
excluded from the clause. But if you look at the second aspect, those involved in the
distribution of perishable foods, they are excluded from being entitled to overtime wages,
merely because of the use of the punctuation mark, packing for does not become a prefix
to the word distribution. That is the essence of drafting.

With this, we move on to another essential ingredient, which is called the million-dollar
comma case. Now, why do you call it a million-dollar comma case is because the use of
one comma cost the companies millions of dollars. How you may ask? This was the
particular clause. Now, there was a telephone company and another entity, which required
to exercise the cable lines of the telecom operator. Now, it so happened that the clause
had a particular provision that says that this agreement shall be effective from the date it
is made and shall continue in force for a period of five years from the date it is made
comma and thereafter for successive five-year terms, unless and until terminated by one
year prior notice in writing by either party.

This is a particular clause that is there in action. I will tell you which is the particular
comma that cost them a million dollars. Now, there are two commas that are used here.
Now, if you look at it, what is the premise of understanding? Can the contract run initially

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for an entire duration of five years? Or should it run for a successive period of 10 years?
Or can it be terminated at any point in time? Now, please note, there are two commas that
are used. One of the comma is the only thing that cost them a million dollars because the
agreement was terminated before the completion of five-year duration. What was that
comma? It is the one that is being circled on the screen. If you notice it, I am re-circling it
again. Please note, the use of this particular comma required that the entire requirement
that the contract should be valid for a period of five years could be terminated by one
year prior notice, which means that if a contract comes into operation today and is to be
running for a period of five years, at any point in time, I can give a one year notice to the
particular opposite party and I can terminate the contract. Now, this is the reason as to
why punctuation marks should not be unnecessarily included within the clauses. One of
the fundamental rules of understanding what a particular clause means is any line, and
this is just a general rule, any line that comes between two commas can be read excluded
from your interpretation. So, which means that this agreement shall be effective from the
date of execution for a period of five years unless and until terminated by one year prior
notice in writing. So, that is the premise of understanding which generally courts will
take into consideration while interpreting a contract. So, please be very careful that a
punctuation mark can kill a business.

Next, we move on to the premise of what is drafting and what can be drafting. We have
already understood that drafting is generally a synthesis of law and fact being recorded.
So, in common parlance, it is called getting the documentation ready. Now, what do you
mean by getting documentation ready? So, for that you need to understand what
documents are. Documents have been defined under the General Clauses Act to mean any
matter written, expressed or described upon any substance by means of letters, figures or
marks, which is intended to be used for the purpose of recording that matter. Please note,
now, the aspect that is recorded here is written, expressed or described by letters, figures
or marks. Now, this is something that you need to keep in mind that documents do not
necessarily mean something that is in writing in terms of words or letters. It can also have
certain marks, it can also have certain symbols that is used across and other aspects also.
Like say, for example, if you are going to take a sale deed, a sale deed in its one of its
scheduled properties is also going to have a sketch of the property itself. So, as such,
documents can also include sketches wherein marks or figures can be used to make you
or understand the reader what the transaction is. Documents also includes the following
aspects, contracts, agreements, deeds, MOUs, appointment letters, etc. Now, these are the
basic premises which probably you will get to know based on common usage. Now,
contracts you quite clearly know any agreement that is enforceable by law is a contract.
Agreements, yes, there can be agreements that are not enforceable also. And as such one
such form of an agreement which cannot be enforced is a memorandum of understanding
that clearly tells that it is not binding on the parties.

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Deeds, deeds, I think, I have already suggested to you that they are something that relate
to some particular transfer of immoveable properties. Memorandum of Understanding,
yes, we just had a discussion about it. Appointment letters, employment bonds are also
certain other examples. Drafting can also include the terms and conditions or privacy
policy of the website that you are using. You can check out the terms of use and privacy
policy of the NPTEL website also. You can check out the terms of use and privacy policy
of Amazon for instance. All of these terms of use and privacy policy and your
appointment letters, the MOUs and other aspects have certain purpose that they are exist
in existence for. What is it you may ask? They tell you what are the particular terms and
conditions that apply to a given transaction. Like say for instance, in a sale deed, the
terms and condition are the buyer is going to purchase the property for a consideration of
X rupees and the seller is required to transfer the title of those property into Mr. X. So,
that is the particular aspect that you need to keep in mind that these are the facts that are
recorded. Now, in terms of marks and others, the sketch of the property is included in the
sale deed. In terms of words, it is said that the buyer shall purchase for consideration.
And in terms of figures, you have the amount of consideration that is given. Let us say
for example, 1 crore, 1 crore will be written in both numerical font as well as in word
format. So, these are aspects that you need to keep in mind as to what documents are.

Going further, there are few essential rules of drafting that you need to follow. What are
those? Now, there was a particular researcher who gave 5 essential rules of drafting. Now,
what are those 5 rules? He says drafting should be direct, simple, brief, vigorous and
lucid. Now, these are just the 5 particular premises which he says, when you are going to
go about drafting a particular contract or a document, these are the 5 rules that you need
to keep. Do not keep it very indirect, do not keep it very ambiguous, do not keep it very
elongated, do not keep it in a manner which does not hit your comprehension. So, these
are aspects that you need to keep in mind. One of the particular aspects or essentials, if
you are going to subtract these 5 rules into multiple points is that prefer a familiar word
to a far-fetched word. Forbearance as against restraint. Now, that is a particular point that
you need to keep in mind when you are going about it. Then prefer a concrete word to the
abstract word, in the sense that there are few words hat have a better meaning to it. Do
not use words which are very ambiguous. Like say for example, work hard to construct.
Now, this is a particular aspect that is not concrete enough as against effectively
construct. Now, when I say work hard, what do I mean by it? He might be doing the work
continuously for about 9 hours of duration, but he might not end up getting the building
constructed.

The clarification is quite obscure here. Prefer a single word to a “circumlocational”. Now,
what is this? He has a large house. Now, large house is a particular aspect which is a
single word. If you look at the circumlocational word, it is a descriptive aspect. He has a
house that could fit a hundred horses and a few elephants. Now, in case of drafting, you

623
do not require to give such a big descriptive circumlocations because it only makes the
contract more ambiguous and susceptible to interpretation.

The next particular point that you need to keep in mind is the need to prefer a short word
to the long word and also prefer the English, Saxon word to the Roman word. Good faith.
Now, in common parlance, good faith is something that is used much wide as against
bona fide. Although bona fide and good faith mean the same, it is preferably that you can
use the aspect of good faith rather than bona fide. And the last rule that is to be kept in
mind is always prefer active voices as against passive voices while drafting of
documents, because it gives the reader a clearer picture of what the transaction for which
you are drafting the contract to be.

These are a few guiding factors that need to be kept in mind and these are just general
principles. Now, there may be more stricter and more specific rules based on the
transaction that you are working on or based on the particular nature of the law that you
will be drafting the contract in relation to. The couple of these guiding factors are faith
essentials that you need to keep in mind. First thing is numbering of clauses and pages.
Now, sometimes you find agreements that run from line 1 to line 10 without a particular
numbering of any sort. It starts with I so and so, son of so and so and ends with hereby
witnesseth that. Now, this is the particular aspect that needs to be avoided. So, if you are
going to look at this particular aspect, numbering of clauses gives in a particular sense of
clarity in what the contract essentially means and what it tries to convey. Numbering of
the pages gives that the document in hand has a certain fixed number of pages. Now, as
an essential practice, I use the particular page numbering format, one of dash total
number of pages. So, one of 10, two of 10, three of 10, these are the format of numbering,
which I prefer to use. And clauses, I would suggest that you use a systematic continuous
numbering format, wherein you start with 1 and end with X number, whichever it goes in
a continuous flow.

The next aspect that you need to keep in mind or bear in mind is the use of annexures or
schedules appropriately. Now, a couple of, this is a particular principle that few
advocates defer it. A few of them insist that let us not have annexures or schedules, let us
have the entire agreement drafted into the main text or main body of the contract itself.
Now, there are certain aspects, probably when you must reconsider this particular point of
view. Now, in case there are certain things which are non-essential factors, like say, for
example, the description of the property and with regard to the sketch of the property,
and it could be something in case if it is a contract relating to the service, the quantity of
goods that is to be supplied, the price relating to each of these goods, it is preferred that
you can remove it from the main body or text of the contract and include it suitably in an
annexure or a schedule. This allows the contract to be interpreted without any
interference as to the particular non-important or non-essential ingredients of the contract.
Now, one may say that, you know, if you are going to include it into the schedule, the

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schedule can always be changed. That is where the numbering of the clauses and pages is
very essential and crucial.

Please note that when you have the total number of pages put or inserted at the end of
every single page, you know that when a contract ends, there are certain schedules
because the schedule is also included in the numbering. So, as such, you can suitably
include annexures and schedules also. The last particular aspect I would suggest is try as
much to avoid using negative sentences in successive phrases. Now, the reason I say this
is because when you use two negatives, like the math rule goes, two negatives make a
positive, applies also to drafting. Like say, for example, if you are going to, if you do not
want somebody to enter into a particular room, this is the particular clause wherein
somebody decides to go ahead and drafting a contract. “No person shall not enter the
room.” Now, if you look at it, this sentence is not direct. It is something indirectly being
spoken about. So, the one of the particular essential rules is have it simple and direct.
Now, this is one of the two proper premises that is brought about completely against and
also there are two negatives that is used. “No person shall not.” Now, if you are going to
interpret this, it means that every person shall enter the room because no person shall
have the opportunity not to enter the room. That is what the particular clause means
essentially. Now, on that note, I would suggest that in case you do not want something to
happen, please use a particular different formatting method for defining the sentence. Do
not use negative sentences in successive usage so that it avoids ambiguity and brings in
certainty to your document.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat
Professor of Law
National Law School of India University
Arbitration Clauses in Government Contracts

VARIOUS TYPES OF DEEDS

The next discussion that we take forward is to understand what are the various types of
deeds. Now, if you look at it, this is more of a generic understanding of the different
kinds of deeds. The first one being a good deed. A good deed is something, it is not just
necessary that it speaks about the style of paper, the drafting and other aspects, that
conveys a good title and not one which is merely good in form. Meaning not the
particular form of the contract, but rather the substance of the particular document that is
being drafted. A good deed refers to one which is complete in all aspects. It is complete
in the aspect of the facts, it is complete in terms of the law, it is complete in terms of the
interaction between the law and the fact and form. So, this is a particular aspect of a good
deed because a good deed is like running an electricity circuit. If there is a break in the
circuit, will there be a free flow of electricity? No. Similarly, if there is a break in the
chain or a particular deed or a document or a contract, the contract cannot be fully
performed. So, as such, it is necessary that in order to be good, it needs to be complete in
all aspects, there should be successful transfer of title or any other particular conveyance
that is being done in a particular document.

Next, we have is Inclusive deeds. Like a good deed, inclusive deeds are those which
actually have designated boundary lands which are expected from the operation of the
deed. There are certain aspects that are included within the deed and that is a particular
premise which makes it an inclusive deed.

A latent deed: The concept of a latent deed, is something like say, for example, a Will.
Generally, a Will is usually kept hidden. It is not disclosed that there is a Will in existence
until the death of the person who has drafted such a bill. So, in those circumstances, it
also becomes a latent deed. This particular distinction that we are looking across is just a
particular understanding of the various kinds of deeds that you will find across and when
you are introducing a particular document before the courts as to how it can be
introduced is what the premise is.

Then the next is a particular aspect called a lawful deed. Now, if you look at it, a lawful
deed is something that conveys a good or a lawful title. Now, if you notice that there are
not much of a difference between a good deed and a lawful deed. But nonetheless, a

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particular good deed, even though it is particularly well drafted and it conveys good title,
merely because of certain aspects of illegality, it can become an unlawful deed.

The next aspect is called pretended deed. A pretended deed is something that on the face
of it looks to be valid. But when you go into deeper analysis, it looks to be invalid. A
classic example of a pretended deed is your employment bonds. Majority of the
employment bonds that you execute are something that cannot be enforced, especially
with regard to the non-compete clauses or your restriction from the employee from
leaving the employment. Now, these on the face of it, it looks to be good and formed, it
looks to be drafted well. So, in those circumstances, you feel that there is a, it looks to be
enforceable against the employee if the employer says you cannot join my competitor.
But please look at it, it is only a pretended deed. It is just used as a means to scare the
employee to ensure that they do not refrain from carrying out their duties. But if you look
at the position of law, which is already been discussed in our previous classes, section 27
of the contract act makes it clear there cannot be any clause which is in restraint of
employment. So, your non-compete clause only applies to those who are working as
partners, but not as employer and employees. So, that is the particular aspect that you
need to keep in mind to understand what is a pretended deed.

And lastly, this is also a particular aspect that is called a voluntary deed. Now, what is the
difference between all of these? Now, here a voluntary deed is something that is executed
by both the parties. Now, you must have learned when in the initial classes of drafting of
a contract, the consensus ad idem, meeting of the minds is essential for going ahead with
a contractual agreement or a transaction. So, in those circumstances, parties come
voluntarily and execute the particular contract. There are certain involuntary deeds also,
where the second party is not at all given an opportunity to look into it. It is drafted
involuntarily and if he wants to take the benefits out of it, he can take the same. Examples
of involuntary deeds are your gift deeds, bills and others. Now, with this, you quite get a
particular generic understanding of the various types of deeds that are there.

PARTS OF A DEED

With this, we move on to this next aspect called parts of a deed. Now, if you look at a
contract, you know, a lot of times it scares the reader, because the contract starts with,
you know, extremely difficult phraseology, it has multiple parts to it, there is some
introductory part on the top, and then there is some witness clause in the bottom. And you
know, there are schedules, there are annexures, you quite literally do not understand as to
how to go about reading a contract. So, that is the reason we are going to have a
discussion on what various parts of a deed are.

The first aspect if you look at it before the clauses start, from the particular “This
Agreement”, it could be a service agreement, it could be an employment agreement, there

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is a title that is given and after that comes a description of the particular agreement. Now,
if you look at it, this _______ agreement, this employment agreement is executed as on
such and such date by and between so and so. This is the description of the entire deed
title. So, it means that you are kind of communicating to the reader what the premise of
the agreement is, who the contract is between is what you are trying to convey. The place
and date is included with this description. So, wherein it is quite essential to understand
that you are recording the presence of a party at a particular place. Please note the plea of
alibi is something that can be taken against the place and date of execution of a deed. So,
in case you are executing a deed on one date and going to insert another date in it, please
note tomorrow you are just giving across chance of an ambiguity in interpretation or
implementation of the contract because a plea of alibi can be taken by a person stating
that on such and such date he was never within that place. So, as such entering the place
and date of execution is also extremely crucial in a deed.

The next one is the description of the parties. Now, like I told you, the description of the
parties has the name of the person, the name of the father, the age of the particular party
as on that date and the address in which he resides. Now, this is a particular description
which is mandatory and it is not any law that mandates this custom but it is a practice that
has come about. So, it is a customary practice of describing the parties using their name,
their father's name and others. So, as such, it becomes essential to make it a part because
identification of the parties becomes easier when you go about this format of description.

Recitals, now this is a part where in the contract or in the document you will find it
generally starts with the heading “whereas parties”. So it says that whereas the parties
have come together to purchase and sale of a particular immovable property situated at.
Now, this is a form of a recital. You know, there are multiple clauses where the recitals
are included, which can be taken into consideration to understand what the entire
transaction is of in a sum and substance.

The next clause that you need to keep in mind is something called a testatum clause. See
now these parts of the deed are sometimes you know obsolete. They may be there in
current date contracts or not. But if you essentially follow all of these particular premises,
it allows you to make a good draft which has a particular premise. Now generally, if you
look what a testatum clause is, it starts with the following phrase in a general parlance.
“Now this deed witnesses that for lawful consideration of which is accepted by the
parties, the parties hereto under agree as follows”. This is a particular introductory
phrase which speaks about the valid consideration that is received and that the parties are
agreeing to the subsequent clauses which are there in the contract or the deed.

Consideration: Now this is also part of the particular contract where sometimes, you
know, due to oversight consideration clause is left out. Now, if you look at the purpose of
a transaction, the whole purpose of premise is the consideration itself. If you fail to

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include the aspect of consideration in clear terms as to what is the exact amount that is to
be paid to a party or anything, then in those circumstances, you are leaving it out to
ambiguity.

Receipt clause: Now, it may so happen that prior to entering into a contract, there is
already certain transaction that have taken place between the parties. Sometimes like say,
for example, in case of sale of an immobile property, it may so happen that the keys to the
particular property has already been received by one of the parties and as such, it might
be required to be stated as to what are those things that are received and what are those
things that will be transferred in the short due course.

Operative clause: The operative clause generally tells you what is the term or duration of
which the contract continues to operate. Now, let us say for example, in case of a rental
agreement and others, you might have noticed that in most circumstances, rental
agreements are for a period of 11 months. Now, why is it so? Because the moment you
make it more than 11 months, that is 12 months or more, there is a requirement or a
mandate for you to register such agreements. So, as such generally on a common
parlance, you follow that rental agreements are kept for an 11 month period or the
operative clause is generally restricted to 11 months so that you avoid the aspect of
registration.

Description of property: Now, in case the agreement relates to a property, which is an

immoveable property, then description of such property becomes essential. So, you use
north, south, east and west to describe the location of the property, the surrounding
property situated close to it. Like say for example, if there is a plot of land which is
adjacent to the road, then you would describe the property number having survey number
so and so situated at the address having road on east, property number x on the west,
property number y on south and property number z on the north. Now, this is the manner
in which you go about describing the properties using the sense of directions.

Parcels clause: Now, generally this parcels clause is essentially requirement especially
when you are dealing with the sale of immovable properties. Now, sometimes what
happens is that there are certain fixtures or certain other aspects that are stuck to the land.
Parcels clause generally includes everything that is affixed to it. But it may so include
that in case you do not add a parcels clause, you are excluding certain aspects that are
affixed to the land. It could be the trees; it could be a certain machinery or any other
aspects. So, as such using parcels clause is something that is very essential to make you
understand as to what is being transferred.

Exceptions and reservations: Now, this is a particular premise wherein you can create an
exception to the contract, and you can have certain reservations also. Like say for
example, you must have heard about these rights called Rights of First refusal. In the

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previous instances, you must have discussed about the Zahir Khan case where and the W
Rooney case wherein there was a right of first refusal that was given to the advertising
agencies against the sports player. Now, in those circumstances, what do these
reservations do? These reservations create a pre-emptive right in favour of those persons
against whom it is granted. In the sense that, like say for example, there is a split of
ancestral property between four brothers. It may so happen that one of the brothers
tomorrow wants to sell the land to another person. The right of first refusal can create a
right in favour of the three other brothers to ensure that they are given a pre-emptive right
to purchase the land before it is being sold to a third party. Now, those are the aspects that
one of the manner in which a reservation can be created in a contract.

The next aspect is your Premises and Habendum. Now, these particular aspects have,
you know, a whittled over time and as such, having a Habendum clause is seen to be
something that is more of a traditional form of a contract and which you might not follow
in the recent or modern forms of contracts.

Covenants and Undertakings: Now, please note, whenever a contract is executed, there
are certain understandings that the parties have. One such aspect is that each party agrees
or takes an onus of doing a particular action. Now, in those circumstances, these
covenants need to be upheld to and there are certain undertakings that parties take. Like
say for example, in case of safe keeping of the goods, one of the party may undertake to
ensure that insulin cover is taken on those goods that are being safe kept. Now, this is an
undertaking that parties agree over and above their usual course of performance of the
contract.

Covenants, like say for example, certain covenants are essential when you are getting
into a transaction. Like say for instance, in regard to sale of a property, it is essential for
the parties to covenant that they have lawful and valid title to transfer the agreement. Like
for instance, there could be a property where I have taken a loan. But however, this
particular loan is something that is not registered. But there is an agreement to the
contrary that says that the person to whom the loan is given shall not sell the property.
Now, tomorrow, I am a lawful purchaser of that property. And I have a covenant clause
which says that there are no restrictions on the seller to sell such property. In those
circumstances, before the courts of law, my interest will be protected as a purchaser
because the person selling me the property has undertaken a covenant that he has lawful
title and all rights to transfer such property, unlike how it is put across in the loan
agreement with the lender.

Testimonium clause: Now, Testimonium clause generally it is taken into consideration to

have witnesses for a transaction so that tomorrow in case there is a dispute between a
party or to the contract, there is a person who comes across and says that yes, I did
witness them entering into a particular contract.

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Signature and Attestation: Please note signature and attestation are something that is
generally carried out in every contract. Sometimes those who do not have proper literacy,
they prefer to attest with their thumb impression and that is also a valid attestation and a
signature. And certain other documentation like say, for instance, when documents are
executed at different places, like one of the signatory is in Bangalore, the other signatory
is in Chennai or say, let us say in certain other jurisdictions, like say a foreign country
also. In those circumstances, there might be a requirement for you to have the document
further attested. Like say for instance, attestation through by means of a notary or a
gazetted officer. In those circumstances, what happens is attestation of such notary gives
across a fixture or an increased validity to such documents, because every notary makes a
book entry of a document that he attests to. So that gives you a clearer picture that a
document was executed between the parties at such and such places at different times.

Now, the next part of a deed is also referred to an endorsement or supplemental deed.
Now, it may so happen that contracts can be assigned to other persons. In those
circumstances, certain endorsements are made, wherein a third person steps into the shoes
of one of the parties of the contract to perform the contract. Now, this could be done also
by way of a supplemental deed or by mere endorsement itself. But there may be certain
other scenarios where a contract's full term requires to be amended and as such, a
novation of the contract takes place. The novation of a contract is essentially a
supplemental deed. And it may so happen that the parties no longer want to carry out the
contractual relationship and may also execute a contract for termination. And that is also
in the form of a supplemental deed.

Lastly, we come to the aspect of annexures or schedules. And this is also a particular
essential part of a contract. I have already described to you as to what are the contents
that an annexure or schedule can have. Essentially, those things that do not make a
substantial change in the legal position of the parties in a contract can be included within
an annexure or schedule. Like say, for example, quantity of the products to be sold, the
manner in which a purchase order is to be made, the form in which an invoice is to be
raised, all these are aspects that can be included within annexure or a schedule, because
including this within the main body of the text only increases the time taken to
understand the contract.

CERTAIN CRITICAL CLAUSES

With this, I would just bring about certain critical clauses that you might have to look into
while going ahead of a contractual drafting. One of the most essential critical clause is
that of the parties. How you describe the parties is very crucial, because with a small
change in a spelling, the identification of the parties will become difficult. And as such,
the description of the parties that is the name of the parents, their existing age, and the
place where they are residing, all of those have to be described and disclosed clearly in a

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contract. In case they are a company, then you will have to say that it is a private limited
company and also include certain descriptive factors, like say, for instance, every
company has something called a corporate identification number within India. In certain
other jurisdictions, they may have something like a registration number. So those
registration numbers may have to be stated when you are describing a company, because
tomorrow in case there is going to be a change in name, the name is lost, but the
registered number or the corporate identification number will not change in respect of a
company. So, it more or less remains the same, as such, it becomes easier to identify such
entities.

The second critical aspect that you need to look at is cost allocation. Now, generally,
when a contract or a transaction is executed, there are certain costs that parties have to
bear, especially if it is a contract relating to sale of goods, who is to bear the cost of
insurance, who is to bear the let us say the cost of storage or transportation. Now, this has
given a cost to various modes of contracts, like say free on board, and your cost insurance
and freight contracts and others. Now, as such cost allocation determination in a contract
is also extremely critical. The third part is the duration of the contract. Please note,
specifying in express terms, what is the duration or the term in which the contract is to be
in operation is extremely crucial and critical to a contract. And sometimes there are
certain clauses, which extend beyond the duration of the contract, like say, for example,
your non-compete clause, your confidentiality clause and your non-disclosure clauses.
These clauses are generally given an extended duration than that of the duration of the
contract itself. So, as such, it is extremely critical for you to draft it cautiously.

Payment terms: Now, payment terms, you may ask me why are we looking at it as a
critical clause? Please note a contract is executed only for the purpose of consideration.
Everything else in a contract becomes immaterial if a payment clause is not drafted in
constructive sense, like the payment could be monthly, annual or on a weekly basis. And
as such description of the payment terms is quite crucial for understanding what is the
consideration that is payable by each of the parties.

The next critical aspect that comes across to deliberation is that of Force Majeure. The
COVID-19 pandemic did create a particular premise of deliberation as to whether force
majeure includes within it the COVID-19 pandemic crisis. Now, given that premise, there
were few contracts which were held to be entitled to the relief of force majeure and there
were few that were not. That essentially is because in a manner in which the force
majeure clause was drafted. Although COVID-19 pandemic was a scenario of an act of
God, which is beyond the control of the parties, there were few clauses that alone had the
words pandemic introduced within it. And unless the term pandemic was introduced
within it, the relief was not granted. But the government of India and certain other state
governments did come out with a clarification in respect of government contracts alone
that the COVID-19 would be treated as a ground for force majeure. And only those

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contracts that fell within that purview of the clarification were given the release whereas
those of others were not given.

Dispute Settlement and Arbitration: This is also another critical clause. One of the
particular points to be noted with regard to dispute settlement and arbitration is that these
are also called essentially something called a “midnight clause”. One of the reasons why
it is called a midnight clause is by the time you finish the entire discussion, the team of
lawyers come across discuss a transaction, the parties come into discussing a transaction,
and they enter into a dispute settlement and arbitration clause, what happens is by the
time they reach out to deciding which is the venue for deliberation of some sort, it is
almost late in the night. So, as such, it is called a midnight clause. And generally, what do
you do in the midnight? So generally, you are in a rush to go back to sleep and often than
not, contractual drafters or those involved in drafting of contracts make a mistake in these
clauses. They generally tend to use different words because they just want to be done
with the work, they want to finish it and they want to get back to their homes. So
therefore, a dispute settlement and arbitration clause is extremely crucially to be drafted
rather than working it as a midnight clause, I would suggest that you work it out in a
specific manner and carry out the drafting. Now dispute settlement, you can choose
courts as a mode of dispute settlement, arbitration as a mode of dispute settlement,
mediation as a mode of dispute settlement, or a step-up arbitration clause which allows
for you to include all forms of ADRs before finally going towards arbitration.

Let me tell you my friends, given that we have the MSME Act and the Commercial
Courts Act, the role of arbitration has diminished drastically because arbitration is a very
expensive process. If you are a small businessman or a particular person who is a small
trader, a small-time trader, in those circumstances, I will recommend that you do not add
an arbitration clause to your agreement, rather you stick it out to the courts of particular
jurisdictions. Like say for instance, in order for it to be a commercial dispute under the
Commercial Courts Act, the transaction has to be of a minimum value of 3 lakh rupees as
on today. So in those circumstances, if your transaction is between 3 to 15 lakhs, I would
suggest that you can go ahead with enforceability of those transactions through the courts
process itself. Because commercial courts have made it faster and more approachable for
the matters to come into being listed and it is more speedier than arbitration itself.
Arbitration was earlier preferred because of the extensive pendency of cases, the security
of transaction that it allows and the immediate reactive processes that can be initiated
once the arbitration process is put to frame. With the Commercial Courts Act, there is a
time bound decision-making process that is introduced and as such, it is a much faster
and speedier mechanism for settlement of disputes.

The next point comes across is to the Termination Clause. Now, under what
circumstances can a contract be terminated? I have already discussed the million-dollar
comma case for you to understand what can go wrong if a termination clause is drafted in

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a poor manner. Just by mere addition of a comma, a punctuation mark, the entire term or
duration of the contract which was to be running for a period of 5 years and more was
reduced drastically to just a mere term of 1 year. That is one of the reasons why
termination clauses need to be critically drafted.

Confidentiality clauses, like I told you when we were discussing about duration, that
there are certain contractual clauses that can extend beyond the terms of a contract,
beyond the term of a contract in the sense that if a contract is for a period of 1 year, a
confidentiality clause can be extended to a duration of 3 years also. And as such
confidentiality, the information that is to be confidential have to be clearly defined in well
withheld scope under the confidentiality clause.

The next aspect comes to your Non-Compete clauses. Now, non-compete clauses like I
discussed earlier that there are few transactions in which you cannot have a non-compete,
like say for example, if the relationship between the parties is an employer and an
employee, in those circumstances, you cannot come up with a non-compete clause
preventing them from taking any employment with any competitor in the future. But if
they are a partner to your business, if they are a shareholder in the same company as you
are, in those circumstances, you can enter into a non-compete contract with such
shareholder or business partner and it can be enforced. As the case of an employment,
non-compete clauses, there are certain newer methods of ensuring that they do not jump
to a competitor. One of the classic examples is that of a garden leaf clause, which
mandates that an employer has a right to keep the employee on bench, like I think as it
popularly goes on for software employees and employer has a right to keep the employee
on bench for a minimum period of one to three months before he is relieved from his
duties. So, this is a particular aspect of mandatory notice period, which can be enforced in
order to ensure that employees are also kept hand in glove.

BOILERPLATE CLAUSES

With this, we move on to certain Boilerplate Clauses. Now, one of the reasons why I call
them boilerplate clauses or why it is popularly called boilerplate clauses is because these
are time tested. So, you do not draft these clauses specifically for a transaction, rather
they are already drafted in an earlier contract, you just ensure that you extract it from the
older document and insert it into a newer document. What are those? Sometimes the
entire agreement is used as a boilerplate contract. This happens essentially in your
standard form of contracts, like your insurance agreements, your software licensing
agreements. I am sure that during the course, you must have definitely installed at least
one or more of the apps, including the browser app that you are using to view these
videos. Now, if you look at it, the agreement or the terms and conditions are something
that is already in existence. They do not draft it specifically because Mr. X or Rohit is

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installing the particular app. It is there because any user can download it and install it and
they will see this entire agreement as a boilerplate clause.

Further assurances: Now, sometimes further assurances are used as boilerplate clauses,
generally in respect of transfer of properties, further assurances are generally included
like say, for example, the transfer of documentation such as your katha or your property
tax receipts and certain other registrations as well. These are further assurances that are
included as boilerplate clauses.

Cost and expenses: Generally, the cost and expenses clause that relate to that all parties
shall pay their respective costs and expenses. This is a boilerplate clause and it can prove
detrimental to you in case you have had an understanding with the other party that they
are required to bear the cost. Like say, for example, cost with regard to freight, transport
and certain other aspects, if they are going to be included in your contract and you are
going to have a boilerplate clause on cost and expenses, it is going to be contradictory to
one another.

Time is of essence: This is generally inserted into every single contract to just to make it
abundantly clear that in case the contract is not performed within a particular time, the
parties have the opportunity to repudiate the contract and go for a new vendor or some
other person.

Notices: Notices is also a boilerplate clause, which is generally a copy paste version. It
gives you the name of the parties, the address, the phone number and others. So please
ensure that it is edited while you are inserting it into the contract.

No partnership or no joint venture or relationship of parties. So sometimes when you

are executing into a commercial transaction, like say, for example, a distribution
agreement, or it could be a vendor agreement, or it could be a sub service contract, in
those circumstances, there is a clause that is inserted in just to ensure that the contractual
arrangement is not read as a partnership or as a joint venture between the parties.

Liquidated damages: This is another boilerplate clause, which has a restriction on the
amount of damages that each of the parties can claim. And essentially, liquidated
damages as a boilerplate is included to the maximum of the total sum consideration of the
contract. If you look at the inclusion of liquidated damages, it is still interpreted in terms
of your Section 74 of the Indian Contract Act. And even though if you stipulate certain x
amount as liquidated damages, as per the Indian law, it is only up to that amount that can
be given as liquidated damages and not otherwise.

Specific performance: This is a clause which generally is included to state that the
contract shall be specifically performed. But please note, if you are going to add
liquidated damages and specific performance, there is going to be a conflict between the

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contract because specific performance ensures that there cannot be any compensation.
The contract has to be performed. Liquidated damages ensures that in case the contract is
not performed, giving of consideration or a sum of money is equivalent to performance.

Amendments: There is also a premise that boilerplate clauses can say that this agreement
may be amended by way of such and such form or manner. Now, if you are entering into
an amendment clause, which is stricto sensu that says that a particular contract to be
amended has to be something in writing in those circumstances, such amendments have
to be in the same form and manner as the clause provides for.

Assignments, like I told you, contracts can also be assigned to another person. So, sub
assignment or sub licensing, these aspects need to be specifically provided. And if it is
provided in a contract, they have to be carried out in the same form and manner.

Waivers: Generally, boilerplate clauses says that no part or no clause of this contract can
be waived. And as such, the waiver clause stipulates that unless the party is given writing,
a contract is not waived.

Severability clause: Which says that there are multiple facets in a contract. I think in the
previous discussion, we spoke about various parts of a deal. Now, it may so happen that
one part or one aspect of your contractual transaction becomes unlawful. Like say, for
instance, two months back in September 2022, we had a decision which was passed by
the Karnataka High Court, which said that your bhang, which is actually sold the “bhang
ki goli”, which is sold, especially during the time of Holi and other aspects in various
parts of North and South India is not a narcotic drug or a psychotropic substance. But
whereas marijuana, gaanja or weed is defined to be a narcotic drug or psychotropic
substance. Now in those circumstances, please note the position of law as on today is
with regard to supply of bhang is not illegal, sale or purchase of bhang is not illegal. But
let us say tomorrow, the law changes, there is a change in law that is made and by reason
of which sale of bhang also becomes illegal or position of bhang also becomes illegal. If
you are entering into a contract for sale of bhang today and sale of certain other aspects
like say filter paper and certain other points, tomorrow when the contract is avoided,
because of the change in law, where sale of bhang is made illegal, you can still go ahead
and enforce the particular contract for sale of the filter paper or certain other aspects.
Now, this is one of the particular premise, which you need to keep in mind to understand
what severability means. It means that two parts of a contract can be read as distinctive
from one another. In such circumstance, if one part becomes unenforceable, the other part
continues to be a valid contract by means of severance.

Force Majeure, we have already had a discussion in the previous instance as to why
there is a requirement to draft the force majeure clause in a proper manner. Please do not

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ensure that it is a boilerplate clause. Try and modify the force majeure clause time and
again when you are executing a contract.

Confidentiality Clause: It is also essential for you to describe what is the confidential
information because a confidentiality clause in respect of a pharma company or pharma
transaction cannot be the same as a confidentiality clause or let us say in respect of a
software transaction or a SaaS based contract that is a “Software as a Service” based
contract.

Non-complete clauses, these are also boilerplate, but try and ensure that depending upon
the nature of the parties and relationship of the parties, you ensure that the non-complete
is drafted accordingly.

Governing law clause, now sometimes governing laws require to be modified depending
upon the place of business of the parties. Please ensure that you put a court which has
competent jurisdiction to handle the matters and the laws as well. If there are two Indian
parties, you cannot have a foreign law for implementation. You have to implement it as
per laws of India only even if you choose arbitration as a mode of dispute settlement.

Jurisdiction, please ensure that the jurisdiction like the governing law and the
jurisdiction go hand in hand. Like I mentioned earlier, please ensure that the jurisdiction
clause is given to one of the places where the parties have their principal place of
business.

Mutual understanding of parties, now this is also another boilerplate provision which
says that the parties have a mutual understanding, and which is included within the
contract. Essentially, most boilerplate clauses may become immaterial because of the
reason that the major contract itself provides for the sum and substance of these contracts.
So, few of these clauses like let us say for example, further assurances, time is of essence,
your mutual understanding of parties, these are things that need not be included also.

Counterparts, like I told you earlier that one contract can be executed in multiple parts,
but all of them will be led as one single agreement itself and that is where you have
counterparts coming into place.

NEGOTIATING FACTORS

Next, we move on to certain aspects or negotiating factors that have an impact on the
drafting of a contract. Essentially, when you are looking at drafting of a contract, it is
necessary to understand that a contract is drafted based on the negotiating practice that
each party has. Now, what may be these negotiating factors?

First thing is the project size and capacity of one of the parties. Now, if you are a
largescale supplier or a largescale business, any person doing business with you will have

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a lesser of a bargaining factor in the sense that your project or your business is so large
that it will have not just one but several vendors. So, therefore, you are in a higher
negotiating capacity or have a higher negotiating power over the other counterpart in
your contract. But however, look at the inverse of this. Now, if you are a largescale
business, but you require a critical component which can be provided by only one vendor
and there is no other vendor who is competent enough to give you such other aspect, then
the negotiating factor immediately tilts towards the smaller business. Even though despite
your large scale business aspect or your project size and capacity, merely because the
component that you are trying to procure is a critical component, your negotiating factor
immediately shifts.

The next aspect is the manner in which you are carrying out the financing of your
business. Now, the financing or the business model that you have in case you are
extended because of loans or other aspects, there might be certain limitations that you
have to carry out in your business. Like say for instance, the lender might have put in
certain restrictions on you from entering into certain kind of transactions that kind of
curbs your negotiating factor with other contracts that you are executing.

Now, the aspect of taxes also plays a crucial role in order to understand what is the
negotiating factor that you have. Given the premise of your goods and service tax and
certain other aspects, it quite becomes a necessary negotiable aspect as to the pricing of
the product that you are trying to take across. Certain goods might be inclusive of the
GST that you might have to discuss, but there may be certain things wherein a higher
duty or rate of duty is being imposed, which impacts your negotiating price. And as such
your price fixation becomes a challenge because of the variability in the taxing model
that you try to take forward.

Operating costs: Operating costs also have a huge impact on the manner in which you
negotiate with either of the parties because an increased operating cost wants you to
ensure that there is a sufficient markup or price that is fixed at and as such your
negotiating factor gets affected immensely by the operating costs or the standing costs
that you have in your day to day business operations.

The tenure of the contract and post contractual Life. Now, also the term of the contract
is something that you might have to look into for understanding the negotiating factor.
Now, if you are a business that looks at a long term fixed or stagnated revenue
generation, then the tenure of the contract can be kept, is required essentially to be kept
for a longer period of time. For example, power purchase agreements. Power purchase
agreements are generally for a longer time period and they are generally preferred for a
minimum duration of 5 years or more because the price fixation method is for a period of
5 years and only if they execute a contract for a longer duration, they will be able to reap
out the benefits in the long run and not otherwise because electricity price is subject to

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change depending upon the price fixed by the regulator. Now, if a power purchase
agreement fixes a particular price fixation for the duration of the contract, then in those
circumstances, there is an immense benefit that one or more of the parties obey. And also,
the seller of power is also to benefit because he has a continuous buyer and as such, the
negotiating factor is quite equally divided there.

Similarly, to it, any other contract depending upon the tenure and the post contractual life
of such transaction is something that determines a negotiating factor. Like say for
instance, in the case of a construction contract, the post contractual life that is the
building has to be in existence for another duration of at least a minimum period of 30 to
45 years and that is the post contractual life of the building which gives across a premise
as to your negotiating factor. So, as such, the vendor or the construction agency will have
a higher negotiating capacity to ensure that quality products are utilized and as such the
negotiating factor of the person who is receiving the services is quite reduced as against
that of a construction agency depending upon the choice and material that is sought to be
used by either of the parties.

It is pertinent to note that there may be certain other contracts that also impact your
negotiating factor. The foremost being in case you are a special purpose vehicle that has
been incorporated for a specific purpose, then you will be bound by certain agreements
like your shareholders agreement and loan agreements, whereby your objects can be
limited to serve only the purpose of the SPV alone and so that the purpose for which the
SPV is formed is not deviated thereof.

The second aspect that comes into premise is your operation and maintenance contracts.
It so happens that having an operation maintenance contract gives across to economies of
scale, in the sense that you know what exactly your fixed cost is and so that you do not
have to worry about your operation and maintenance variations, because this is for a
fixed term period, and you are able to focus on more other important things. But having
an operation and maintenance contract creates a limitation on your price negotiating
strategy because regardless of what price you negotiate for selling the particular product,
your operation maintenance contracts remain fixed and does not change.

The next aspect that comes across is with regard to your tenancy. Now, the aspect of
tenancy is something that you can take into consideration for discussing as to in the
manner in which you can make use of your tenancy rights. Like say for instance, if there
is a clause that does not allow you to sublet or sublease your particular land, the
additional space or storage that is there in your particular tenancy contract or any other
particular aspect cannot be used for certain other purposes, thereby affecting your
negotiating factor with certain other businesses or expansion of your activities.

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Certain other interconnected agreements also limit your negotiating factors and utility
agreements, especially those with regard to your electricity and certain other aspects, the
limitation for purpose for which you can make use of such aspects are all those aspects
that have a hindrance on your negotiating factors.

With this, we move on to the last leg of discussion, which is the aspect of financing
agreements and its ability to affect or impact your negotiating factor. Now, financing
agreements are generally executed with your financial institutions or non-banking
financial companies who have the tendency to impose restrictions on the manner in
which you do your business. Now, if there are certain clauses that restrict you from
carrying on a particular activity or any other aspect of doing business like say, for
instance, recruiting a third person as a part of a management or anything of that sort, in
those circumstances, the financing agreements also impede your negotiating factor in any
given contract. As such, it is pertinent to note that there may be a circumstance where
other contracts have an impact on your negotiating factor and a due diligence of your
contractual management is utmost important to understand your negotiating factor before
going into a contract.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat, Professor of Law
National Law School of India University

Arbitration Clauses in Government Contracts

CHALLENGES TO DRAFTING

We now continue to understand what the challenges of drafting are. Now, if you look
about the previous discussions, you would have learnt that drafting is a synthesis of law
and fact. It tries to convey in coherent terms what the actions of each of the parties are
doing. Now, in that aspect, there are certain inherent challenges that the law poses before
you. Because at the end of it, a contract is only an agreement which is enforceable by law.
And the inherent challenge that lies at drafting is creating or framing of a clause that does
not get implicated or vitiated by the law.

On this point, we will come to a discussion on an aspect called restrictive covenants. I

am sure you must have learnt this in the previous discussions. But we will look at it from
the perspective of the challenges that drafting holds onto restrictive covenants. Restrictive
covenants are always on the journey, in the sense that with every passing year, you come
across a new form or sort of restrictive covenant, something that tries to create a binding
nature on the parties between a partner.

Now, if you would ask me what restrictive covenants inherently are, a restrictive
covenant is something that asks a person to do a negative act. In the sense, it puts across
an obligation for a person to abstain from doing a particular action or refrain from doing a
particular action in a particular manner. Now, with the particular years, I would just like
to bring about two instances where certain new restrictive covenants came across as
wildfire. The first discussion that we will be taking about is the Infosys Story of 2018. I
would just take you back in time to 2018, when there was a crisis which unfolded in the
top-level management of Infosys.

What happened was that the founder of Infosys and the then managing director of Infosys
had an ideological clash. This ideological clash brought about a particular requirement
that the then managing director had to step down from the company. Now, in that pursuit
came across a discussion on something called a non-disparagement agreement or a
non-disparagement clause. What would you understand by what a non-disparagement
clause is? Please look at the conflict that was there in hand. This is a company which has
been pivotal in the development of India Silicon Valley and India software system.

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This is a dispute between the top-level management of a listed company. Any amount of
information that gets breached into public domain, owing to this dispute by either of the
parties is almost going to set a huge setback for the company, its reputation and all the
people who are associated with it. On that ground, there was a particular rumor that a
non-disparagement agreement was executed between the top executives. Now, to
understand what a non-disparagement agreement is, please note, it simply puts that either
of the parties who are executing the non-disparagement agreement or who are signing to
or consenting to the non-disparagement clause cannot in any manner create any hindrance
or disrepute to either of the parties to the contract. That is what essentially a
non-disparagement agreement puts across. It tries to ensure that the reputation of either of
the parties does not get vitiated merely because one person decides to take the matters to
the press or to any other third person.

The second aspect for today's discussion on restrictive governance comes across to the
Wipro Story of 2022. As you may see, the Wipro story of 2022 brought about the aspect
of moonlighting. You may ask me what is this aspect of moonlighting? Please note
friends, moonlighting is one of the aspects of ethical misconduct that Wipro highlighted
in several of its employees. What essentially the employees did was, although they were a
full-time employee of Wipro, after the office hours, they went ahead and carried out
certain personal errand or personal avocation of some sort or the other.

It could be a start-up idea, it could be working together on a different project or other

ones, which are not in the interest of Wipro. Now, one of the ethical combats that Wipro
brought about in justifying the action of firing most of its employees who were engaged
in moonlighting was that Wipro had in its mind that moonlighting will affect the
performance of the employees in giving their services to Wipro. While on one hand, this
is the story of Wipro, on the other hand, you will notice that the employee’s contention
was that although I am bound by Wipro's employment, I am carrying out all my personal
activities after my employment hours. I think that has nothing to do with Wipro. So, this
is the ethical combat that was there between the management and the employees in the
2022 story.

But my friends look at it from this perspective. Section 27 of the Indian Contract Act is
quite clear. It speaks about agreements in restraint of trade or employment. And please
note my friends, as long as an employment contract is valid, restrictions can always be
imposed during the tenure of employment and not beyond it. So, even though
moonlighting is brought about the kind of ethical dilemma that the employees carried out
their moonlighting activities or carried out their personal avocation beyond the working
hours, it was nonetheless during the subsistence of their employment contract with
Wipro.

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And as such, the implementation of the moonlight clause or reputation or termination of
the contract citing moonlighting by its employees was an absolutely valid action as long
as the other procedures are also duly carrying forward. So, these are the aspects that come
across on the points about how contractual clauses are evolving over time and as to how
draftsmen have to be on their toes to keep in light the new advancing changes.

With this, we move on to the second leg of restrictive covenants that relates to your
employment bonds or service contracts. Now, one of the essential aspects is with regard
to the implication of fundamental rights in your employment bonds. This is a particular
aspect that particularly relates exclusively to government bonds, employments with the
government or with any particular public sector undertakings, where the government has
a substantial hold.

The Supreme Court in the year 1982 answered categorically that fundamental rights are
something that can be imposed on government employment or contractual activities with
the government. Fundamental rights cannot be alienated merely because the government
is carrying out the economic activity. The Supreme Court was held that it is the duty and
the bounding requirement or obligation of the state to ensure that the fundamental rights
are meted out at all times and including in those natures where the government carries out
employment activities as well. In the case of Air India v. Nergesh Mirza, it so happened
that Miss Nergesh Mirza was an air hostess. The contract had stipulated certain
conditions on basis of which on the completion of a particular age the air hostess could be
terminated from service.

It was the stipulation of the contract that air hostesses were to retire on the first pregnancy
and on marriage within 4 years and also retirement at the age of 35 years, extendable up
to 40 years. Now, please note this was the particular contractual clause that was there in
the agreement which employed air hostesses in Air India. Now, if you look at it, Nergesh
Mirza took it quite intrude and felt discriminated merely because of the particular
requirements. She was of the view that these obligations that were cast under the contract
were something that went inherently against her fundamental rights. The right to have a
child, the right to be married and of course the unmeasurable or undeniable right to grow
old.

Age of a person cannot be stopped at any count. That being the premise, a petition was
filed challenging such contractual clause stating it to be of arbitrary in nature and against
the fundamental rights. Please look at it my friends, look at it from the perspective of the
employer also. Air India on the other hand had certain justifications as to why they had
imposed these conditions. On the aspect of first pregnancy, they mentioned that see
pregnancy is a medical condition and inherently there are certain medical factors that are
associated there with and as such any person who has the effects of pregnancy will not be

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able to go ahead in the part of the flying crew and as such there might be a requirement
for the air hostesses to retire because essentially she is there on flight crew duty.

The second aspect that was put across was with regard to the marriage within a particular
period of 4 years. Now, if you look at it, the aspect of marriage, it was brought about
saying that see the flight crew has a very stringent requirement or timing requirement to
travel at odd hours, which may not be possible in case there is a matrimonial issue that is
involved. So, as such on basis of those particular counts, it is suggested that within a
particular period of 4 years of marriage, the retirement is required to happen. And while
at the same time, if you look at the aspect of the age limit of 35 and extendable up to 40
years, it was suggested that this is how the service industry is. If you look at it, there is a
requirement for the age of the air hostesses to be kept in mind, that is a special industry
that is kept in our across and as such, it is on par with the other competitors, and we are
not doing something that no other competitor has not done.

So, on these grounds, Air India sought to uphold the particular contraction clause. But
look at the marvelous manner in which the courts interpreted the clause. The courts
categorically held that such a clause was arbitrary and against the fundamental rights of
every woman. They proved that as an employer, the government should set a benchmark
for other participants in the market. They cannot state that market conditions are of
similar nature and as such our contractual clauses are also valid and they can also violate
fundamental rights, because in no juncture, fundamental rights can be violated by the
government at any cost, even though if such particular violations occur, because the
government is carrying out an economic function. On those grounds, it was held that such
a particular clause in an employment bond, especially with that of a government entity or
a public sector undertaking cannot be withheld as valid and as such, it has to be struck
down.

These are the challenges friends which comes across when you are going about drafting
of a contract. Merely the change of how a business entity is formed, the nature or source
of its funds through which it operates can categorically effect the manner in which the
courts will view the contracts. Now, had this been with a private player, the implication of
violation of Part 3 of the fundamental rights would never have become an issue before
the courts of law. So, as such, depending upon the type and nature of the party, the
contractual drafting style also has to be modified and this is one of the biggest points
which you should take forward while going ahead with drafting of contracts.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat, Professor of Law
National Law School of India University

Arbitration Clauses in Government Contracts

Moving further, the inherent challenges to drafting are not just that. The next big aspect
is with regard to confidentiality and non-disclosure agreements. When you are entering
into a transaction, you want it to be of absolute secrecy. You will want some particular
aspects of the contract to be kept confidential, so that no competitor of yours comes to
know in case you are a businessman. In this context, it is pertinent to note that Coca Cola
is one of the largest kept trade secrets across the world. How can this be maintained? If
you are looking to enforce the aspect of secrecy and confidentiality with persons with
whom you are engaging in the business; say there could be multiple people who come
into the business. You would have partners, you would have vendors, you would have
service providers, you will have customers, and you will have employees, who on a day
to day basis engage with you in the business. On whom can you impose confidentiality
or a non-disclosure clause? This is one of the foremost questions which every draftsman
is required to understand. We have discussed time and again that the aspect of
employment is something to be looked at through the lens of Section 27 of the Indian
Contract Act. Section 27 says that any agreement that is in restraint of trade employment
is void.

That being the case, is a particular condition about disclosure or non-disclosure of aspects
relating to employment a restraint on trade or employment? Please note that the aspect of
restrictive covenants such as confidentiality and non-disclosure agreement is something
which can be imposed on any person who is on an equal footing; that is whether the
parties are falling under the rule of pari delicto. If the parties are falling within the
purview of pari delicto (on equal footing), then in those circumstances a confidentiality
and a non-disclosure agreement shall stand valid. However, if one or more of the parties
are on a different footing, for example the relationship between an employer and an
employee, a doctor and a patient, a teacher and a student, a father and a son, in those
circumstances the contract cannot be set to be in pari delicto. It could be because of
fiduciary capacity of the relationship or any other superior or subordinate relationship. In
those circumstances, even if a particular clause such as confidentiality or a non-disclosure
agreement clause is drafted, the same will not be allowed to be enforced.

The thin rule of exception is that with regard to employment related aspects. In those
cases there are divergent aspects that one needs to keep in mind. One is during the
subsistence of the employment and after the completion of or termination of your

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employment. During the subsistence of your employment, a non-disclosure agreement or
a non-disclosure clause can be enforced against an employee, but the same cannot be
implemented or enforced after the termination of employment. In Ambiance India versus
Naveen Jain, there was an injunctive relief that was sought against Naveen Jain with
regard to his employment in a particular industry. He was a specialist in fabric related
technology and during his employment tenure he was subject to a non-disclosure,
confidentiality and a non-compete clause. What was the impact of these clauses? The
impact of these clauses was that he could not use the knowledge that he gains in
Ambiance in any other employment that he needs to carry forward. This is what
confidentiality agreement does. It prevents another person from using such information
which has been acquired by a single party to the contract. In this case, because of these
clauses, the information that was picked up Naveen Jain during his employment and
subsequently upon termination could have prevented from joining another similar
business. The courts have clearly held that such a particular restraint will become void by
virtue of Section 27. So understanding a clear aspect of the position of law and how it is
implemented in these contracts is also an essential thing that one needs to remember
while drafting a confidentiality and a non-disclosure clause.

Moving further, similar aspect applies to non-compete clauses as well. It has been well
etched in the Indian jurisprudence that any non-compete clause cannot be extended
beyond the term of the contract. If the employee is to resign, he cannot be prevented from
joining even a business of a competitor. But what is the relief that one can have in order
to prevent this? Owing to a plethora of cases, there has been a development that has
come into existence called ‘garden-leave clauses’. When an employee wants to resign,
there is a mandatory notice period that is carved out into an agreement. What does this
do? If an employee wants to resign from the company and join a competitor, in those
circumstances, especially with regard to businesses where there are high amounts of
confidential path breaking information that is being exchanged with the employees and
the management or if the employee is a person belonging to the top key managerial
position, such information going to the competitor would be detrimental to the business.
Garden-leave clause ensures that there is a mandatory notice that is required to be given
by such employee to the employer and only after completion of such period can he join
the competitor or any other person whatsoever. Please note that, if information is worth
protecting, only then confidentiality clauses are carved into. In such cases, it is then
worth covering the notice period of one’s employee. It may seem that one is paying
additional salary for the employee during such notice period as specified in the
garden-clause. Essentially, it is called garden-leave because during this tenure, the
employee will not be given any day-to-day activities. He will only be required to come
over to office, handover or complete necessary basic formalities, whatever the need be
and then return back home. He will not be engaged into the day-to-day activities of the
management nor of the business. So, therefore, especially in volatile businesses, such as

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businesses related to technology and innovations, having such garden-leave process is
worthwhile. But the same may not be the case in a lot of other businesses. So, in those
circumstances, the notice period that is required to be given by the employee can be
sufficiently managed. The greater the secrecy of the information, the higher the notice
period of garden-leave clause. The lesser the importance of the information, the lesser
can be the notice period.

The next challenge that comes across is with regard to drafting of arbitration clauses.
Why should we have immense care and precaution while drafting it? The misconception
is that these arbitration clauses are generally not those clauses that are drafted
immediately, when the contract is executed. For example, if you are going to do a
business, you are first going to discuss about the commercials of that business and only
then you will come to the drafting of the agreement. In case of a dispute, you are not
going first settle by arbitration and then discuss the commercials. As discussed
previously, arbitration clauses are called ‘boilerplate clauses’ because in most
circumstances, the clause is copy pasted. Let’s see why it is pertinent to note how an
arbitration clause can be misinterpreted. Please note friends, the law of arbitration that is
the Arbitration and Conciliation Act, 1996, clearly provides that the seat or place of
arbitration shall be used to determine which law is applicable. It is a clear position that
whichever is the seat of arbitration, the law or the courts will have jurisdiction, not the
place, not the venue. Please note the law makes a distinction between seat and place. The
term venue is not used anywhere else. So it was a question of challenge where a contract
was executed mentioning London as the place of arbitration, whether it is to be construed
that London is also the seat of arbitration. Please note that seat, place and venue, if used
interchangeably, the position of law can be much different because the law recognizes
only seat of arbitration for determining the jurisdiction. Place or venue of arbitration can
lead to confusion in the state of mind in the courts and you might be creating lacunae in
interpreting the contract. Hence, use appropriate words while drafting an arbitration
clause. Secondly, an arbitration clause which is loosely drafted saying that all the parties
shall refer to an arbitration without defining as who the arbitrator is or the manner in
which the arbitrator is to be appointed or the manner or place where the arbitration shall
take place shall give rise to ambiguity in the enforcement of the contract. Therefore, these
are the particular things to be kept in mind while drafting an arbitration clause.

Similarly, there may be an instance where even though there is a particular arbitration
clause as seen under the ONGC versus Saw Pipes case, the concept of public policy is
something that can be used for interpretation of the arbitration clause or the award that is
passed by the tribunals. The Antrix episode is also another aspect that was to be kept in
mind as to how the existence of an arbitration clause can impact a contractual
performance. This was a case where the Antrix Devas had executed a contract. Devas
was a company which reconstituted itself in the sense that there was some amount of

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shares that was held by few of the shareholders in DEVAS which was sold across to
another shareholder, owing to which Antrix had the opportunity to terminate the
agreement. But nearly because there was an arbitration clause, the matter could not be
determined by the courts in India. It had to go for arbitration and after several rounds of
arbitration in multiple jurisdictions, India faced a backlash.

The existence of an arbitration clause is something that can intrude into the contractual
implementation as well. Because when there is an arbitration clause that is given and the
powers are rested with an arbitral tribunal, the same cannot be revoked at any point
unless there is a novation of the agreement between the parties. So please that, it is
always important to understand in what circumstances arbitration can be provided for and
in what circumstances it cannot be. On this note, let’s look into the aspect of the
Commercial Courts Act. With the enactment of the Commercial Courts Act, there is a
chance for a faster, speedier and a more cost effective dispute resolution that can be
carried out in case of commercial transactions. Therefore, the Commercial Courts Act has
now limited the role of arbitration in India because of the manner in which the time
bound determination of dispute is provided for by the Act. Further, there is a standard
operating procedure that is created by the courts across India with regard to commercial
disputes particularly in the form of special courts. In few states, the high courts are the
special courts that have been warranted with the jurisdiction to handle commercial
disputes. That being the point of concern, please look into the drafting of arbitration
clauses keeping all of these points in mind.

The next aspect that you need to keep in mind is in case if one or more of the parties in
the contract is a MSME (Micro, Small or Medium Enterprise). In such cases, even if
there is an arbitration clause in the contract, the MSME Act supersedes the same and
MSMEs can approach the dispute facilitation center that is created within the MSME Act.
This dispute facilitation center is available on the portal called e-Samadhan. Therefore,
having an arbitration clause drafted or inserted into a contract does not necessarily mean
that it can be enforced accordingly. The implementation of the arbitration clause differs
from one transaction to another depending upon the nature of the parties and the purpose
for which the agreement is executed. The aspects to be kept in mind while drafting
preemptive rights are multiple. The preemptive right is something that gives a step in
advance to one or more of the parties. What it does is that when there are two or more
parties in a contract and one of the parties decides to carry out a particular action or not,
the other party is given a right to choose whether such person should carry it out or not.
This may be understood from the aspect of enjoying a common property. Let us say that
there are three brothers. All three brothers have a share in the land which is their ancestral
property which is currently being enjoyed as a joint property. One of the brothers decides
to sell his share in the land to a third person. Having a preemptive right in a contract
allows the other two brothers to get the first right of refusal to choose that the share in the

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property of the seller brother can be purchased by the existing brothers themselves, either
solely or jointly. This is what a preemptive right does. It tries to prevent any third person
from being engulfed or brought in within a particular transaction by providing one or
more existing parties the right to choose to perform a particular action in addition to their
obligations under the contract. This clause most popularly used in aspects of transfer of
property. There are multiple ways of transfer of property such as lease, mortgage,
hypothecation etc. In case of a lease, the right to sublet can be created by way of a
preemptive right which means that if the lessee wants to sublet the premises, the lessor
can withstand or hold a preemptive right to not allow that sublet. In case of mortgage, a
creditor can put in a particular preemptive right stating that in case there is going to be
any subsequent charge or mortgage that is going to be created on the property, the
consent of the creditor shall be availed before going ahead with such transaction. These
are aspects or in a manner in which preemptive rights protect the interest of one or more
parties. In the example of the creditor, if the preemptive clause is not there, it may so
happen that the borrower will take a second or a subsequent loan, which will actually
affect the right to recover the entire loan amount from the sale of such property or the
proceeds of such sale of property in case there are two or more subsequent loans that are
taken in the sale.

The next aspect where preemptive contracts come into importance is with regard to
corporate transactions. In a corporate transaction, the major conflict or dispute is
essentially between the investors and the shareholders. Generally, the investor takes
shares in the company, which is promoted by the shareholders and a minor stake of the
investor is taken for a major chunk of money, which is given as investment. In those
circumstances, there are certain preemptive rights that are carved out for the investors.
There could be investor protection matters that could be carved out, which says that if
any particular item which is listed under the heading of investor protection matters, those
aspects shall be done only with the consent of the investor. In the alternate, a shareholder
or a promoter can also have a preemptive right stating that if the investor chooses to sell
his shares to Y, then the existing shareholders shall have a right to purchase such shares.
So, this is a particular clause which can be drafted in case a preemptive right is required
for the existing shareholders as well.

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 Advanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat, Professor of Law
National Law School of India University

Arbitration Clauses in Government Contracts

It is essential to bear in mind that when a contract is being drafted, you are creating a
synthesis of fact and law. It is a particular scenario where such document can be proof of
a transaction between the parties. In that circumstance, the evidentiary value of such
documents becomes pertinent. When one is going ahead with the drafting of a document,
there are certain aspects of language that is involved, there are aspects of facts that are
involved and there is a synthesis of law into that fact as well that has to be kept in mind.
When there is a combination of all these three aspects, there is a chance for each person
to interpret or look at the particular contract differently when there is ambiguity.

As a general rule, there are several rules for interpretation. The first and foremost is the
‘literal rule’. When there is confusion in interpreting the terms of a contract, the literal
meaning of the term is what is taken as final. If the term ‘bag’ is used, it will be
interpreted from the perspective of what is generally considered as a bag. It will not be
looked at it as a bag of a specific make, rather as a particular instrument in which things
can be stored and the same can be carried away. That is the literal rule. If the brand name
bag is mentioned and dimensions are specified, the literal rule of interpretation shall not
apply. Here, specific construction of the contract is required. The next aspect is the
‘beneficial rule of interpretation’. When there is an ambiguity in the contract, so long as
the party has performed his part of the beneficial rule of interpretation is also applicable
in a contract.

The next rule that applies is with regard to the ‘parol evidence’. Parol evidence means
that you are going to read into documentations which are not there within the contract.
This is a particular instance when there is a contract, it should have some evidentiary
value. There cannot be any subsequent document as a general rule, which can be read
into that contract. For instance, if one is placing an order for a bed or any other particular
furniture, the initial discussion for such furniture happens on a particular slip, wherein the
raw basic fundamentals are taken note of and thereafter, one gets a final quotation for
going ahead with the purchase. Which of these two documents can be construed as the
contract? Please note, it is the second document which is prepared on a final basis, with
all the specifications is to be treated as a contract. But can the initial rough slip that was
utilized for understanding the transaction be used for interpretation in case the carpenter
fails to deliver the appropriate furniture? That is the biggest question. That is what is

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called the parole evidence rule. It can be used only in certain circumstances which are
allowed under the Evidence Act. We will come to it a little later.

The last rule that applies to interpretation is ‘contra proferentem’; where a contract is
interpreted against the party who drafts such clause. This is also further extension of the
rule of pari delicto. When two or more parties are not on equal footing, there is a
particular instance where the contract is read in a manner that is favorable to the weaker
party who has not drafted the contract. This rule of contra proferentem is applicable
majorly in contracts with consumers, contracts where a person from a fiduciary
relationship is engaged and not in commercial transactions. In commercial transactions,
please note it that all parties are deemed to be equal. They are not to be looked at
different footings or foot scales. They are looked as parties who have equal bargaining or
negotiation power. Nonetheless, there are certain exceptions to it are the only instance
where it can be looked into.

Let us move ahead with understanding Section 91 of the Evidence Act. Please note that
the Evidence Act clearly provides that when there is a document which describes the
terms and conditions of a contract which the parties have etched into writing, in those
circumstances, such document would be used as primary evidence. There cannot be any
evidence introduced to the contrary to such document except in certain circumstances.
When a contract is drafted into and brought into existence, there is a synthesis of facts,
events, the understanding of the parties and the law in hand. As such the document
becomes the foremost aspect to be looked into to understand the nature of the transaction
and the manner in which the parties are to carry out their conduct. Section 91 provides
that a deed constitutes as primary evidence. If there is a contractual document in hand,
which speaks about the manner or the obligations of the parties, there cannot be any
evidence introduced to the contrary. The law has forbidden any contradiction, addition,
subtraction or variation in a written document by any extrinsic evidence.

In this context, it is pertinent to understand the one of the judgments of Delhi High Court.
In this case the court observed that WhatsApp messages cannot be used for interpreting a
contract. Where the contractual terms are clear, there is no ambiguity involved in
interpretation. In those circumstances, WhatsApp conversations between the parties
cannot be looked into for secondary evidence. However, in case there is an ambiguity in
interpretation, can WhatsApp conversations or any other alternate communication
methods such as emails, letters be used as a secondary evidence or not is something that
can be allowed as per the Evidence Act. It is provided that the courts may examine the
facts surrounding the circumstances to which the language of the document may be
related. Every business has its own colloquial terms and phrases which are used for the
purpose of understanding. For instance, the term load in a business of distribution may
mean for the aspect of loading of goods and cargo onto a vehicle for delivery. Whereas in
the case of a power sector, the term load could mean the capacity of the generator. These

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are two intricate aspects of the same interpretation of the word load. In case it is a power
sector contract, then the term load will be interpreted in light of its business. In the case
of a distribution contract, the term load will be interpreted likewise.

Further, usage of clear and unambiguous words would prevail over hypothetical
consideration or supposed intention. For example, there is a particular phraseology that is
used that one of the parties shall ‘work hard’ in order to deliver the goods. In case the
contract is performed at ease by the particular party of the contract, even in those
circumstances, the contract will be held to have been performed. There would not be any
requirement for proving the hypothetical or supposed intention aspect of working hard.
What is meant by working hard is something that is ambiguous and as such the courts
will not go into interpreting such terms to understand on the performance of the contract.
As long as the parties perform the contract appropriately, it would be ignored accordingly.
Hardship to either of the party would not be an element that is considered for interpreting
a contract unless it amounts to a degree of inconvenience or absurdity. It is pertinent to
understand that economic hardship is not used as a defense for non-performance of a
contract nor can be used for interpretation of the contract. So, this is one of the biggest
aspects that bring about on the aspect of using external documentation for interpretation.

In this context, the concept of enforceability of the contract in case of hardship was
discussed in the Energy Watchdog case in the year 2015 and 16 respectively by the
Supreme Court. In the Energy Watchdog case, the facts were that the Adani power group
was required to supply power to the Gujarat electricity company, which is a state owned
entity. But owing to the price change that happened with regard to coal prices in
Indonesia, which Adani power had determined to procure and generate the power, Adani
could not procure it at a low price and sought to terminate the contract or sought to revisit
the price negotiation on the ground of change in price owing to change in foreign law.
This is one of the particular aspects that need to be looked into; whether the change in
price was an economic hardship amounted to execution of the contract or performance of
the contract was a question that was involved before the courts. The contract nowhere
contained with regard to the procurement of coal from Indonesia and as such it was
something which was an element which was beyond the terms of the contract. The court
categorically held that procurement of coal from Indonesia was never a point that was
mentioned in the contract and as such cannot be read into. The contract was held to be
valid and enforceable and could not be set aside by the Adani group; nor could they ask
for an escalated price on a contractual basis. However, given the nature of the contract,
the parties have negotiated a particular settlement in the same to ensure that the power
supply is not terminated merely because of near small price fluctuations.

The next aspect that is brought about by Section 91 if there is a commercial transaction or
a commercial document that is being executed, such commercial document should be
given a liberal construction. It should be interpreted in the broadest manner possible. Let

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us say there is an agreement for delivery of goods. Unless the contract stipulates the
manner in which the delivery is to be made, so long as the delivery is made by one of the
party within due course of the contract or within the particular time stipulated under the
contract, the contract should be interpreted liberally. The court or any of the parties
cannot interpret the contract in such a manner that the delivery should have been made by
a tempo traveler only or that the delivery should have been made by train, rail or metro
services alone. These are aspects that cannot be brought into or read into the contract.

The next aspect that is to be looked at while understanding the evidentiary rule is that
ordinary grammatical interpretation is not to be followed if the contextual interpretation
is different from the grammatical interpretation. The illustration of the term load can be
used to understand this. Depending upon the context of the contract, text can be altered
alternatively so as to give a meaningful interpretation to the contract. With this, we
understand that the evidentiary value of the documents is something that acts as an
inherent challenge to the drafting of a contract. If a contract is drafted poorly, the
evidentiary value of such documents before the courts becomes questionable.
Implementation and receiving a favorable order or relief from the courts from a poorly
drafted contract becomes a huge challenge and a hurdle for enforcement between the
parties.

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 Advanced Contracts, Tendering and Public Procurement

Prof. (Dr.) Sairam Bhat, Professor of Law

National Law School of India University

Arbitration Clauses in Government Contracts

Going forward, it is pertinent to note that the rules of interpretation also act as a challenge
to drafting a contract. In this discussion, we will have an array into certain rules and also
look into certain general principles on the basis of which a contractual clause will be
interpreted. These rules of interpretation have been tested and tried and have been
implemented by the courts in various instances. We will discuss a few of the instances
just to have a clearer picture of what the rules of interpretation are. In this context, it is
necessary to note that there is a difference between what the textual interpretation of a
contract is and what is the contextual interpretation of the contract. The courts always
tend to look at not just the mere text but the contextual interpretation of a contract.

That is where we had discussed as to the beneficial interpretation rule and other aspects.
It is important to note, merely because the text is interpreted in one way, if there is any
absurdity that comes to the contract, if there is any ambiguity that arises in interpreting
the contract, the contextual meaning will always be weighed on by the courts for
understanding the obligation of each of the parties. At this, there is this Latin phrase
‘Expressio Unis es Exclusio Altinis’, which means express mention of one thing excludes
all others. Note that, when a contract is being executed, we have understood from our
previous discussions in what circumstances drafting can make a change in interpreting
the contract.

You must have looked at the lecture where we made reference to the payment of overtime
wages. So, in those circumstances, express mention of the aspect of distribution business
or packaging for distribution business makes a complete differential understanding to the
business which is being carried out for the purpose of distribution alone. Here further,
there was a contract in Swastik Gass' case, which said the contract shall be subject to the
courts at Calcutta. This is a synthesis of both fact and law whenever a contract is drafted.
Ideally, in any contractual transaction or any civil transaction, jurisdiction arises in more
than one place.

It could be the place of contract, it could be the place where either of the parties is
residing, or it could be the subject matter of the contract and its location, or it could be
the place on which the deficiency or any other aspect arises. So, this being the case, it is
to be understood that the jurisdiction of the contract can go off to more than one place.
But what if one of the contractual clauses provides that this contract shall be subject to

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the courts at Calcutta? Does it exclude all other jurisdictions? The observation made by
the Honorable Supreme Court in this case is to be noted. It has mentioned that if a
particular clause is put across that says ‘subject to the courts at Calcutta’, it means that it
excludes all other jurisdictions.

In this case, one of the parties was based out of Jaipur and they sought to execute the
contract in the courts of Rajasthan. As such, there was an objection that was raised by one
of the parties that the contract can be enforced, the contract or the case in hand can be
filed only before the courts at Calcutta and not at any other courts. The Supreme Court
held the view to be appropriate and mentioned that it is not necessary for the contractual
clause to say courts at Calcutta alone, because they have given across one step down
interpretation for contracts from statutes. In the case of statutes, there is a chance for you
to read into the statute for the purpose of making the statute beneficial. However, in the
case of a contract, such a form of interpretation is generally refrained from. The courts
held that since it has been mentioned at Calcutta, the intention of the parties was never to
be amenable to the jurisdiction of the courts in Rajasthan or particularly at Jaipur.

As such, if any matter has to be filed in respect of this contract, it shall be filed before
Calcutta alone. So that is what this rule, Expeciunis ex Exclusio Alteris implies. The next
rule is that of ‘Edgis Dem Generis’. Edgis Dem Generis implements that if a particular
contract has more similar words, you will go by the generic understanding of what that
particular term is. Let us say, for example, you understand this particular force measure
clause which is there before you.

None of the parties shall be liable for any delay, failure in performance, loss or damage
due to force measure events. During the performance of the agreement, events of force
measured may occur such as, but not limited to war, fire, flood, earthquake, accident, riot,
strike, explosion, lockout, act of God, act of government authority, accidents and or all
damage, decisions from customer or any event beyond the reasonable control of any of
the parties. The term any event beyond the reasonable control of the parties will be read
in light of the rule of Edgis Dem Generis. In the sense, in case there is a particular
incident, like say for instance in this particular strike, there is no aspect of gherao that is
included. In case there has been a gherao of one of the parties in performing the contract,
will that be read as force measure? Please note by applying the rule of Edgis Dem
Generis, which means of the same nature or kind, in that circumstance, the term gherao
will be read into the term strike.

So as such, this is the manner in which the rule of Edgis Dem Generis applies to
contractual interpretation. Further, we come to another question as to whether this clause
can cover the COVID-19 pandemic. You must have come across the aspect of the
COVID-19 pandemic and certain instances where a lot of courts have held COVID-19 is
a pandemic and is also an inclusion into the force measure. Whereas few of the courts

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have held the defence of COVID-19 cannot be held for non-performance of a contract.
There was a clarification that was issued in 2020 by the government of India in respect of
the contractual performance in case of government contracts.

And this particular limitation or circular or clarification which was issued could not be
extended to all the contracts by itself unless the contract provided for some similar
nature. If you look at it, nowhere in this particular definitions, if you are to make across
an instance, war, fire, flood, earthquake, accident, riot, strike, explosion, lockout, act of
God or act of governmental authority, accidents or damage, decisions from the consumers
does not include anything related to diseases, epidemics or pandemics. So, as such
COVID-19 pandemic, in my opinion, will not be read into the term by way of a
Jerusalem Generous, because it is inherently a disease, it is the flu. As such, the term
disease not being in the force measure clause, the COVID-19 pandemic cannot be read
into the contract by means of a Jerusalem Generous. Although it is something that is
beyond the control of the parties, given that it is not been included as a force measure
event, it cannot be read as such.

Interpretation by way of incorporation, is another addition that has been made. If you
look at it, what do you understand by this concept? It means that if there are certain
additional documents or additional agreements that have been executed by the parties,
can the second or subsequent agreement or the prior agreement be read into the new
contract that is being executed by the parties? Incorporation by reference or by
implementation in a particular contracting clause is allowed. So, you can make a mention
in the clause subject to the previous agreement executed by the parties, which means that
you are giving prior importance or utmost importance to the previous agreement because
you are using the term subject to. If you want the subsequent agreement to get
paramount, then in that case, you would put across notwithstanding anything contained,
which is a non-obstante clause. So, using certain contractual clauses such as a
non-obstante clause or a particular aspect of a non-prejudice clause, which is subject to,
you can make across a contractual interpretation by way of incorporation.

Further, there is a possibility for you to also include certain schedules or annexures to the
existing or the new contract which you are executing, wherein you are including the
previous agreements as well by way of annexures or schedules. This is an example of
incorporating different agreements into a new contract so as to ensure which agreement
of the two shall have a superseding effect. Next is the aspect of the implications of
contractual interpretation and the principles and their interface. Here, we will be using
certain aspects of understanding as to in what circumstances the interpretation rules have
an implication of the contract. The first and foremost aspect is the use of pre-contractual
discussion and negotiations.

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There was a particular slip delivery slip that was made that had a particular note which
said that if any new plating is required, the same is to be paid for extra. And upon
confirmation of that the contract was executed. However, this particular pre-contractual
discussion was not included within the contract. But nonetheless, the courts looked into
the scenario and understood that since there is a particular aspect of additional cost that is
involved, additional labour that is involved, it cannot be excluded from interpreting the
contract. In the sense that you must have come across in the system of damages that
there are also damages based on quantum merit.

If one of the parties is put in a detrimental position, in those circumstances, it has to be

adequately compensated for. So, this is the manner in which the courts can also tend to
look at pre-contractual discussions and negotiations to understand the full purpose for
which the contract is executed. The next aspect is the rule of parole evidence, which is
covered under Section 92 of the Indian Evidence Act. Please note, we spoke under
Section 91 about in what circumstances the contract alone will be looked at as primary
evidence. And there is no particular manner in which the contract can be looked away
from or shied away from by the courts while interpreting the same.

The rule of parole evidence is the exception to that general rule. What are those
exceptions and instances where the courts will delve into other contractual documents or
other necessary facts and circumstances covered under Section 92 of the Indian Evidence
Act? The next section is the importance of merger clauses. If there is any fact which
may be proved, which would invalidate any document or which would entitle any person
to any decree or order relating thereto. This is the first premise.

The merger clause could be a particular subsequent agreement that is executed. We

spoke about the concept of using non-obstante clauses such as notwithstanding anything
contained in the erstwhile or the previous agreement. If such a clause is there, then in
those circumstances, the courts are bound by Section 92 of the Indian Evidence Act to
look beyond the terms of the first agreement to the subsequent document which is
executed accordingly. The second one is with regard to the existence of any separate oral
agreement as to any matter on which a document is silent and which is not inconsistent
with its terms which can be proved. Take the example of a construction agreement.

If you have to look at it, once the building is constructed, there is no requirement for
painting the particular building. The only obligation that is put on the builder is that
please lay out the primer and then hand over the delivery upon construction. This is the
only obligation that is imposed on the builder or the constructor. It may so happen that
there is an oral agreement or an oral arrangement between the parties asking the builder
to also paint the house. In those circumstances, would the builder be entitled to costs for
painting incurred and also a reasonable amount of compensation? Pretty much yes,

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because there is a separate oral agreement between the parties asking the builder to go
beyond his contractual obligations and perform the same.

If you look at the contract, the contract ends as soon as the primer is laid, there is no
requirement for painting. But the parties have entered into an understanding that the
painting is required to be done additionally. In those circumstances, the parole evidence
rule allows you to read the oral agreement for interpreting the written contract. The third
one is the existence of any separate oral agreement constituting a condition precedent to
the attaching of any obligation under any such contract, grant or disposition of the
property. Please note that this is a particular aspect that speaks about the condition
precedent.

So, this covers the aspect where there is a separate oral agreement. Wherein it is
provided that, as long as you perform that particular condition precedent, you will be
entitled to the benefits under the new contract. So, if there is such existence of a separate
oral agreement, in those circumstances, the rule of parole evidence operates to read such
separate oral agreement also into the contract. The next clause is with regard to the
existence of any subsequent agreements to rescind or modify a contract or grant of
disposition of property. But there is a small aspect that which this rule of parole evidence
applies.

In the case of the sale of property, which is an immovable property that may be done so
only by means of a written instrument alone, it cannot be done by way of an oral
agreement. So, in those circumstances, even if there is an oral agreement to transfer the
property to another person after a sale deed is executed, the oral agreement will not be
read under the rule of parole evidence because of the bounded obligation under the
Transfer of Property Act of 1882 to exclude oral agreements for transfer of property. So,
in those circumstances, unless there is a written document, it will not be looked into.
Second , even if there is a written document, there are few impositions or limitations that
are created by certain other laws. Like say, for example, the payment of stamp duty, the
requirement for registration and others.

Unless a property is duly executed, which means in compliance with all the necessary
applicable laws and procedures, it will not be read into for reading out or interpreting an
existing agreement. The next contemplation is where there is any usage or custom by
which incidents not expressly mentioned in any contract are usually annexed to contracts
of that description, which can be used for interpreting by way of parole evidence. In
certain instances, customary practices or usages are generally utilized in mercantile
contracts. In this sense, most of these contracts go by way of their usage or practice. For
this aspect, there are certain key terminologies that are generally used in contracts which
are therefore shipment.

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For example, if the price payable says CIF, it means that it is inclusive of cost, insurance
and freight. A is the FOB, which means free on board. So here, these terminologies CIF
and FOB are those that have been utilized for times immemorial by those engaged in
shipping businesses. So as such, the terminologies will be interpreted in the manner in
which the custom read rates. So on this note, it is to be looked at, if the contract is silent
and the term CIF is read into, it means that the seller shall be responsible for the cost of
transportation for the insurance and the freight of the goods while putting it across.

And in no circumstances, the buyer will be entitled to infer those expenses. The last
aspect that comes under the rule of parole evidence is the point where any fact that proves
the manner of the language of a document, can be used for the interpretation of the
contract. Let us say, for example, if there is a fact which provides that Mr. X has a
particular object with him, and that object is described in the contract without any further
description or anything of that sort. In those circumstances, the facts can be proved to
understand what the terminology that is used in the contract denotes.

For instance, let us say Mr. X has an antique car. And that is the only antique car that Mr.
X owns. But the description of the antique car is not given in the contract, but rather it is
put across in clear terms that Mr.

X owns an antique car. So in those circumstances, any car which is antique in nature,
which can be proved before the courts as to the aspect of its antiquity can be used for
interpretation of the contract by means of parole evidence. So this is the general outline
or outlook on the basis of which a contractual document can be interpreted with evidence,
either documentary or evidentiary proofs of other nature by looking beyond the contract.
Further, it is to be noted that in the case of special contracts and special businesses, the
implication of contracts and interpretation may vary from case to case basis. Next point
to be discussed is the principles of brand principles, which is applicable in the case of
standard essential patents. It should be noted this is a case where the usage of CDMA
and GSM aspects were debated.

Where Ericsson was a pioneer in this technology. And it so happened that Ericsson was
giving this particular standard essential patent, which is your CDMA or GSM technology
to mobile phones at a beneficial price to few of its joint venture partners, but whereas
certain others were required to procure the same at a very exorbitant pricing. This aspect
of standard essential patent means that there is a particular invention, which is a basic
standard or a bare requirement for it to be operational. And without such particular
ingredients, the product cannot by itself sell in the market. Such a position of such
technological advancement puts the owner of such technological advancement at a very
high pedestal and a very high bargaining power that cannot be negated by any of the
parties.

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In those circumstances, the Competition Commission has interfered and held that clauses
relating to standard essential patents have to be fair, reasonable and non-discriminatory.
Non-discriminatory principles have also been read into private contracts, especially in the
case of standard essential patents. This being a special contract, it quite gives a
perspective that in the case of special contracts, the rules of interpretation can also have a
slight variation in order to protect the interest or the larger public interest at hand. With
this, we move on to further additional rules in the interpretation of the contracts. The first
query that comes across is can an allegation of fraud vitiate a foreign contract? Can
arbitration proceedings be initiated where a CVC inquiry or probe is in the process? This
is the particular point that is to be looked into.

The courts have time and again held that fraud as a particular aspect is something that the
arbitration tribunal can look into as long as it relates to civil liability. But whether a mere
allegation of the existence of fraud stalls the arbitration process, this is the interpretation
that has been taken in a 2014 decision of the Honorable Supreme Court. Please note,
that a mere allegation of fraud by itself cannot vitiate arbitration proceedings. It has to be
proven and only then in that circumstances, depending upon the nature of the fraud and
its implication on the implementation of the contract, it can affect the same. The next
point that we have to look across is with regard to the survival of the arbitration clause.

There are multiple clauses that are generally given as to in what circumstances a survival
of an arbitration clause takes place. Please note, in case a contract is terminated, would it
allow for the arbitration clause to survive? The answer is typically yes. In case of
termination of the contract by one of the parties and not by both parties, the arbitration
clause survives the contract. What about the case of repudiation of a contract? It is
important to be noted, that an arbitration clause survives even a repudiation. What about
frustration?

What happens in the case of frustration when a contract becomes impossible to perform?
And in the case of rescission, where one or more of the parties rescinds from performing
the contract. This is a slight aspect that needs to be looked into, where a contract becomes
void on account of the fourth measure. In those circumstances, still, the arbitrator has the
power to go ahead and look into the validity of the contract as to whether there has been
an instance of frustration or impossibility of performance as provided under Section 56.
However, in the case of rescinding the contract with the consent of both parties, in those
circumstances, the arbitration clause ceases to survive, because it is a volition which is
carried out by both parties. Unless the consent of both parties is available for a contract
to be put an end to, the arbitration clause survives regardless.

Examples of non-survive, novation and waiver. If a contract is novated in the sense that
the parties enter into a fresh agreement and clearly stipulate that the erstwhile agreement
is no longer in existence and has been amended or modified by way of Novation, in those

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circumstances, an arbitration clause does not survive. The second aspect is that of a
waiver. If one or more of the parties put across a waiver stating that we hereby waive the
requirement for arbitration, in those circumstances, an arbitration clause can be waived
and as such will not survive the termination or refutation of the contract. However, , here
it is pertinent to note that when a particular agreement for arbitration is required to be in
writing, the same which is to be novated or to be waived off also has to be in writing and
cannot be done by means of a mere oral agreement.

Choice of laws in an arbitration clause. In case the parties to a contract are Indians, then
in those circumstances, the rules of interpretation provide that even if there is something
contrary drafted, the law that is applicable is the Indian law alone. You cannot have any
foreign law which can be read into an arbitration clause. The rules of interpretation of an
arbitration clause in escalation or multi-step clauses. Escalation or multi-step clauses are
where there is a step-by-arbitration that is created across in a contract, in the sense that
the first premise or at the first instance, the parties are required to settle their dispute by
way of a negotiation. They are required to send notice to either of the parties and
thereafter attempt negotiation and in case of failure for negotiation, they are to look at
arbitration as a mode of recourse.

In those circumstances, the rule of interpretation would be that unless step 1 is satisfied,
you cannot go for the arbitration aspect at all. Therefore, escalation of multi-step clauses
in the case of a contract are required to be complied with before moving to the second
step or the third step which is provided under multi-step clauses. Forced arbitration.
Please note that an arbitration clause is something that has to be voluntarily signed by
either of the parties. So forced arbitration in certain circumstances, especially when
parties are not on equal footing will not be enforced by the courts.

However, if there is a business transaction that is in place, then in those circumstances,

the forced arbitration will also be accepted by the courts for interpretation purposes.

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 CoAdvanced Contracts, Tendering and Public Procurement
Prof. (Dr.) Sairam Bhat, Professor of Law
National Law School of India University

Arbitration Clauses in Government Contracts

In the last leg of this discussion, we will be looking at how other laws interfere with the
drafting challenges. It has been reiterated time and again that the drafting of contracts is a
synthesis of law and fact. So, as such it is not just the Indian Contract Act that has an
interplay with the drafting, but also other laws that are applicable. For if any particular
contractual clause is something contrary to any other existing law, then such contractual
clause will be read as void. So that being the circumstance, it becomes necessary to
understand the importance of special law when you are drafting contracts. It is the special
laws that have an impact that we will be discussing in this session.

The laws of tender are quite special in nature because they apply to a certain set or
category of contracts only and not to every other contract. Therefore, there is a particular
aspect of whether to go by auction or whether to go by way of a bid system, whether to
select the lowest bidder or select the highest bidder. So, depending upon the nature of the
transaction, the laws of the tender will decide appropriately whether you must take the
tender by quotation root or the auction by bidding. So, this is a particular aspect.

Let us say, for instance, that a government is required to receive services. So, for the
receipt of services, the government is the person who is going to make payment to the
contractor. So, in those circumstances, tender by way of lowest bid or quotations is the
one that is to be accepted. That is the age-old premise of the rule. Just for instance, let us
switch the rule of the government.

In this instance, the government is the one who is the one supplying for services. So, you
have several government companies and public sector undertakings that manufacture
goods that are into construction activities and others. If the government is the service
provider or if they are going to go ahead with the supply of some form of natural
resources, then in those circumstances, there may be a possibility that the bidding route is
taken into consideration. Because the government is required to earn the highest bid
because it is an inward amount of services and that is what the public trust doctrine
speaks about. So, it is quite categorical here.

If the government is performing a particular function, which has some particular

governmental sanction or authority, which pertains to let us say for instance, natural
resources, then in those circumstances, the auction shall be the only route. Let us say for
instance, the government is also providing services or providing for products, which are
fairly in the sense that a competitive interest where there are multiple players in the
market, then in those circumstances, you can go ahead with a competitive aspect of

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pricing and negotiation strategy. So, this is a particular aspect of the law of tenants.
Then when we move on to the aspect of consumer protection, it is to be noted that
regardless of how you draft a contract, which you are executing with a customer, those
contracts are of the nature of business to consumer, not in the nature of business to
business. So, when you have a contract, which is the nature of a B2C contract, in those
circumstances, regardless of how the contract is drafted, in case there is any ambiguity or
an unfairness principle that is hit by.

So, in those circumstances, the contractual clause will be read in favour of the consumer
based on the rule of contra-proferentum. Securities laws. When you are dealing with
securities in India, you have the Securities Exchange Board of India which has certain
stipulations and guidelines which are issued. So, in those circumstances, it becomes
appropriate to follow those guidelines when you are dealing with listed securities. In the
same instance, like say for instance, if it is an unlisted company, then there are certain set
format and guidelines that are required to be followed under the Companies Act of 2013.

So, in those circumstances, if you are dealing with the transfer of securities or the
creation of a lien on securities, they are also bound by the provisions that are contained
under the Securities law. Corporate law has its own niche areas. So, it is a synthesis of
both the Companies Act of 2013 and the internal documents of the company. The
memorandum of association and articles of association are something that are signed by
all the persons who form a company. It may so happen that the drafting of these
memoranda of association and articles is bound by the provisions that are contained
under the Companies Act of 2013.

There are certain restrictions depending on the nature and type of corporation that you
want to set up. The contractual drafting for those aspects will change accordingly.
Further, in this connect, the law on partnership is also quite clear. The law on partnership
includes both limited liability partnership as well as normal partnership business.
Regardless of what the partnership deed says with regard to limitation of liability or
otherwise, the law on partnership is quite clear that in case there is a partnership that is
formed, the liability of the partners shall always be unlimited.

Intererestingly, between the partners you can always have an arrangement, but
nonetheless, to any external your liability is open. That is a particular premise of the rule
that you need to remember while dealing with the partnership law. In the same aspect,
when you are dealing with limited liability partnerships, which is a stricter form of
partnership, but a lesser form of your company in partnership. The LLP agreement may
have particular pointers with regard to the limitation of liability. However, the partnership
agreement will always be bound by the Limited Liability Partnership Act, which provides
for certain requirements as to having a designated partner and otherwise.

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So, as such the drafting of our LLP agreement will be substantially different from
drafting of a mere partnership agreement. The aspect of the implication of competition
law and the drafting of contractual clauses is the next topic. You may have already
discussed with regard to how competition law impedes contractual interpretation.

Clauses of exclusivity. From the clause of exclusivity, there is a certain premise that the
competition affects how the contractual clause has been drafted. There are several factors
that come into the interface to determine whether a contractual clause of exclusivity is
something that is anti-competitive. Take the example of Himalaya International versus
Himalaya Simplot. This was a particular contractual clause wherein one of the entities or
the parties to the contract was mandatorily required to be the exclusive supplier and
distributor of potatoes. So frozen potato products was one of the particular premise or
subject matter of this contract. It so happened that this particular transaction was between
a company that was also a party to a joint venture contract.

That being the case, what is the manner in which a contract is to be led into? The
structure or the synthesis of this contract has with itself the backdrop that there is a
subsistence of a joint venture agreement between the parties. This is not a normal
contract with a transaction that you have with any third person. So as such keeping that in
mind and also given that there was a small duration of probably around 3 to 5 years
which was considered to be a limited period of time for it to be valid. The CCI observed
that even though there is a clause of exclusivity, it does not look to be having any
appreciable adverse effect on competition. So on that basis, such a clause was held to be
valid.

But let us say for instance, had the contractual duration been higher, the determination of
the CCI would not have been the same. Had there been certain change in circumstances,
like say for instance in this case, there was a joint venture, had there not been a joint
venture, probably the outcome would have been different because of the manner in which
one of the entities could have sole control over the distribution or supply of frozen potato
in this manner. The next point that we would also look at is whether there can be
restrictions imposed on online sales. We have come to a particular scenario today where
there is a difference between your physical market and your e-marketplace. Amazon,
Flipkart and others are all e-marketplaces.

So in those circumstances, can one by means of a distribution agreement restrict their

contractual parties from having their sales on online portals? This is the particular aspect
that you should understand. So long as one is not having a very diverse pricing strategy,
so long as one is not creating a particular impact that the online sales would have a
negative impact on the retail sales through physical markets, in such circumstances it
would be held to be valid. If there is any particular aspect wherein because of the
differentiation of price or any other particular aspect, one’s sales by way of retail is going

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to get affected, in those circumstances a restriction on online sales would probably be
held to be having an adverse appreciable effect on competition and may be set aside. So
as such drafting of a contractual clause has to be done in tandem with other contractual
clauses which are there in similarly placed transactions. Long-term take or page clauses,
this is a particular aspect only in respect of the energy sector.

In the energy sector, the reason why you have long-term or off-take agreements is
because there has to be a certainty of the cost. So in those circumstances merely because
there is a long-term impact or effect on the particular contractual premise, it cannot be set
aside because the nature of the industry is such that it requires a long-term determination
of the pricing strategy. Let us say for instance the ruling that is given in this case, cannot
be applied to a short-term or a seasonal industry. So as such the differentiation between
one nature of an industry to another is quite vagrant and can have inverse relationships
between the contractual clauses and that is to be kept in mind while drafting a similar
clause. This is a classic example that shows how the change in competition aspects has
taken place over a period of 1 to 2 decades.

In 2012, Google was charged with abusing its dominant position in the market and was
said to have been anti-competitive because of the manner in which it had certain
particular search engines integrate only a particular website or otherwise. It so happened
that back in 2012, Google was not held to be having an anti-competitive practice, but the
same categorically changed in 2022 when Google decided to have certain news impacts.
So with regard to certain news channels, only a few news channels were being portrayed
on the Google portal because of which traffic was getting diverted in an abusive
dominant position manner wherein it was directed to only particular news channels
depending upon the keyword search. So that being the particular premise and content,
Google was held to have interfered in the particular aspect of the display of search results
and was held to have abused its dominant position and indulged in anti-competitive
behaviour. This is the manner in which your contractual law has an interface in your
drafting of contracts.

So please be wary of these particular principles as a forerunner for you to assist you in
your drafting. We have had this deliberation for quite some time that the nature of the
parties can also have an impact as to how contractual clauses are to be drafted and how
the courts are to intervene in respect to the same. Here there will be a few points that you
can ponder upon when you are contracting with a micro, small and medium enterprise. At
the outset, the MSMEs are governed by the MSME Act of 2006 and as such there are
certain statutory protections that are granted to the MSMEs while contracting with any
party whatsoever. So that being the case, any contract with an MSME is always impacted
by the following questions.

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The first premise is whether an agreement with an MSME can provide for a lower
interest in case of delayed payments. Under the MSME Act of 2006, within 45 days,
payments are to be made clear to MSMEs and in case there is any delay in such payment,
then there is a bank rate of three times that bank rate which is required to be paid as an
interest compoundable for the amount of delay. So in those circumstances, can one
provide for a lesser or a lower interest rate in an agreement? The answer is categorically
no. As such MSME Act is a beneficial and forward-looking legislation by means of a
contraction provision, you cannot limit or delay the payment of MSMEs beyond a period
of 45 days. So as such all payments and statutory period has to be kept less than 45 days
or 45 days accordingly.

And in case of any delayed payment, the interest rate that is prescribed under the MSME
Act shall be applicable. However, you are free to also provide a higher interest rate than
what is provided under the MSME Act of 2006. The next aspect is, related to arbitration
under the MSME Act and the aspect of arbitration under the Conciliation Act of 1996.
There is a statutory premise that actually speaks about limitation of liability and others
and also with regard to the aspect of arbitration. If you have to consider it, then in those
circumstances, there is a clear-cut provision that is given across that the MSME Act is a
special law that is over and above the Arbitration and Conciliation Act of 1996.

So in the case of arbitration with MSMEs, it is the arbitration that is procedure that is
provided under the MSME Act that will have a superseding or a super-winning impact on
the arbitration proceedings. So as such, when you are dealing with a contractual clause
with the MSMEs, go through the MSME Act of 2006 and the aspect as to how the
arbitration under the Act is dealt with accordingly. So the last point is with regard to the
limitation of claims. Under the MSME Act of 2006, the limitation period that is provided
or has almost done away with the Limitation Act.

So as such, whether the application of the Limitation Act of a general nature, is

applicable to contractual dues payable to MSMEs, this is a question of great
preponderance because multiple courts have held it in diverse ways. But given the
purpose for which the MSME Act is described and also given that the Limitation Act is a
general law and the MSME Act is a special law, the limitation provided under the
Limitation Act under the schedules will not be applicable to the MSME Act is a fruitful
or a forward-looking conclusion that we may draw while dealing with MSMEs. With this,
we come to the last discussion of this session as to why are there multiple contracts that
are necessary. The question in your mind might be, cannot we do it with just one
agreement? Why should we have multiple contractual obligations? Let us not waste our
time in drafting several contracts. Therefore this is the reason why it is necessary to have
multiple contracts even if it is a single part and parcel of the same transaction.

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This is a matter that was decided in 2022 by the Supreme Court. It was Uttar Pradesh
Power Transmission Corporation versus CG Power and Industrial Solutions Limited. The
aspect of the contract was CG Power and Industrial Solutions was required to have a
construction of a particular plant and they also were required to run and operate the same
plant for about 3 years. So in this instance, it happened that they divided their contract
into 4 segments. The first contract was with regard to the supply and delivery of
equipment and materials wherein they categorically mentioned that this would only be for
the supply of materials and equipment and would not involve any particular construction
activity.

The second aspect was with regard to the handling, erection, testing and commissioning
works. So here the particular aspect was dealt with specifically and then the third contract
alone included the aspect of construction related aspect. The fourth contract dealt with
after the post the construction how CG Power is going to carry out the operational
maintenance for the next 3 years. So this was the premise under which the contract was
drafted. It so happens that there was a particular aspect or intricacy that involved the
Building and Other Construction Workers Welfare Cess Act of 1996.

If you have to look into this particular premise, the particular act of 1996 provided that
there was a requirement for contribution for welfare cess on the total construction cost. If
you have to look at this particular project, the project is not just the construction alone
rather it starts with the supply and delivery of equipment then there is a handling and
erection that is involved then the actual construction takes place and then there is an
operational maintenance contract. If all these 4 contracts were to be combined into one,
the differentiation between each of these particular transactions would have been
difficult. It so happened that the CAG audit took place and under the CAG audit the
requirement to deduct the welfare cess on the first contract that is the supply and delivery
of equipment and materials was held to be noted and it was directed and based on which
the UP Power transmission Corporation decided to withhold certain funds from the
payments that were being made to CG Power. It so happened that the Supreme Court
held that although they were part and parcel of the same transaction, the parties had a
clear intention to demarcate between what is a construction activity and what is a
non-construction activity and upheld the contention that was raised by CG Power and
refused to allow for a deduction of the welfare cess on the first contract.

Merely because there are only two parties in a contract does not necessarily mean that
there is only one contract that is necessary to suffice all the transactions. Each contract
may be different depending upon the nature of the services that you are providing. It
could be different based on the nature of the parties and also based completely upon the
applicability of law to such contracts. So that being the case these aspects should be in
mind while going ahead with drafting a contract. Thank you.

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