Contract Management - Article II & III

As projected in the last article, the attention can now be focused to Indian Contract
Act, 1872 and its significance for Contract Management Strategy.

The significance of Indian Contract Act, 1872 cannot be overstressed. To put it

simply. whenever two parties write in the contract, the conditions therein cannot
exceed or cross the limits and conditions set in the Indian Contract Act. Normally if a
Contractor has to accept and sign on conditions set by the client which appear to be
against the Indian Contract Act's provisions, such terms normally get struck down by
court during any dispute resolution process. Hence, it is beneficial to clients or
contractors to be aware of importance provisions listed in the Indian Contract Act,
which safeguards the rights of both the parties to the contract.

i) Agreement

Normally, two parties to the contract are Promisor (Contractor) and Promisee
(Client). There must be an agreement between these two parties. One of the
parties should make a proposal which is called an offer and the other party
should give its consent to the offer which is called an acceptance. The offer
must be in definite terms and acceptance should be absolute and
unconditional. There should be proper communication about offer and
acceptance which are complete when it comes to the knowledge of other
party to whom it was conveyed.

ii) Legal Relationship

As stated earlier, any contract normally means, an agreement enforceable by

law. But the agreements of social or domestic nature usually do not intend to
create legal relationship. While as in business and commercial transactions,
there is a clear desire to create legal relationship.
iii) Lawful Consideration

As per Contract Act, absence of consideration in an agreement, makes the

agreement unenforceable by law except in certain situations. The
consideration in an agreement should be lawful and paid in return for some
product and/or service.

iv) Free Consent

The consent of the parties to the agreement must be free and genuine. The
consent is not free when it is affected by coercion, undue influence, mis-
representation and fraud.

v) Competent Parties

The parties to the agreement must be capable of entering into contract; not
being minor or of unsound mind. Such person should not have been
disqualified by any other law from entering into another contract.

vi) Proper Objective

The object of the contract agreement should be lawful, i.e. not illegal, immoral
or against the public policy, otherwise such agreement will not be enforceable.

vii) Illegal Agreement

An agreement is null and void for acquiring or selling goods or providing

services which are illegally acquired, and results into an illegal one. Only the
the legal part will be enforceable.

viii) Certainty of Performance

The terms of every agreement must be certain, without any ambiguity.

Similarly the agreement should not be impossible to perform. If it is
impossible to perform, it will not be enforceable by law.

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ix) Legal Formalities

All agreements should fulfil the necessary legal formalities for ensuring the
enforceability of the contract. Though an oral agreement can be valid, it is
better to have the agreement in writing. Similarly in certain cases necessary
stamp duty is to be paid as per Stamp Act. In such cases, it is necessary to
register the agreement.

As mentioned earlier, consideration is one of the essential ingredients of an

agreement to make it enforceable. Absence of consideration makes the
contract void, except in certain cases, such as natural love and affection
between parties, where absence of consideration does not make the contract
invalid.

Abovementioned nine points are like essential features which need to be in place if
the contract is to be legal and valid. But this discussion will not be complete without
discussing nature or type of contract that comes into existence during various
business transactions in any contracted activity.

Types of Contract

An important classification of contracts commonly applied is as follows : (i) Valid;

(ii) Void; iii) Voidable; (iv) illegal; (v) unenforceable. 'Valid' contract is one that meets
all the essential criteria. While a 'Voidable' contract is one which may be repudiated
at the option of one of the parties, i.e. if consent of one of the party is not freely
obtained. Voidable contracts remain perfectly valid and binding till rejected by the
party whose consent was not freely obtained.

An illegal agreement is one where object or consideration is prohibited by law or is

fraudulent, immoral or opposed to public policy or causing injury to person or
property. While as an enforceable contract is quite valid but its performance
becomes difficult or even impossible due to the reason that it lacks some of the
essential elements, such as proper written format and registration.

There are other ways to classify the contracts, such as based on performance or
mode of formation, which can be briefly discussed.

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Executed and Executory Contracts

On the basis of performance, contracts can be classified as Executed Contracts or

Executory Contracts. In simple language, when both the parties have performed their
parts of the contract, it becomes an executed contract. While in Executory contract
one of the party has performed its part of the contract and the other party has to fulfil
its part of the contract.

Express and Implied Contracts

When contracts are reviewed accordingly to their method of formation, Express

Contracts or Implied Contracts, come into existence. Express contract may be
formed by both the parties by expressly agreeing upon on particular thing, whereas
Implied contracts are based upon conduct of parties, where the proposal or
acceptance of any promise is made otherwise than in words. Someone boarding a
bus or entering a restaurant is getting into an implied contract of paying for the
services rendered to him.

Contingent Contracts

A contingent contract is a contract to do or not to do something, if some events

connected to such contract does or does not happen. Hence contingent contracts
become enforceable only upon happening of a particular event, e.g. Accident
Insurance Policy, which is operated only in an event of an accident. Naturally if that
event does not take place, the contract automatically becomes void. Sometimes
such contingent contracts are dependent upon happening of a particular event within
a fixed time.

In the above discussion relating to basics, background and general principles of

contract, some of the clauses from Sections 1 to 75 are covered. They can be
summarised as under

i) Introduction (Section 1)
ii) Proposal, Acceptance and Consideration etc. (Sections 2 to 9)
iii) Communication & Revocation (Sections 3, 7 and 8)
iv) Valid Contracts (Section 10)
v) Competency of parties to contract (Sections 11 and 12)
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vi) Consent & Free Consent (Sections 13 to 22)
vii) Lawful object & consideration (Sections 23, 24, 57 and 58)
ix) Contingent contracts (Sections 31 to 36)

The rest of the clauses can be covered selectively, keeping in mind its relevance to
construction business. Hence, issues such restraint of marriage or agreements by
way of wager (Sections 26 and 30) can be paid less attention and issues such
Performance Discharge and Breach of Contract need to be looked into due to its
importance for day today business of managing contracts.

Before moving further Communication of Acceptance and Revocation as defined in

law can be reviewed for its relevance to tendering process.

Normally communication of offer is complete when it comes to the knowledge of the

person to whom it is made i. e. the client receiving the offer. This offer cannot be
turned into contract unless client conveys his acceptance to the proposer (contractor
in this case) and such acceptance letter reaches the proposer who acknowledges it.
Till that stage the original offer made by contractor can be withdrawn or revoked. In
case of Govt. contracts this freedom of withdrawal is limited upto tender opening
date.

Performance of Contract

Every contract signed by two parties creates certain obligations on each of the
parties involved in it. When both the parties to the contract fulfil their obligations
towards each other, the contract is said to be performed. In some cases, the
promisor (contractor) offers to perform his part of the contract at appropriate time
and place, but the promisee (client) does not accept the performance. This is known
as attempted performance or tender for performance.

A Valid Tender

The performance of contract is dependent on proper and valid tender. Important

conditions of validity of tender are ;
i) Unconditional offer against tender enquiry;
ii) Tender offer must be for full scope of work;

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iii) Tender offer by party or person willing and capable of performing;
iv) Tender offer must be in proper form to the correct person and at proper time
and place of delivery;

v) In case of tender offer relating to goods, it is essential that Promisee is

granted opportunity to inspect the goods. The goods delivered by Promisor
without such inspection is not a valid tender;

vi) If there are several joint Promisees, tender offer may be made to any of
them;

Performance of Contract

It is better to understand first, in which situation contract need not be performed by

Contractor (Promisor) or Client (Promisee).
i) Illegal contract need not be performed;
ii) The contract which become impossible to perform, need not be performed;
iii) The old existing contract need not be performed when it is altered or a new
contract is formed in lieu of earlier contract;
iv) In case Promisee decides to dispense with whole or part of the contract;

v) If Promisee either obstructs or neglects the performance of the contract;

vi) If contract is voidable type, at the option of one party and is rescinded.

Who should Perform

This question appears unnecessary, but in some cases carries great importance, as
explained in some situations below.

i) In certain cases, Promisor himself must perform, like painting of portrait or

complicated surgery or very personalised business or investment advice.

ii) In some other cases, an agent of a Promisor may perform the contract,
without adversely affecting the promise made to the Promisee.

iii) Even third party can perform the Promise if accepted by the Promisee as
adequate.

iv) If Promisor dies, the legal representative will have to perform.

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vi) In certain cases, there may be several promises and all the joint Promisors
are required to perform to fulfil the contract.

The further responsibilities between joint Promisors are also provided in the Indian
Contract Act in Sections 42 to 44 and can be referred when need arises.

Time and Place of Performance

The time and place for performance of contracts is sometimes not specified. In such
a situation, the Promisor has to perform the contract within reasonable time. What is
'reasonable time' is not made clear in the Act and may, therefore, depend upon each
case. But if the time has been decided in the contract, the Promisor should perform
it on the specified day, within normal business hours. If no place for performance is
fixed, the Promisor has to seek a place for performance from Promisor and work at
that place.

Time as Essence of Contract

If in a contract, time is the essence of performance, the contract becomes voidable

at the option of the party who is affected by such a non-performance, if the contract
is not executed within the stipulated time. Catering Contract for a function or
marriage is of this type, being time specific.

But if time is not the essence of contract as implied under Section 55 of the Act, and
the Promisor does not perform the contract within the normally stipulated time, the
contract does not become voidable. However, the Promisee can claim
compensation for the delayed performance.

The most important thing in any contract is that if time is going to be the essence of
the contract, it should be clearly mentioned in the contract.

Assignment of Contracts

When the rights and liabilities arising out of a contract are transferred to third parties,
it is known as Assignment Contract. The assignment may take place with or without
the consent of the other party unless expressly prohibited in contract conditions.

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The contracts of personal nature involving personal skill, cannot be assigned. Hence,
Singers, Musicians or Surgeons cannot assign their contract. However, Promisor
may assign a contract to other competent person who may perform the work for
Promisor and the Promisee does not object to it.

Assignment by operation of law takes place in case of death or insolvency. For

example, on the death of a person, who is party to contract, his rights and liabilities
are transmitted to his legal heirs. In case of insolvency of a person, his rights and
liabilities are transferred to official Receiver or Assignee.

Discharge of Contract

Discharge of contract is achieved when the rights and liabilities created out of
contract come to an end. The discharge can arise out of any of the following
situations :

i) By proper performance of the contract;

ii) By agreement between both the parties;
iii) By replacement of old contract by new;
iv) By lapse of time under Limitation Act;
v) By breach of contract by one of the parties;
vi) By impossibility of performance;
vii) By operation of law regarding death/insolvency/merger

Though most of the above methods of discharge can be easily understood, some
comments are necessary to clarify certain issues arising out of discharge of contract.

Discharge of contract by proper performance is the common phenomenon, whereas

discharge by both the parties due to non-performance may create some issues.
Breaking of contract also called Rescission done by mutual consent might also be
due to failure of one of the parties to perform its part of the contract. Discharge by
lapse of time comes into picture due to provisions of Limitation Act, 1963. If a
Promisor does not perform within a specific period and the Promisee does not take
action within the specified period, the Promisee loses the right of taking the legal
action.

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Impossibility of performance of contract comes into consideration due to Section 56
of the Indian Contract Act. The impossibility of performance may be known to the
parties at the time of forming of the contract or may be unknown to them at the time
of signing. Sometimes, at the formation of the contract, it is quite possible to
perform. Such impossibility, also called as 'Supervening Impossibility' arises due to
destruction of subject matter or due to change of law or outbreak of war, etc.

Breach of Contract

Though Breach of Contract is mentioned earlier, as one of the reason for discharge
of contract, the breach by contractor cannot get settled without compensation for the
loss caused due to such non-performance. Following remedies are available in the
Contract Act.

i) Rescission of Contract
If there is a breach of contract by one of the parties, the other party can
rescind the contract. In such cases, the other is relieved from performing its
part of contract. However, other party can claim compensation for the loss the
loss caused to him, by the first party.

ii) Suit of Damage

Filing of legal suit for claiming damages from the party not performing its part
is another remedy for the breach of contract. The basic objective behind
allowing damages is that the aggrieved party should at least get monetary
compensation. Damages awarded can be of different types. There could be
ordinary or special damages. In case of clear misbehaviour, court may award
exemplary damages (e.g. dishonour of a cheque by a banker inspite of
sufficient funds in the customer's account). The damage can be awarded for
loss of reputation caused by breach of contract.

iii) Quantum Merit

Quantum Merit literally means "as much as earned". This compensation or
the breach arises when one of the parties performs its part as instructed but
the other party doe not perform its part of amending the contract to pay for the
services rendered by the contractor.

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iv) Specific Performance
In case of breach of certain contracts, compensation in monetary terms is not
enough. In such cases, the court directs the defaulting party to perform its
part rather than awarding any damages.
vi) Injunction
Stay order is awarded by court when a party to a contract has agreed not to
do a certain thing as a part of the contract, but in fact showing an intention of
doing that thing. This can prevent defaulting party from doing non-contractual
wrong things.

By now some key issues of Indian Contract Act are covered here to the extent
necessary at general level. But there are many more topics in the Act that
also matter. For example, Quasi Contracts, Contracts of Indemnity, Bailment
and contract of agency, etc., the related topics which can affect the
contractual relationship, but instead of dealing with it here, these issues can
be commented in further articles, when appropriate occasion arises.

Review and Conclusion

This review of Indian Contract Act was undertaken to dispel some wide spread
misunderstanding many project and contract engineers have about the legal frame
work. Many of them believe that whatever conditions written down in the contract
are automatically valid or applicable when both the parties sign the contract. In
reality, Indian Contract Act is like a frame work within which all the contract
conditions must be written. Any unreasonable contract conditions imposed by client
or contractor can get struck down if they are not fitting into legal frame work created
by Indian Contract Act. Many court verdicts are testimony to this fact.

It will be quite appropriate now to move on to actual conditions of contract normally

written in construction business, which can fit well in the legal frame work. It will be
like developing a beautiful portrait, after making sure that a frame with elegant border
is guiding your business canvas.

By
Prof. Ajit Patwardhan,
64, Ideal Colony, Kohrud, Pune 411 029
Telephone No. 25461748, e-mail : [email protected]

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