Contract Law

Contract
 What is contract?
 Essential elements of a good contract?

Objectives Force majeure

Commitment to meet Insurance
obligations Indemnity
Communication Damages
Governing laws - LD or UD
Scope of work - Penalty
Monetary terms Dispute resolution
IPR - Which order
Time schedule 2

-Delays
Introduction

 What does contract mean? [Sec 2(h) of ICA, 1872]

 'Anagreement enforceable by law’
 Agreement between two or more persons/companies
 Parties must intend to create legal relationship
 Balfour v Balfour [1919]
 Creates rights and obligations for parties concerned

 Contract = Offer + Acceptance + Communication of

Acceptance (Mutuality of Intention)+ Consideration
 Something in return
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Classification of Contracts
Contracts

Validity Formation

1. Valid 1. Express
2. Voidable
2. Implied
3. Void
4. Illegal
3. Quasi
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 Classification of Contracts

 Valid- agreement enforceable by law

 Voidable- some missing element
 eg. Consent- enforceable at option of one parties
 Void- it ceases to be enforceable
 eg. Contract entered without valid consideration*
 Illegal- Contract forbidden by law or public policy

Consideration- valuable benefit passed on by promisor to promisee 5

Classification of Contracts

 Express- agreement in writing or orally accepted

 Implied- agreement is inferred from conduct of parties
 E.g: Take a taxi, parking car in a paid parking lot, ordering a meal
 Quasi- Resembling Contract
 'As though’- it appears like A but not A
 Absence of agreement- neither express nor implied
 Obligation: a person shall not be allowed to enrich himself unjustly
at the expense of another
 E.g: Salesman inadvertently delivered B's parcel to A and A used it.
Law imposes an obligation A to pay
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Basic Definitions
 The Indian Contract Act, 1872
 One of the best drafted colonial laws
 Sec 1-75 (General Principles)
 Sec 124-238 (Special kinds)

 Whether Invitation to offer is an offer?

 Advt in newspaper or TV- expression of intention?

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 Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1

 Carbolic co. made a product 'smoke ball'

 Claimed to cure flu and other diseases
 Flu pandemic killed 1 million people
 Rubber ball is filled with Carbolic acid
 Advertisement
 Advertised in newspapers that it would pay
GBP 100 anyone who got sick with flu after
using their product
3 times/day and for 2 weeks
 Each ball costs GBP 1000 deposited with
Alliance Bank
 Many were sold
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Source: https://cdn-az.allevents.in/banners
Cont…

 Plaintiff bought one packet and used it 3 times/day for

more than one month
 She still had attack of influenza
 Company refused to give GBP 100 as promised

 Issues
 Was there a binding contract between the parties?
 Notification of acceptance served?
 Proper consideration?
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Arguments

 Defendant's Argument
 Words of Ad not amount to promise b/c
 Too vague to make a contract
 Also no communication of intention to accept the offer

 Plaintiff contention
 Ad was an offer
 There was consideration

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QB Held

 There was a binding contract

 Notification of acceptance- need not precede the
performance
 Because this is continuing offer
 There was a consideration
 Carbolic received a benefit- sales increased due to this ad
 When offer is made to the whole world,
 Anyone can ripen into a contract who comes forward and performs
the condition
 This case forms foundation for Contract law
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Essential elements of Valid Contract

 Sec 10: All agreements are contracts if they are made by

the free consent of parties competent to contract, for a
lawful consideration and with a lawful object, and are
not hereby expressly declared to be void.

 Who are competent to enter into a contract?

 Any person who attains the age of majority
 Sound mind and not disqualified from contracting by any law

 Mere silence amounts to fraud?

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 Discharge or Termination of Contracts

 When rights and obligations arising out of contract are

extinguished?

1. By fulfilment of duties (performance)

2. Mutual consent
3. Operation of law- mergers, insolvency
4. Impossibility of performance- Force Majeure / Frustration
5. Breach of contract
 Anticipatory
Consequences of unlawful cancellation of contract?
 Actual 13

Antrix v Devas
 Force Majeure Doctrine of Frustration

Occurrence of event Impossibility to perform

identified PRIOR the contract linked to
execution occurrence of event
-NOT contemplated at the
time of contract
Results in deferment of It renders the contract
performance of obligations void
Rights continue All obligations cease to
exist
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 Doctrine of Frustration- Section 56

1) Agreement to do an impossible act- Void

 A and B contract to marry each other. Before the time fixed for the
marriage, A goes mad. Is this a valid contract?
 Void

2) Contract to do an act afterwards becoming impossible or

unlawful
 Becomes void when it becomes impossible or unlawful
 Impossibility can arise due to war, civil unrest, pandemic, act of god,
change in law

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Frustration of Contract (Sec 56)

3) Compensation for loss through non-performance of act

known to be impossible or unlawful
 Promisor already knew that- it is impossible/unlawful
 But promisee did not know

 A contracts to marry B, being already married to C, and

being forbidden by the law to which he is subject to
practice polygamy, A must pay compensation to B for the
loss caused to her by the non-performance of his promise.

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Cardinal Rules to Satisfy the Doctrine of
Frustration
1) There must be a valid contract
2) Some part of the contract is yet to be performed
 NOT applicable to executed contract
3) Aforesaid performance becomes impossible

Executory contract is a contract that has not yet

 Frustration- not defined in the Act been fully performed or fully executed

 Courts interpretation

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Some Grounds of Frustration of
Contracts
 Physical destruction of subject matter
 E.g Wall of construction collapsed due to heavy rain/floods
 Death or incapacity
 E.g Pianist unable to perform concert
 Intervention by legislative or executive authority
 E.g Subsequent change in law, prohibition order, merging two
States
 Energy Watchdog Case
 Intervention of War
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No Frustration of Contracts

 Foreseeable risks
 E.g Strike, mob fire
 Non-escalable tariffs- accepted the risk
 Self-induced frustration
 Abnormal rise, fall or depreciation of currency
 Executed contract

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Effect of Frustration (Sec 65)- Principle
of Restitution
 Person who received any advantage under void
agreement or contract that becomes void
 Bound to compensate or restore other party

 E.g. A contracts B to deliver him 2500 kg of rice before the

1st May 2012. A delivers 1500 Kg only before that day, and
none after. B retains the 1500 kg after the first of May. B is
bound to pay A for them.

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Energy Watchdog v. Central Electricity Regulatory
Commission and Anr. (2017 (4) SCALE 580)
 Mundra Power Project- Mega project
 Supply power to three States- Gujarat, Haryana and Rajasthan
 Tariff for sale of power- determined through bidding
 Bidders had flexibility to choose
 Escalable (OR)
 Tariff based on increase in tariff formula
 Non-escalable tariff
 Power to supply in a uniform tariff without any escalation criteria

 Adani and Tata quoted non-escalable

 Because, both had long term coal supply agreement from mines in
Indonesia at fixed or predictable price
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CERC’s Order & Compensatory Tariff
 PPA were executed for supply of power
 Massive change in Indonesian Law
 Increased the export price
 Tata and Adani filed- Petition before the CERC seeking relief
 Sought
 Discharge from performance of PPA due to frustration of contract
 Change in law clause mentioned in PPA
 In 2013, CERC rejected the claim on the ground of force
majeure or frustration due to change in law
 Held not admissible
 But granted compensatory tariff 22
Appellate Tribunal for Electricity
(APTEL)
 Appeals filed before the APTEL
 APTEL observed that,
 Change in Indonesian law did not come within the
"change of law" clause in PPA
 Constituting committee to award compensatory
tariff
 Beyond the mandate of the CERC
 Mere rise in price would not amount to frustration
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Appeals before the Supreme Court

 Section 56 of ICA did not have any applicable

 B/c change in Indonesian law would not amount of
“Change of Law” for PPA
 Doctrine of frustration is not applicable
 Because PPA remains unaltered
 When producer quoted the tariff they very well know
the existence of risk in Indonesian coal
 Knowingly took non-escalable tariff
 Any other remedies available for Tata & Adani?
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Remedies for Breach of Contract

 Damages- compensation for the loss

 Liquidated- Parties agree the amount in

advance in event of breach (agreed
compensation)
 Unliquidated- assessed by the court
(problematic)

 How to measure damages?

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 How to Measure Damages- Loss of Profit?

Sec 73: Compensation for loss or damage caused by breach of

contract-
 When a contract has been broken, the party who suffers by
such breach is entitled to receive, from the party who has
broken the contract, compensation for any loss or damage
caused to him thereby, which naturally arose in the usual
course of things from such breach, or which the parties knew,
when they made the contract, to be likely to result from the
breach of it.
 Such compensation is not to be given for any remote and
indirect loss or damage sustained by reason of the breach.
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Basic Rules

 Compensation is allowed only for loss which

naturally arose in natural course of things
 Also allowed for loss which parties knew
 Any specified sum stipulated by way of penalty
(Sec 74)
 Not for any remote or indirect loss

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Breach of Contract for Sale of Goods
 Measure of damages upon
 Difference between contract price and market price at
date of breach

Union of India v Commercial Metal Corpn. (AIR 1982 Del 267)

 In 1973, Contract to purchase 200 Mt tons of leaded bronze- at
price of Rs 12/kg
 Corpn supplied 163 Mt tons till 1975
 Then requested UOI to raise purchase price to Rs 20/kg
 Due to price increase in procuring raw materials
 UOI did not agree but extended the date of delivery

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Union of India v Commercial Metal
Corpn. (AIR 1982 Del 267)
 Then UOI cancelled the contract
 Shortfall of supply was 37 Mt tons
 UOI claimed damages for short supply at rate of Rs 20/kg (Rs 8/kg
more)
 Contention
 Corpn contended that UOI had not made repurchase and did not suffer
any loss
 Court disagreed with Corpn. and held that,
 In case of non-delivery by seller, the measure of damages is difference
between the market price and contract price
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 Thank You

Saravanan A
Email: [email protected]

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