A. Ramasubramanian, B.E MCIArb FICA
CONTRACTS – THE PIVOT
Over the last decade, substantial quantum of commercial disputes opted for Alternative dispute resolution (ADR) than the litigation which incurs enormous time and whopping an average 39% cost of the claim value! It is obvious from the milestone amendments to the Arbitration and Conciliation Act 1996 to facilitate seamless remedy via ADR mechanism for the business community.
Whether it is a Project or commercial transaction, disputes are inevitable due to various factors; However, a diligently drafted Contract that balances the rights and liabilities of the stake holders ensures timely remedy and thus accomplishment of the Project within the anticipated time becomes a reality.
Hence it is quintessential to draft the Contracts with exemplary terms that protects the rights of the parties and fosters business relationship for symbiotic growth. For this reason, a well drafted Contract is otherwise termed as ‘Vedas’ for a Project or Commercial transaction that stipulates ethical way forward and balanced remedy for the malaise of the stakeholders.
It is pertinent to mention at the time of epidemic caused by COVID-19 that a well drafted Contract, only can resurrect the dormancy due to lockdown and mitigate the insurmountable losses.
CONTRACT versus CONTRACT ACT:
Contract – Section 2(e) of the Indian Contract Act, 1872 defines an agreement as “every promise and every set of promises forming consideration for each other”;An agreement which is enforceable by law is called a Contract.
Section 10 of the Act stipulates the conditions of enforce ability. Pursuant to this section, an agreement is a contract when it is made for some consideration, between parties who are competent, with their free consent and for a lawful object. There are many types of Contracts on a different basis.
OTHER RELEVANT STATUES:
1. Sale of Goods Act
2. Negotiable Instrument Act 1881
3. Indian Carriage of Goods by Sea Act, 1925 (COGSA)
4. Industrial Disputes Act, 1947
5. The Arbitration and Conciliation (Amendment) Act 2019,
6. The Arbitration and Conciliation Act 1996
7. United Nations Commission on International Trade Law (UNCITRAL)Legal Guide onDrawingup International Contracts
8. Society of Construction Law Protocol
9. Rome Convention on the Law Applicable to Contractual Obligations 1980
II. TYPES OF CONTRACT
1. EXCUTED CONTRACT
When both the parties have completely performed their respective obligations under the contract, it is said to be executed contract. It means that whatever was the object of the contract has been carried out. In most executed contracts the promises are made and then immediately completed.
The buying of goods and/or services usually falls under this category. There is no confusion about the date of execution of the contract since in most cases it is instantaneous.
An executory contract is one in which one or both parties are yet to perform their obligations. In such Contracts, the consideration is the promise of performance or obligation. In executory contracts, the consideration for the promise made is carried out sometime in the future.
Example – Delivery within 5 days and payment to be made after 15 days. The contract is executory. Another good example of an executory contract is that of a lease and Construction contracts.
3. CONTINGENT CONTRACT
‘A contingent contract is a Contract to do or not to do something, if some event collateral to such contract does or does not happen’.
In simple words, contingent contracts, are the ones where the promisor perform his obligation only when certain conditions are met. The contracts of insurance, indemnity, and guarantee are some examples of contingent contracts.
4. COST PLUS CONTRACT
In a construction cost-plus contract, the buyer agrees to cover the actual expenses of the project. These costs include labor and materials, plus other costs incurred to complete the work. The “plus” part refers to a fixed fee agreed upon in advance that covers the contractor’s overhead and profit.
5. FIXED PRICE CONTRACT
A fixed-price contract is a type of contract in project management wherein the payment does not depend on the resources or the time spent. It involves setting fixed price for the product, service or result defined in the contract.
6. LUMPSUM CONTRACT
In this type of contract, the contractor offers to do the whole work as shown in drawings and described by specifications, for a total stipulated sum of money.
7. REMEASUREABLE CONTRACT
In re-measurable contracts, works will be carried out based on the pre-agreed unit rates. All the Payments will be paid based on the actual work done after measuring the work done. So the final value of the project will be derived based on the unit prices and exact quantities.
8. CONSULTANCY CONTRACT
The consultancy contract is made between the company and consultant. It outlines the scope of work to be performed by them and other terms and conditions related to their appointment in the company.
9. COMMERCIAL CONTRACTS
A commercial contract refers to a legally binding agreement between parties in which they are obligated to do or restrain from doing particular things. Commercial contracts can be written, verbal, or implied in a formal or an informal manner.
E-contract is one of the divisions of e-business. It holds a similar meaning of traditional business wherein goods and services are switched for a particular amount of consideration. The only extra element it has is that the contract here takes place through a digital mode of communication like the internet. It provides an opportunity for the sellers to reach the end of consumer directly without the involvement of the middlemen.
11. GOVERNMENT CONTRACTS
As the name suggests a Government contract is a contract in which one of the parties is the Government. The State, as well as the Central Government, maybe the party in a Government contract.
III. ELEMENTS OF CONTRACT – FUNDAMENTAL POLICIES
Freedom of Contract
The very essence of Contract is upholding the stake holders freedom to Contract for mutual consideration; For example, economic intercourse is most efficient when its participants desire it and are free to bargain with each other to reach mutually desirable terms.
Morality of Promise
There is also a longstanding moral dimension of contract in law: that there is an ethical as well as legal obligation to keep one’s promises. Thus, contracts should be honored not only because reliability is necessary to foster economic interaction, but simply because it is morally wrong to break them.
Another fundamental value of contract law is that a person should be held accountable for words or acts affirming their intent to contract, and that the other party, acting reasonably, should be entitled to rely on that affirmation of assent. An objective test of reasonableness is thus often used to evaluate a party’s conduct.
For example, a party’s intent in entering a contract is often evaluated in light of the person’s state of mind as made apparent to the outside world (as opposed to the true and actual state of mind of the party at the time).
Stakeholders’ balancing of power:
Modern contract law is also sensitive to the imposition of contractual obligations through coercion, dishonesty or lack of meaningful choice resulting from power imbalance.
Economic Aspects of Contract Law
Because contracts are concerned with economic exchanges, contract law must inevitably be economic in its purpose. After all, the goals of contract law include facilitating trade and commerce, regulating the way people deal with each other in the marketplace and enforcing commercial obligations.
SOURCES OF CONTRACT LAW
Contemporary contract law seeks to respect free markets, regulate the freedom of powerful contractors, safeguard the rights of weaker parties, and affect social policy concerning matters of consumer protection, employee rights, and business ethics.Comparing the Civil and Common Law Approaches to Contract Law
The system known as the “Common Law’ developed in England, and be came adopted in Britain’s colonial territories. Thus, the common law of England has remained the basic legal system in most of Britain’s ex-colonies, including India Therefore the term“common law”, used in the broadest international sense, designates a country whose legal system is based on the common law of England.
The Meaning of “Common Law”
In addition to characterizing the English and American legal systems on an international level, the term “common law” refers to those portions of law basedupon decisions of the courts (as distinct from those created by legislation).
In common law countries, many statutes govern aspects of contracts. These statutes tend to codify the common law by taking rules and principles already developed by judges and putting them into statutory form, in order to clarify the law or make it more accessible.
United Nations Convention on Contracts for the International Sale of Goods- CISG
The United Nations Convention on Contracts for the International Sale of Goods (CISG) applies to international sales transactions involving countries that are signatories to the treaty. The Convention covers only issues of contract formation and the rights and duties of the parties. It does not address matters touching on contract validity, such as fraud, or illegality. It also excludes product liability issues.
A fundamental principle of justice is the equal treatment of people in like situations.
As common law developed, it became established practice for court decisions to be recorded so that they could be used as the basis for resolving later cases. Thus, a court decision not only settled the dispute between the immediate parties, but it alsoformed a rule to be followed in the next case involving similar facts.
SOURCES OF CONTRACT
1. Tender submission / quotations
2. Negotiation / Communication
3. Letter of Acceptance
4. Minutes of Meetings
5. Contract Act
6. Risk Identification and Transfer
7. Material / Project Specifications
8. Statutory Provisions
9. Scope of Work / Supply
10. Protocols – Domestic and International
IV. GENERAL WRITING PRINCIPLES
Contract Drafting Process:
Before writing, clarity about what parts the contract must be included and what situations the contract must cover. Parties requirement should be crystalized; Precisely because this is an obvious point, it is often overlooked.
Try outlining the contract to make sure that all the needed pieces are included and are organized logically.
The following guidelines may be helpful in beginning to draft a contract:
1. Draft Contract shall be revised many a times to cover all aspects ;Trying to get all the details right in the first draft, it is likely to miss some important larger points.
2. Clear, simple, businesslike language is mandatory. Much progress has been made in this area, particularly in the areas of insurance and finance. Be careful not to slip back into overuse of “legalese”. Use only the technical terms you need and define them if necessary.
3. Each clause shall define only one thing, not more. Outlines can help you here by breaking down the whole contract into a series of small points.
4. When revising, check for ambiguities:
a. Check to make sure that you have used only one term for one item or person. Referring to the same person, item or concept by two different terms creates an ambiguity that invites misunderstandings later. If needed, include a definition section to define all your key terms, so that the reader understands any unusual terms.
b. Check also to be sure that you have not used one term for several different items or persons. This can create unwanted ambiguities.
5. After fine tuning each clause in the contract, reread the document as a whole,looking for larger contradictions between parts of the contract, rather than wording problems within one clause.
6. Team members shall cross check the contents. No one person can imagine all the pitfalls that the parties to any contract are hoping to avoid. No one person canimagine all the ways some reader can misconstrue a point.
Importance of Multiple Drafts
Guidelines for Revising Drafts of Contracts
Revising occurs after rewriting in the writing process. Revising concentrates on small-scale organization, sentence structure, transitions, paragraphing, grammar, and punctuation.
There are two points to remember about revising.
i. First, do not revise while you write; this slows down both the writing and the revising processes. When you are writing, concentrate solely on your ideas, no matter how unpolished your writing may seem. Revise later.
ii. Second, when you revise, do it in stages. It is exhausting and inefficient to try to revise on every level at once. Use your time for revising to move from general writing problems to more specific ones.
1. ACCURACY: No amount of readability will replace accuracy, so make sure you check first for the content of each legal point. Ask yourself the following questions:
a. Is the content accurately stated?
b. Could any points be misunderstood because of ambiguity?
c. Are irrelevant facts or other irrelevant information excluded?
d. Are terms of art used correctly?
e. Are key terms used correctly?
f. Are paraphrases accurate?
g. Are names of parties and their status correct?
h. Are the citations accurate?
a. Are paragraphs internally logical?
b. Are there clear and precise transitions between paragraphs and sentences?
a. Are subjects and verbs close together?
b. Are unnecessary modifiers eliminated?
c. Are sentences not overly long?
d. Are lists clearly structured?
e. Are unnecessary prepositional phrases eliminated?
f. Is the text generally concise?
a. Is style consistent?
b. Is the tone and level of formality appropriate and consistent?
Try to give each of these categories your full attention for the specific amount of time you have allocated for the task. After you have finished revising, you can move on to fine tuning the draft.
i. No archaic terms (e.g., hereinafter, hereby)
ii. No legal pairs (e.g. good and sufficient)
iii. No Latin or foreign expressions (e.g., bona fide)
iv. Plain English, not legalese
BASIC LANGUAGE GUIDE
1. Avoid Archaic terms
2. Passive to Active
3. Sentences: short is sweet
4. Sentences: subjects and verbs together
5. Sentences: compound verbs together
6. Sentences: put verbs early
7. No Inconsistency
8. make verbs strong
9. Prefer the present tense
10. Use plain English
USING DEFINED TERMS
Obvious goal in drafting a transactional document is to make it unambiguously and accurately. Future readers should know exactly what our document means— regardless of whether those future readers are your client, you client’s successors, some other party, or a judge. A good technique for achieving this goal is the use of defined terms.
When should you use defined terms?
A. As soon as you know you will refer to the same concept more than once in a document; and
B. When it takes more than a few words to explain the concept
How do defined terms work?
A. “External” defined terms are unique to the external circumstances of this particular transaction (names of parties, location of real property, etc
How can defined terms simplify transactional documents?
A. They can assure that any particular laundry list will appear only once in a document. This preserves simplicity, certainty, and consistency.
B. If properly structured, defined terms can allow you to make a necessary change only once—by fine-tuning or modifying a defined term—as the terms of the transaction are negotiated and modified over time.
C. Defined terms can help you prevent a maze of cross-references.
V. BASIC ATTRIBUTES OF THE CONTRACTUAL RELATIONSHIP
A Contract may be defined as an exchange relationship created by oral or written agreement between two or more persons, containing at least one promise and recognized in law as enforceable. The essential elements of a contract thus include: an oral or written agreement; the involvement of two or more persons; an exchange relationship; at least one promise; and enforce ability.
An oral or written agreement
A contract is created only because the parties, acting with free will and intending to be bound, reach agreement on the essential terms of their relationship. It is the element of agreement that distinguishes contractual obligations from many other kinds of legal duty that arise by operation of law from some act or event, without the need for assent.
Determining whether the parties actually agreed to a contract is not always easy.
The law generally gauges intent objectively in deciding whether a person agreed to a contract. That is, the person’s overt acts (i.e., words and conduct) are evaluated to decide whether they reasonably signified intent to enter the transaction.
Although oral contracts may be enforceable under some situations, in other situations certain types of contracts must be recorded in writing and signed in order to be enforceable.
Two or More Persons
While it requires two parties to create a contract, it should be noted that a contract is not confined to two participants. There can be as many parties to a contract as the needs of the transaction dictate. In fact, multiparty contracts are common.
By entering into an agreement, parties bind themselves to each other for the common
purpose of the contract. Thus, the essence of a contract is the relationship. Some contractual relationships last only a short time and require only a minimal interaction. Other contractual relationships, however, can span many years and require constant dealings between the parties, regulated by detailed provisions in the agreement.
For a contract to exist, there must be promise. A promise is an undertaking to act or
refrain from acting in a specified way at some future time. This promise may be made in express words or implied.
Legal Recognition of enforceability is a hallmark of contracting that it creates rules binding on the parties and confers on them rights and obligations cognizable in law. The fundamental role of contract law is to ensure that promises are upheld. Without legal enforceability of promises,only instantaneous exchanges could ultimately occur—with devastating effects on society.
Where promises are broken, the power of legal enforcement enables the disappointed party to sue. Once it is established that a contract was entered into and breached courts can enforce the contract by providing a remedy for the breach.Such remedies can include monetary compensatory damages, specific enforcement of the promise,and other types of damages. Legal enforceability thus serves to deter breaches of contract because a reluctant party knows that failure to perform canresult in litigation with costly results.
VI. ELEMENTS OF CONTRACT- OVERVIEW.
The components of a contract will vary depending on the nature and complexity of the transaction it reflects.
The title should reflect the subject matter of the transaction and, if appropriate, the parties.
b) Preamble (Recitals)
Most transaction agreements begin with some form of a preamble that identifies the purpose of the document and describes the transaction, the intent of the parties and any assumed facts underlying the transaction. The preamble identifies the parties and the date of the transaction as well as the nature of the transaction.
The use of defined terms can simplify a document immeasurably. While the number and extent of the definition section depend upon the nature of the agreement, virtually all contracts will include some defined terms.
Although it need not be complicated, the consideration should be explicitly stated since agreements must be supported by consideration. This may be expressed as an exchange of dollars or of goods, or perhaps an exchange of mutual promises.
The covenants signifies the promises that are being made by the parties.
Examples include promises to deliver certain goods or to refrain from particular activities.
f) Representations and Warranties
Representations and warranties identify the assumed facts underlying the agreement.
These sections represent the real heart of the deal and tend to be heavily negotiated.
An example would be a representation and warranty that the goods to be sold are in working order.
The indemnification portion of the contract deals with the allocation of liability in the event that all does not go as planned. Questions to be addressed in this portion of the contract include who will be liable for what, and to what extent.
h) Breach and Cure
Although promises are not necessarily made to be broken, that possibility must be considered when drafting a contract. What will constitute a breach of the agreement?
What opportunity will the parties have to “cure” the breach?
This section should identify under what circumstances the parties can terminate the agreement and the procedures for termination.
The remedies section addresses the consequences in the event of termination. This section should specify what the parties are entitled to in the event of breach or termination. It may identify a dollar amount, a formula, or simply a mechanism for determining the appropriate remedy (such as arbitration).
Additional Important Contract Provisions
A number of other standard provisions are important to include in drafting contracts.
VII. TYPICAL CONTRACT DOCUMENT STRUCTURE: (INFRASTRUCTURE PROJECT)
VOLUME 1: FORM OF AGREEMENT & CONDITIONS OF CONTRACT
Part 1: Form of Agreement
Part 2: General Conditions of Contract
Part 3: Letter of Acceptance
VOLUME 2: APPENDIX A – SCOPE OF WORK & TECHNICAL INFORMATION
Part 1: Scope of Work
Part 2: General Requirements
Part 3: Site Specific Information
Part 4: Heath& Safety, Environment & Sustainability Regulations & Requirements
Part 5: Risk Management
VOLUME 3: APPENDIX A – SCOPE OF WORK & TECHNICAL INFORMATION
Part 1: Particular Specifications
VOLUME 4: APPENDIX A – SCOPE OF WORK & TECHNICAL INFORMATION
VOLUME 5: APPENDICES B TO F
Part 1: Appendix B – Schedule of Prices and Rates
Part 2: Appendix C – Insurance
Part 3: Appendix D – Contractor Technical Proposal
Part 4: Appendix E – Contract Execution Plan
Part 5: Appendix F – Administrative Procedures
Attachment 1 – Advance Payment Bank Guarantee
Attachment 2 – Bank Guarantee (Performance Security)
Attachment 3 – Contract Variation Form
Attachment 4 – Completion Certificate
Attachment 5 – Discharge Certificate
Attachment 6 – Instruction Form
VIII. ESTABLISHING CONTRACTUAL RELATIONSHIP
It is the pinnacle of skill of an ace Contract Administrator to draft the relationship among the stakeholders in such a way that it flows like the rivers enter in to the sea; The definition of relationship among the stakeholders shall be subtle at the same time consummate. It shall never disintegrate the degree of relationship that has been established at the Contract formation stage unto the performance of the Contract.
Five essential elements of a valid contract include:
1. Competent Parties
2. Subject Matter
3. Legal Consideration
4. Mutuality of Agreement
5. And Mutuality Of Obligation.
Competency of parties includes being of adult age (18 years of age in some jurisdictions) and being in complete control of mental faculties. This means that the contracting party must not have a mental defect that would affect his/her ability to understand and appreciate what he/she is doing.
The contract must clearly and sufficiently set out the subject matter of the agreement.The subject matter may not be illegal or for an illegal purpose.
Simply stated, consideration is the inducement to a contract. It is the cause, motive,price or impelling influence, which influences a contracting party to enter into a contract. Legal consideration is consideration recognized or permitted by the law as valid and lawful. It is also referred to as good or sufficient consideration. The most common form of consideration is money. However, goods or services or a combination thereof may also constitute valid consideration.
Mutuality of Agreement
For a contract to be valid and enforceable, the parties must be in agreement as to their respective rights and duties under the agreement. Mutuality of agreement isalso referred to as a “meeting of the minds.”
Mutuality of Obligation
The doctrine of mutuality of obligation provides that neither party to a contract is bound unless both parties to the contract are bound. Thus, if performance of an obligation (which is the consideration of the particular contract) is elective, rather than mandatory, and the other party is required to perform some duty, then the rewould be no mutuality of obligation and, accordingly, no valid enforceable contract.
IX. PLANNING AHEAD FOR PROBLEMS
When negotiating a contract, special attention should be given to “exit provisions”.Well-drafted termination provisions are among the most valuable contractual protections.
Termination for Cause provisions
Termination “for cause” refers to a material breach that is not cured within as pecified period.
Opportunity to Cure provisions
Termination sections often grant the damaged party the right to terminate the agreement in the event of a material breach of the agreement by the other party.
With respect to curable breaches, such provisions typically provide that the damaged party shall have the right to terminate the contract if the breach is not cured within a specified time period.
Events Triggering Termination
Contracts also often grant the parties the right to terminate upon the occurrence ofcertain specified events. These can include (but are not limited to):
a. Insolvency, bankruptcy, or liquidation
b. Merger of the other party
c. Change of control of the other party
d. Changes in governmental regulations
e. Failure to meet certain specified performance levels
IMPRACTICALITY OF PERFORMANCE
Impracticability applies when events following contract formation are so different from the assumptions on which the contract was based, that it would be unfair to hold the adversely affected party to its commitments.
There is an important difference between mistake and impracticability. A mistake causes a defect in contract formation, permitting a party to be excused from accountability for a manifestation of assent. Impracticability, on the other hand, has nothing to do with any problem in formation and presupposes that a binding contract was made. Rather, it is concerned with whether a post-formation change of circumstances has such a serious effect on the reasonable expectations of the parties that it should be allowed to excuse performance. Similarly, the doctrine of frustration of purpose is also concerned with a post-formation change of circumstances but in a slightly different context than the doctrine of impracticality of performance.
Elements of the Excuse of Impracticality
The excuse of impracticability can be available to the party who is adversely affected by the change in circumstances. However, all elements to this excuse must be satisfied in order for a party to be relieved from performance.
These elements include:
1. After the contract was made, an event occurred, the non-occurrence of which was a basic assumption of the contract.
2. The effect of the event is to render the party’s performance“impracticable”, i.e., truly burdensome.
3. The party seeking relief was not at fault in causing the occurrence.
4. The party seeking relief must not have borne the risk of the event occurring.
Understanding the Limitations on the Excuse of Impracticability
Impracticability arises from the occurrence of an event which event must be so contrary to the assumptions of the contract that it changes the very basis of the exchange. An event is unforeseen by the parties if they themselves did not
contemplate it as a real likelihood. Most occurrences external to the contract could quality as events, such as: war, a natural disaster, a strike, and so on. A change in the law or government regulation could also be an event. On the other hand, a change in market conditions would not generally be regarded as a contingency beyond the contemplation of the parties. A person should not be able to take advantage of his own wrongful or negligent act, and a party who makes performance more difficult or disables himself from performing, cannot expect to be excused from liability. Risk allocation is often the dispositive issue in impracticability cases.
Thus, if the party adversely affected by the event has expressly or impliedly assumed the risk of its occurrence, then the non-performance cannot be excused even when all the other elements of an impracticability defense are satisfied. Thus, careful drafting is required with respect to risk allocation in a contract.
FRUSTRATION OF PURPOSE
Similar to impracticability, frustration of purpose is concerned with a post-formation event, the non-occurrence of which was a basic assumption on which the contract was made. This event must not have been caused by the fault of the party whose purpose is frustrated; and that party must not have borne the risk of its occurrence.
The essential difference lies in the effect of the event. Frustration of purpose arises when the impact of the event is on the benefit reasonably expected by a party in exchange for the performance, rather than directly affecting the performance of the adversely affected party by making it unduly burdensome. In this case, the event so seriously affects the value or usefulness of that benefit that it frustrates the contract’s central purpose for that party. As to the purpose that has been frustrated, the purpose must be so patent and obvious to either party that it can be reasonably regarded as the shared basis of the contract.
RISK ALLOCATION IN CONTRACTS
Risk allocation is often the dispositive issue in mistake and impracticability cases.The analysis of risk allocation is relatively straightforward: if the party adversely affected by the event had expressly or impliedly assumed the risk of its occurrence,the non-performance cannot be excused even if all other elements of a defense or excuse are satisfied.
The first place to look in determining risk allocation is the contract itself. If the parties realized that a particular future event could affect performance, the contract may include an express and specific term assigning risk.
Even if the parties do not have a particular contingency in mind, the contract may have a more general provision allocating the risk of disruptions or calamities. Such general provisions are called force majeure clauses.
FORCE MAJEURE CLAUSES
Force majeure is a term used to describe a “superior force” event. Force majeure clauses have two purposes: they allocate risk and put the parties on notice of eventsthat may suspend or excuse service.
The essential requirement of force majeure is that the invoking party’s performance of a contractual obligation must be prevented by a supervening event that is unforeseen and not within the control of either party.
Typical force majeure provisions include: “acts of God”, superseding governmental authority, civil strife and labor disputes. However, there is no uniform set of events that constitute force majeure. Instead, force majeure remains a flexible concept that permits the parties to formulate an agreement that corresponds to their unique course of dealings and industry idiosyncrasies.
Moreover, recent world events have increased the necessity of including additional unthinkable events, such as terrorism and the risk of biological and chemical warfare.
Negotiating Force Majeure Clauses Parties negotiating a force majeure clause must scrutinize the events and allocation of risk to assure that the clause is not one-sided or unenforceable.
Drafting a Force Majeure Clause
The terms of the Force Majeure clause shall corroborate with the Indian Contract Act 1872 and appropriate to the respective trade. For example, Force Majeure clause for an export import Contract will not suit for a Construction Contract wherein the circumstances vary altogether.
In drafting force majeure clauses, parties may rely on general clauses or specifically enumerate which events will constitute force majeure. A prudent force majeure clause specifically enumerates the events that will prevent performance and entitle aparty to suspend or excuse an obligation. Force majeure clauses may also include language that is industry specific.
Invoking a Force Majeure Clause
Generally, a party may invoke a force majeure clause if an enumerated event occursthat is out of the party’s control and prevents performance of a contractual obligation. The burden of proof is on the party seeking to invoke the force majeureclause. The force majeure event may either suspend or excuse a party’s performance.
Sample Force Majeure Clause
Neither party shall be liable in damages or have the right to terminate this Agreement for any delay or default in performing hereunder if such delay or default is caused by conditions beyond its control including, but not limited to Acts of God, Government restrictions, wars, insurrections ad/or any other cause beyond the reasonable control of the party whose performance is affected.
Additional Risk Allocation Clauses
In addition to a force majeure clause, a contract may impliedly place risk on a party by means of a provision such as a warranty, an undertaking to obtain insurance, or some other commitment from which the assumption of risk may be inferred. It isgood planning for the parties to consider potential risks and to provide for them clearly in the contract. This reduces the possibility of later disputes and litigation.
Clauses that Address the Possibility of Future Litigation
Too often, a situation that might have been quickly and easily resolved by simply referring to well-drafted contract language turns into costly and time-consuming litigation. Whether the contract is simple or complex, clauses that address the possibility of future litigation should never be overlooked.
Forum Selection Clause
Forum selection clauses specify the place where lawsuits will be filed in the event a dispute arises between the parties to a contract. Specifically, the parties utilize such clauses to expressly agree to litigate all disputes arising from the contract in a specific jurisdiction and venue.
Choice of Law Clause
Parties may also negotiate which laws will govern their contract. Specifically, choice of law clauses specify the legal jurisdiction under which the agreement shall be governed and construed. While there are clear advantages to the parties for inserting such clauses into their contract, there must also be a rational reason for the specifie choice of law. Such clauses require careful research and negotiation, because the laws of different jurisdictions may affect the parties differently.
X. ALTERNATIVE DISPUTE RESOLUTION CLAUSE
At present most of the agreements contain alternative dispute resolution (ADR) clauses that obligate the parties to submit their disputes to arbitration or mediation rather than litigation. Alternative dispute resolution procedures are often cost-effective and enable disputing parties to pursue their claims more quickly than traditional litigation.
Through the use of alternative dispute resolution clauses, the parties can agree to such specific matters as: whether the arbitration will be binding or non-binding; how the arbitration provision is to be triggered; where the arbitration would take place; which rules will govern the arbitration proceedings; and the selection of the arbitrators.
Thus, properly drafted dispute resolution clauses can provide assurance to the parties that their disputes will be resolved through the less expensive and speedier processes of arbitration or mediation rather than by litigation. Moreover, alternative dispute resolution clauses are of particular value in international agreements, in light of the availability of established arbitration institutes to serve as a forum for disputes involving contracting parties from different countries.
TYPICAL ARBITRATION CLAUSE:
Any claim, dispute or difference relating to or arising out of this Agreement shall be referred to the arbitration, of a sole arbitrator. The arbitration shall be subject to the Arbitration and Conciliation Act, 1996 as may be amended from time to time. The XYZ Arbitration Centre, will appoint the Sole Arbitrator and will conduct the Arbitration in accordance with its rules for conduct of Arbitration proceedings then in force and applicable to the proceeding. The seat and venue of arbitration shall be New Delhi. The proceedings shall be undertaken in English. The arbitration award shall be final and binding on the parties.”
Suggested terms: In case of unforeseen circumstances caused by Govt actions due to epidemic or Nation wide lockdown, arbitration process shall be conducted online under the rules of the XYZ Arbitration Centre.
XI. REMEDIES FOR THE BREACH OF CONTRACTS
A breach of contract terms occurs when a party fails to perform either fully or adequately the obligations provided in the contract. In the event of breach, the non-breaching and performing party may be provided relief for the breaching party’s failure to perform its obligations.
Damages are generally designed to compensate the non-breaching party for the benefit of its bargain. Damages may be compensatory, consequential, punitive or nominal. The non-breaching party generally has an obligation to mitigate its damages.
Types of damages include:
Damages awarded, not to compensate the victim for established loss, but to punish the breaching party and make an example of him.
At the time of contracting, the parties may wish to avoid disputes and uncertainty over damages if a breach should occur in the future. They may include a term in the contract itself that seeks to fix in advance the amount of damages to be paid if a breach occurs. Such “agreed damages”provisions are referred to as liquidated damages clauses.
Liquidated damages clauses can be enforceable if the clause was fairly bargained, was agenuine attempt to forecast probable loss, and is not disproportionate to the actual loss ultimately suffered. If the clause fails to meet these standards, it is generally treated as a penalty and is unenforceable.
The non-breaching party may seek a court order to force the breaching party to perform in accordance with contract terms. This remedy is generally granted in situations where money damages are inadequate as a remedy.
Rescission and Restitution
Another remedy involves cancelling the contract and making restitution to the parties. Rescission is the cancellation of a contract. In its most common use,rescission is the victim’s termination of the contractual relationship following a material and total breach by the other party. Rescission ends the victim’s performance obligations under the contract.
Restitution is a judicial remedy under which the court grants judgment for the restoration of property or its value to the damaged party.
Reformation is an equitable remedy that allows the parties to rewrite or reform the contract as originally created in order to reflect what they intended.
Limitations and Waivers
The non-breaching party may waive its right to enforce a remedy. Generally,contracts provide that waiver of one event of default does not mean waiver of any future defaults. If permitted by law, the contracting parties can limit the type and amount of remedies provided to the non-breaching party.
A contract that is void is not legally enforceable and the parties thereto are not legally obligated to each other. Generally, contracts are void because the subject matter is not legal or one of the contracting parties does not have the competency to contract. For example, a contract to commit a crime is void and cannot be enforced.
XII. ANCILLARY DOCUMENTS.
a) FORM OF ADVANCE PAYMENT GUARANTEE
b) FORM OF BANK GUARANTEE (PERFORMANCE BANK GUARANTEE)
c) FORM OF DISCHARGE CERTIFICATE
d) FORM OF CHANGE REQUEST
e) LETTER OF ACCEPTANCE
i. Contractors All Risks Insurance
ii. Third Party Liability Insurance
iii. Workmen Compensation Insurance
iv. Employers Liability Insurance
v. Professional Indemnity Insurance
vi. Plant, Tools and Equipment Insurance
vii. Public Liability Insurance
Contractors’ all risks insurance
Contractors’ all risks (CAR) insurance is a non-standard insurance policy that provides coverage for property damage and third-party injury or damage claims, the two primary types of risks on construction projects. Damage to property can include improper construction of structures, the damage that happens during a renovation, and damage to temporary work erected on-site.
Third parties including subcontractors may also become injured while working at the construction site. CAR insurance not only covers those associated risks but also bridges these two types of risks into a common policy designed to cover the gap between exclusions that would otherwise exist if using separate policies.
CAR insurance coverage is common for such construction projects as buildings, water tanks, sewage treatment plans, flyovers, and airports.
Workmen’s Compensation Insurance:
Employers are legally obligated to take reasonable care to assure that their workplaces are safe. Nevertheless, accidents happen. When they do, workers compensation insurance provides coverage.
Workers compensation insurance serves two purposes: It assures that injured workers get medical care and compensation for a portion of the income they lose while they are unable to return to work and it usually protects employers from lawsuits by workers injured while working.
Workers receive benefits regardless of who was at fault in the accident. If a worker is killed while working, workers comp (as it is often abbreviated) provides death benefits for the worker’s dependents.
Employers liability (EL) insurance
An EL policy covers the legal liability of the employer for any illness, injury or death suffered by their employees. EL insurance is always on an annual basis so it is divorced from specific projects. However, most EL policies are issued on a ’causation’ basis. It is in general annexed to the Workmen’s compensation Insurance policy.
Professional indemnity (PI) insurance
Cover is provided under PI policies for awards of damages, costs or settlements(including defence costs) for which the Consultancy practice is legally liable resulting from a claim made against them during the policy period for any act, error or omission arising out of the conduct of the business. Cover is for matters notified to the insurers in the policy period. The event giving rise to the claimmay have occurred during the same period of insurance but is more likely to have occurred before (perhaps many years before).
Plant and Tools Insurance:
Plant & Equipment Insurance provides cover for a range of construction equipment such as portable tools, bobcats and forklifts. It is vital to ensure you have this type of cover to protect yourself against potential issues such as theft, damage and breakdown to name a few. We are able to provide insurance solutions for both fixed and mobile equipment as well as indoor or outdoor plant.
Public liability (PL) insurance
The standard cover will provide indemnity in respect of liability at law for damages or compensation arising from accidental injury to third parties (not employees) or accidental damage to their property arising in connection with the project.
It is recommended that this element of cover be considered very early on in the procurement process, as decisions made about who is to purchase what cover and in whose names should be reflected in the contract conditions. The policy may be annually renewable or project specific.
XIII. SPECIAL CONTRACTS:
E-Contract is meant for negotiating successful contracts for consumer and business e-commerce and related services. It contains model contracts for the sale of products and supply of digital products and services to both consumers and businesses.
An e-contract is a contract modelled, executed and enacted by a software system. Computer programs are used to automate business processes that govern e-contracts. E-contracts can be mapped to inter-related programs, which have to be specified carefully to satisfy the contract requirements. These programs do not have the capabilities to handle complex relationships between parties to an e-contract
An electronic or digital contract is an agreement “drafted” and “signed” in an electronic form. An electronic agreement can be drafted in the similar manner in which a normal hard copy agreement is drafted. For example, an agreement is drafted on our computer and was sent to a business associate via e-mail. The business associate, in turn, e-mails it back to us with an electronic signature indicating acceptance. An e-contract can also be in the form of a “Click to Agree” contract, commonly used with downloaded software:
The user clicks an “I Agree” button on a page containing the terms of the software license before the transaction can be completed. Since a traditional ink signature isn’t possible on an electronic contract, people use several different ways to indicate their electronic signatures, like typing the signer’s name into the signature area, pasting in a scanned version of the signer’s signature or clicking an “I Accept” button and many more.
E-Contracts can be categorized into two types i.e.
i. web-wrap agreements and
ii. shrink-wrap agreements.
Web-wrap agreements are basically web based agreements which requires assent of the party by way of clicking the “I agree” or “I accept” button e.g. E-bay user agreement, Citibank terms and conditions, etc.
Whereas Shrink-wrap agreements are those which are accepted by a user when a software is installed from a CD-ROM e.g. Nokia PC-suite software
Law governing e-contract :-
Section (11) of information technology Act, 2000
Section(12) of information technology Act, 2000
Section (13) of the information technology act, 2000 and
Section 10 of the Indian Contract Act, 1872
FIDIC FORM OF CONTRACTS FOR THE CONSTRUCTION INDUSTRY:
FIDIC Stands for Fédération Internationale Des Ingénieurs-Conseils (International Federation of Consulting Engineers) which has about 102 countries as members. The FIDIC forms of contract have conditions suitable for use in all types of construction, electrical, mechanical and domestic contracts.
FIDIC published four new editions of forms of contracts:
1. Conditions of contract for construction
2. Conditions of contract for plant and design-build
3. Conditions of contract for EPC and Turnkey projects
4. Short form of Contract
This Second Edition of the Conditions of Contract for Construction has been published by the Fédération Internationale des Ingénieurs-Conseils (FIDIC) as an update of the FIDIC 1999 Conditions of Contract for Construction (Red Book), First Edition.
Along with the FIDIC 1999 Yellow Book (the Conditions of Contract for Plant and Design-Build) and the FIDIC 1999 Silver Book (the Conditions of Contract for EPC/ Turnkey Projects), the FIDIC 1999 Red Book has been in widespread use for nearly two decades.
In particular, it has been recognised for, among other things, its principles of balanced risk sharing between the Employer and the Contractor in projects where the Contractor constructs the works in accordance with a design provided by the Employer. However, the works may include some elements of Contractor-designed civil, mechanical, electrical and/or construction works.
This Second Edition of the FIDIC Red Book continues FIDIC’s fundamental principles of balanced risk sharing while seeking to build on the substantial experience gained from its use over the past 18 years. For example, this edition provides:
1) greater detail and clarity on the requirements for notices and other communications;
2) provisions to address Employers’ and Contractors’ claims treated equally and separated from disputes;
3) mechanisms for dispute avoidance and
4) detailed provisions for quality management, and verification of Contractor’s contractual compliance.
These Conditions of Contract for Construction include conditions, which are likely to apply to the majority of such contracts. Essential items of information which are particular to each individual contract are to be included in the Particular Conditions Part A – Contract Data.
In addition, it is recognised that many Employers, especially governmental agencies, may require special conditions of contract, or particular procedures, which differ from those included in the General Conditions. These should be included in Part B – Special Provisions.
It should be noted, that the General Conditions and the Particular Conditions (Part A – Contract Data and Part B – Special Provisions) are all part of the Conditions of Contract.
To assist Employers in preparing tender documents and in drafting Particular Conditions of Contract for specific contracts, this publication includes Notes on the Preparation of Tender Documents and Notes on the Preparation of Special Provisions, which provide important advice to drafters of contract documents, in particular the Specifications and Special Provisions. In drafting Special Provisions, if clauses in the General Conditions are to be replaced or supplemented and before incorporating any example wording, Employers are urged to seek legal and engineering advice in an effort to avoid ambiguity and to ensure completeness and consistency with the other provisions of the contract.
This publication begins with a series of comprehensive flow charts which typically show, in visual form, the sequences of activities which characterise the FIDIC Construction form of contract. The charts are illustrative, however, and must not be taken into consideration in the interpretation of the Conditions of Contract.
This publication also includes a number of sample forms to help both Parties to develop a common understanding of what is required by third parties such as providers of securities and guarantees.
Drafters of contract documents are reminded that the General Conditions of all FIDIC contracts are protected by copyright and trademark and may not be changed without specific written consent, usually in the form of a licence to amend, from FIDIC. If drafters wish to amend the provisions found in the General Conditions, the place for doing this is in the Particular Conditions Part B – Special Provisions, as mentioned above, and not by making changes in the General Conditions as published.
While Contract drafting demands due diligence, there are a number of strongly held ideological values underlying contract law and its rules are motivated by conscious and deliberate public policy. Understanding these policy themes can help a practitioner appreciate the goals and assumptions underlying the legal rules involved in drafting Contracts.
One of the most important parts of drafting a contract is ensuring the language is clear and unambiguous. We should shun flowery words and legal jargon. A contract should be clearly understood by the stake holders who are not legal professionals.
For an effective Contract drafting/compilation, the Administrator should be involved from the bidding stage itself ; this will enable him to track all the negotiating communications and meeting minutes integrated in to the respective sections and to construct a flawless, comprehensive Contract agreeable by the stakeholders.
Further, an efficient Contract Administrator should adopt the time-tested ethics while formulating the terms and conditions. The terms shall be pleasing, beneficial, and not agitating the stake holders as stipulated in the song of the God – Bhagavad Gita
Austerity of words consists in enumerating words that are truthful, pleasing, beneficial and not agitating to others.
In a nutshell, the Contractshall foster synergetic relationship among the stakeholders, sustainably by imbibing the values that are inherent to our culture and this great Nation!
A. CONTRACT TERMINOLOGY
ADR – this is short for alternative dispute resolution, or ways to resolve disputes outside of the courtroom. The term typically encompasses negotiation,mediation and arbitration.
Assignment – the transfer of rights or duties by the assignor to the assignee.This may occur only by agreement or by operation of law, for example, when someone dies or when a company is bankrupt.
Choice of Law – often, the parties to a contract will specify which rules of law should be used to resolve any dispute between them. Particularly in international transactions, the choice of law can be a significant point of negotiation among lawyers. Choice of law (what legal principles will be used to resolve the dispute)should be distinguished from choice of forum (where the dispute should be resolved)and choice of dispute resolution method (litigation or some form of ADR).
Common Law – this term, when contrasted with Civil Law, refers to legal systems which have their origin in the British legal system. The legal system of India is from the common law tradition.
Condition Precedent – an event that must happen before a contract or a contractual obligation goes into effect.
Condition Subsequent – a happening which terminates the duty of a party to perform or do his/her part.
Consideration – a common law concept which requires (in essence) that a promise be part of an exchange to be enforceable as a contract.
Contracts of Adhesion – standardized contracts, usually presented on a take it-or-leave-it basis, to parties of unequal bargaining strength.
Covenant – this term used in a contract means a promise which, if not carried out, will carry legal consequences. Often, covenants are divided into Affirmative Covenants (the things the promis or agrees to do) and Negative Covenants (the things the promis or agrees not to do).
Defects Liability Period – often, when a Default occurs under a contract, the obligor may have a certain period of time to cure the Default before the affected party is allowed to exercise Remedies.
Default – the circumstances where an obligor under a contract is considered to be in breach of the contract. In formal written contracts, Defaults often include failure of a Representation or Warranty to be true when made, failure to perform any Affirmative or Negative Covenant, insolvency or bankruptcy, as well as other enumerated situations tailored to the specific circumstances.
Equity – this term, which is often used to mean fairness, also has a more technical legal meaning. It used to be that the Common Law system was rather rigid,and in order to obtain relief, a litigant had to fit into a limited class of situations.
Estoppel – an equitable concept that prevents a party from raising an argument when the party has acted unfairly, fraudulently, or other wise in appropriately. (EU equivalent: “legitimate expectations”).
Force Majeure – an “act of God” which prevents one party from performing the obligations owing under a contract. Commonly such things as war, riots,earthquakes, floods, strikes and the like are included. The common law generally takes a stricter approach to force majeure than civil law legal systems.
Impracticability – A legal doctrine closely related to Force Majeure. If some unanticipated event makes performance of the contract unusually burdensome, some legal systems will allow a party to be excused from the contract under the doctrine of impracticability. Different legal systems have varied requirements for invoking this doctrine.
Indemnity – an agreement in which one party agrees to reimburse another party if it is held liable. An indemnity is in the nature of a guaranty, but typically is used when the party offering indemnity has some interest in, involvement with, or control over the events leading to liability. Indemnity clauses are often found in commercial contracts, and may be coupled with “hold harmless” provisions. In a“hold harmless” provision, the first party says that they will not hold the second party responsible for certain actions, even if the first party might otherwise have the right to do so under applicable law.
Lien – a creditor has a Lien on a piece of property owned by a debtor when the creditor has a contingent claim to that property. Sometimes, the debtor voluntarily gives the creditor a Lien as a form of security for payment; other times the creditor receives the Lien by operation of law. Usually non-payment of the debt,or an Event of Default under any contract creating the debt, allows the creditor to Foreclose on the Lien.
Liquidated Damages – when parties to a contract settle in advance the amount of damages which will be available should one party fail to perform.
Remedies – the actions that can be taken upon an Event of Default.Sometimes an aggrieved party can take action on its own. This is often referred to as“self-help.” Other times, the term “remedies” is used to describe the court procedures and decisions that are available to help an aggrieved party.
Severability – the characteristic of a contract that allows for removal of duties or portions that are incorrectly or illegally drawn up. The parties may agree that incorrect, impractical, or illegal portions be severed from the agreement and replaced by language that best reflects the intent of the parties and comes closest to the business objective of those severed portions. Severance allows the remainder of the contract to be valid and enforceable.
Specific Performance – a court orders specific performance when it requiresa party to carry out its obligation, rather than merely paying damages. Specific performance is an extraordinary remedy.
Void – is absolutely null, empty, having no legal force, and incapable of being ratified. In contracts it refers to an attempt at formation of contract which is equivalent to no contract at all.
Voidable is capable of being voided, or later annulled. If a contract is formed but voidable, it may either be ratified or confirmed by conduct or else it may be voided by one of the parties. Once ratified, the promise is enforceable. If itis voided, it is unenforceable.
UNCITRAL is the core legal body of the United Nations system in the field of international trade law, with a mandate to further the progressive harmonization and unification of the law of international trade.
Author : Ramasubramanian is an ADR and Claims professional having over 20 years of international expertise in the dispute resolution arena. He is a Member of the prestigious Chartered Institute of Arbitrators- UK and empanelled as an Arbitrator with the Indian Council of Arbitration. email: email@example.com