This article has been written by Pramil Kant pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Anahita Arya (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).
Table of Contents
A contract has been defined in various terms in different legal jurisdictions. But in general parlance, a contract is a legally binding agreement between two or more parties who are legally competent to enter into a legal contract, supported by a lawful consideration and is not against public policy of the land where the contract was entered. We enter into contracts in our everyday life. Most of these contracts are verbal but when the stakes are high, parties prefer to record the terms of their contract in a written form. A written contract ensures that the obligations, representation and warranties of both the Parties have been recorded in writing.
With the opening up of the Indian Economy, there has been a drastic surge in cross border contracts. A cross border contract means a contract wherein the Parties belong to two different nations and therefore fall under two different legal jurisdictions. For example, an Indian trader enters into a contract with a French national to supply certain goods in India. This is an example of a cross border contract. Now, in case a breach of the above-mentioned contract occurs, the law of which place will govern the interpretation of the Contract? Which Courts will have the legal jurisdiction to entertain any dispute arising out of the Contract? Let’s make this situation a bit more complicated. Suppose the Indian trader enters into an agreement with a French Supplier to supply goods in London, U.K. So, in case of breach of Contract, which courts will have jurisdiction to entertain a dispute? The article will look into these aspects and also reflect on the meaning of breach of contract, jurisdiction and consequences and the remedies available in case of breach of a cross border contract.
What do we mean by breach of a contract?
When any of the parties to the contract fails to fulfil its duty and/or obligation under the contract, the contract is said to be breached by the defaulting party. A breach of contract can be either a material breach or a minor breach.
- In minor breach of contract, the party has fulfilled its obligations under the contract but has failed to perform its obligations in the manner stipulated in the contract. For example, a seller has delivered products to the buyer but has failed to deliver the products on time. This is a case of a minor breach of contract. But if the seller has failed to deliver the products to the buyer, then that will be the case of a material breach of contract.
- In a minor breach of contract, legal action can be initiated against the defaulting party only if the other party has suffered some financial losses and/or damages. Therefore, if due to late delivery, the buyer has not suffered any losses or damages, legal action cannot be initiated against him by the seller. Whereas, in material breach of Contract, legal action can always be initiated against the defaulting party.
- Another kind of breach of contract is an anticipatory breach of contract. In anticipatory breach of contract, a party to the contract expresses its disability and/or unwillingness to perform its part of obligations before the time of performance of the contract has arrived. Therefore, in other words, the opposite party, in this case, is already aware that the promisor will not be able to fulfil his obligations/promises under the contract. In such a situation, the promisee has two options available. Either he can treat the contract as cancelled and file a suit for the recovery of damages arising out of the contract or he can keep the contract alive and operative and file a suit for damages after the date of performance of the contract has passed.
But in the case of anticipatory breach of contract, the promisee has to show to the court of law that he has taken reasonable steps to mitigate/reduce his damages. In other words, since the promisor has already informed the promisee that he will not be able to keep his end of the bargain, the promisee should take steps, as a reasonable and prudent man should take, to reduce and mitigate his losses.
- In contradiction to the anticipatory breach of contract, there is an actual breach of contract wherein the breach of contract takes place on the day of the performance of the contract.
Jurisdiction and governing laws in case of cross border contract
This is the most tricky and controversial part of the cross border contract. Usually, in cross border contracts, the Parties expressly mention the governing law and the courts which shall have the exclusive jurisdiction to entertain any dispute arising out of the contract. But suppose, an Indian company enters in a contract with an American Company and the clause regarding governing law explicitly mentions that “The contract shall be construed, interpreted and governed as per the state laws of California and the Courts of California shall have the exclusive jurisdiction to entertain, adjudicate any dispute arising out of suit”. Does that mean that Indian courts have lost the jurisdiction to entertain any suit?
The answer is No.
In India, the general principle, as enunciated by the courts is that the parties cannot confer jurisdiction to a court where none exist. But in the case of Modi Entertainment Network Vs. W.S.G Cricket Pvt Ltd. The court held that in international trade and commerce, the parties have the freedom to decide a forum of choice for the resolution of their disputes. The forum chosen could be courts of the jurisdiction of either party or even a neutral court. However, the court also held that the foreign jurisdiction clause can also be quashed in the event of extraordinary and unforeseen circumstances. Now what those extraordinary and unforeseen circumstances are, has not been enumerated by the court.
The Indian law does not recognize foreign jurisdiction clauses as illegal per se and allows the parties to choose a forum for dispute resolution. But Indian courts do not consider such clauses as determinative and they have frequently restrained foreign proceedings and assumed jurisdiction on various grounds such as interests of justice, the balance of convenience etc.
Even when the Indian courts have recognized the foreign jurisdiction of courts, the next issue arises of the enforcement and execution of the decree passed by foreign courts. Here, the Code of Civil Procedure 1908 comes into play.
- Section 13 of the Civil Procedure Code, 1908, mentions the instances wherein foreign judgments shall not operate in a conclusive manner. Further, the code divides the nations into two categories; i. Reciprocating territories and ii. Non-Reciprocating Territories.
- For reciprocating territories, Section 44-A of the Civil Procedure code creates a legal fiction wherein a decree passed by a superior court situated in the reciprocating territory is treated like a decree passed by a district court situated in Indian territory. As of now, reciprocating territories include the United Kingdom, U.A.E, Fiji, Singapore, Aden, Malaysia, New Zealand, Trinidad and Tobago, Hong Kong, Bangladesh etc.
For the countries that do not fall under the category of reciprocating territories, the Party who wants to execute the foreign decree has to institute an entirely new suit before the Indian Courts of law either on the basis of the foreign decree or the underlying cause of action of both. Such judgement of the foreign court will hold only evidentiary value. This position has been recently re-asserted by the Bombay High Court in Marine Geotechnics L.L.C Vs Coastal Marine Construction and Engineering Limited.
Furthermore, the grounds for rejecting a foreign judgment/ decree are broader than a foreign arbitration award. Therefore, in the case of cross border contracts, it is always advisable to go for foreign arbitration rather than to submit to the jurisdiction of a foreign court of law.
Convention on Contract for International sale of goods
Here, it is important to mention the Convention on Contract for the International sale of goods (hereinafter referred to as CISG). CISG is an international treaty to govern international trade and commerce. As of now, CISG has been adopted and ratified by 94 countries globally (also known as contracting parties in the CISG). India has not signed the CISG yet.
The CISG is applicable either directly or indirectly. CISG is applicable directly when both the parties to the contract have their place of business in different States and the States where they have a place of business is a contracting party to CISG.
CISG is applicable indirectly when one or both parties have their place of business in non-contracting states but the law applicable to the contract is that of a contracting state.
Remedies for breach
In case of the breach of a cross border contract, the parties submit themselves to the jurisdiction of the Court/arbitration panel and the matter is finally decided by that particular court/arbitration panel. If the decree is passed by a foreign court, the same can be enforced and executed in India as per the provisions of the Civil Procedure Code, 1908.
If it is an arbitration award, then the same can be enforced by following the provisions of Arbitration and Conciliation Act, 1996.
In case of breach of cross border contract, the aggrieved party may approach the concerned court/ arbitration panel for the adjudication of the dispute.
If the contract is between two parties having their principal place of business in the contracting states to CISG, then they will be given remedies as per the different articles of CISG. As per CISG, the main remedies available to the Parties to contract in case of breach of contract are
i. The aggrieved party may require the specific performance of the contract by the other party (unless the party has resorted to a remedy which is inconsistent with the specific performance such as termination of the contract)
ii. The Buyer can also ask for a reduction in prices of goods if they do not conform to the standards as mentioned in the contract. The Buyer can also ask for the replacement of goods (CISG Article 46(2)).
iii. The party in default of contractual obligations can take the excuse of Force Majeure (CISG Article 79). To take the excuse successfully, the failure must be due to reasons that are beyond the control of the defaulting party. The grounds of Force Majeure excuses the defaulting party to pay interest, damages etc. to the aggrieved party.
In the case of cross border contracts, it is always advisable that the jurisdiction should vest in the courts of India. In this way, the parties could avoid the enforcement and execution of foreign judgements. But if a Foreign Party/investor wants to have a trial in an offshore jurisdiction, it is advised that the party should always choose the laws of a reciprocating territory only. Another way is to go for a foreign arbitration, as the grounds for rejecting foreign arbitral awards are less broad than foreign judgements/ decree.
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