Construction agreements : all you need to know

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May 6, 2022

The article is written by Ansruta Debnath, a law student at National Law University Odisha. This article focuses on construction agreements, their types and the provisions that must be included in a standard construction agreement.

It has been published by Rachit Garg.

Table of Contents

Introduction

A construction contract is a written agreement between a business owner who wants to outsource work and the independent contractor or specialist who wants to do the work. A construction contract should include information regarding the construction project, its scope, and a breakdown of the jobs that will be outsourced. It should also include contingencies between the contractor and the owner in the event of delays in the project’s timeframe.

Both parties to a construction contract must be protected. These documents spell out exactly what work will be done when it will be done, and how much it will cost. They also specify communication channels and how conflicts will be resolved if they arise.

Construction contracts simplify the decision-making process by incorporating information on communication and adjustments. In an ideal world, project risks have been identified and the contract describes the best course of action. A construction contract is first and foremost a contract, but it also functions as a road map.

Construction contracts include a client or owner or property where construction will take place and the contractors, people who will perform the construction. When owners require specialised work that they cannot complete on their own, they hire builders. When the project’s scope is too large for them to handle alone, they may hire constructors. Construction projects, in particular, frequently necessitate the hiring of multiple contractors. In this situation, meticulous building contracts are critical to the project’s success.

Most important clauses of construction agreements

Construction agreements are subjective and must cater to the needs of the involved parties. But some clauses and provisions should be included in them to ensure that the basics of the agreement are not marred by ambiguities.

Identifying details of both parties

The agreement, in the very beginning, should contain the identifying details of both parties, the contractor and the property owner. These include name, office or residential address, contact details like a cell or telephone number or email ID.

Description of property and project

The property where the construction project will take place should be explained in detail. Further, the scope of the construction should be properly defined. This is the most important addition to the construction agreement as it allows the meeting of minds on the crux of the agreement. Care should be taken to make this section as detailed as possible to remove as many ambiguities as possible. For example, if an agreement is being drawn up for building a two-storeyed house, then details should include-

Blueprints of the expected end product.
Raw materials to be used.
Quality of raw materials to be used.

Licences and permits

Building something on a property requires obtaining certain licences and permits from local municipal bodies. Thus, all the requirements must be properly detailed. Further, it should be specified who among the parties would be responsible for obtaining the same to ensure that there are speedy applications for the same and minimal misunderstandings.

Incentives

Creating incentives is one of the most effective strategies to ensure that a building project succeeds. When the scope is unknown and the budget, time, and personnel expenses are unknown, incentives can help. Contractors and owners alike benefit from incentives that push them to work efficiently and complete projects on time and within budget.

Projected timeline and date of completion

Ascertaining when the project must be completed is crucial. Details on when the date of start will be, the work period and the expected day of completion should be included in the construction agreement. Further, such details can be ascertained only by proper negotiation between both the involved parties so that not too strict nor too lax of a schedule is determined and put in the agreement.

Estimated cost and payment schedule

After the contractor gets a clear idea about the scope of the project, they will give a cost estimate. This should be mandatorily communicated to the other parties and then after negotiations are included within the agreement.

One of the most significant aspects of a construction agreement is the payment schedule clauses. These clauses are commonly referred to as “pay-when-paid” and “pay-if-paid” clauses. When the contractor’s responsibility to pay the sub-contractor is triggered by receipt of payment from the owner, this is known as a “pay-when-paid” clause. The contractor’s receipt of payment from the owner is a condition precedent to the contractor’s obligation to pay the subcontractor in a “pay-if-paid” agreement.

Right to stop work

The contractor can have the right to stop work in case certain obligations are not fulfilled by the owners of the property. Thus a stop-work clause gives a contractor a legal right to stop work in case payment is not done by the owner or client.

Right to stop payment

Like the right to stop work, a similar right can exist for the clients. This right can be used when the contractors have been unable to perform up to the standard or have not reached certain milestones according to the pre-determined timeline. The clients, in such cases, can reserve the right to legally stop payments until obligations from the opposing side have been sufficiently fulfilled.

Act of God

The Act of God clause or the force majeure clause is a clause that allows for parties to escape liability in case of breach of contract if the breach is due to circumstances beyond their control. For eg, during the 2020 lockdown due to COVID-19, many agreements including construction agreements had to be suspended due to the inability to continue work or payment by either party. Thus, even if the contractor is unable to commit to the pre-determined work timeline, the contract is not breached but suspended until work can recommence. It is important to note that the performance of the contract must be impossible and not “difficult” for this clause to take effect.

Contingency plans

Contingency plans are included in the finest construction agreements. During a construction job, something unexpected will almost always occur. When contingencies are included in construction contracts, both the owner and the builder have a plan in place for what to do if something goes wrong.

Change order provisions

In the industry of construction, projects frequently begin with the owner’s plans and specifications, as well as the contractor’s agreement to build them for a set price. However, plans and specifications may become incompatible during a project. The owner may wish to make changes, such as adding or removing particular goods, or the terms may differ from what was agreed upon. The project may turn out to be completely different from what the contractor committed to at the start. Change order provisions in the contract terms are frequently used to address these types of issues. They define the procedures for seeking and issuing such orders, as well as the scheduling, notification, and resolution of contractor-owner issues that can arise due to such changes.

Further, it can also be decided beforehand how changes would not be entertained in the future but it is always recommended to keep construction contracts flexible.

Indemnities

“Indemnity” in English law means a promise to save a person from the consequences of an act. The promise may be express or it may be implied from the circumstances of the case. The person who gives the indemnity is called the “indemnifier” and the person for whose protection it is given is called the “indemnity-holder” or “indemnified”. In construction agreements, the clients are generally the indemnifier.

Remedies for breach

A breach of contract occurs when a party renounces his liability under it, or by his own act makes it impossible that he should perform his obligations under it or totally or partially fails to perform such obligations. The failure to perform or renunciation may take place when the time for performance has arrived or even before that. Accordingly, remedies for breach should be pre-determined for either party involved in the agreement. Remedies can include liquidated damages, specific performance, litigation etc.

Dispute resolution mechanisms

A good contract always includes the mechanism through which disputes should be settled in case disputes arise. While litigation is an age-old practice, due to the increasing burden on the judiciary and facilitating easy redressal, parties are encouraged to opt for alternative dispute resolution methods like arbitration, negotiation, conciliation or mediation.

Warranty

It is expected that when a project is completed, it is done with integrity and that the end product will have some kind of warranty. Most agreements should feature a warranty clause, especially if the client refuses to move forward unless a warranty is given by the contractors. Further, breaching a warranty will mandatorily lead to the payment of compensation.

Disposal of materials and condition upon conclusion

Another clause that can be included at the end of the agreement is the obligation of disposing of and cleaning up the newly constructed property. The same can be clearly defined during the formation of the contract to ensure that the same obligation is placed on the contractors beforehand.

Signature and date by both parties

Finally, to transform the agreement into a contract, involved parties must sign the agreement along with the date of signing. This makes the agreement legally binding on both parties. Care should be taken by all parties to properly go through the agreement in detail before signing it.

Types of construction agreements

Lump-sum/ fixed sum construction agreement

A lump-sum agreement gives a complete price for the complete activity. This pre-determined amount accounts for all variables, irrespective of changes or problems. This form of settlement protects owners from unforeseen modifications and setbacks. Lump-sum contracts can appear to favour the owner over the contractor. But there are ways to equalise the scales. Many contractors demand a further per cent of the amount for signing lump sum contracts, as a relatively greater amount of risk is on them. Additionally, incentives are included within the agreement to reward jobs finished early.

Cost-plus construction agreement

Cost-plus agreements have a two-pronged approach: a predetermined fee and accumulated prices. This rate is the agreed-upon charge owners will pay contractors. It may be a percentage of the overall assignment fee or every other form of fee. The defining feature of a value-plus contract is it reports prices as they arise as opposed to deducting prices from a hard and fast price range. A fee-plus agreement is used when project expenses are uncertain. While this could appear as a possible legal liability, cost-plus contracts frequently include incentives for complying with a lower price range and reduced expenses. This avoids the possibility of legal battle and ensures contractors are paid a fair overhead.

Time and materials construction agreement

Time and materials agreements are a fitting choice when the scope of a challenge is completely unknown. In this situation, contractors determine an hourly rate for labour and for materials as is required by the clients. Because this connotes certain levels of uncertainty, these agreements must be unique and prepare for nearly everything by being very flexible. The owner should provide incentives for construction initiatives finished beforehand of schedule and/or beneath budget. A time and materials settlement is a superb choice for small projects, as they require such close supervision. The gain of selecting a time and materials settlement is that it protects proprietors from overpaying contractors.

Unit pricing construction agreement

A unit pricing agreement is used when an owner needs to buy a large amount of a positive product. Each product is a unit and costs a set price. These gadgets can also regularly be charged in bulk portions for a reduced rate. Unit pricing contracts are nice whilst a proprietor is aware of precisely how much of a specific product they want. Using this type of agreement and shopping for all the devices immediately is likewise a very good manner to defend against potential future inflation of material fees. By buying all of the gadgets at once, owners normally pay less than they might within the destiny and don’t need to fear approximately drawing up another contract in the future.

Advantages of construction agreements

It is always advisable to draw out the rights and obligations of parties in a contract beforehand.
Calculation of the costs is done beforehand.
If appropriate clauses are added and the construction contract is drafted in the right way, then it allows for easy change of construction plans in the future.

Disadvantages of construction agreements

Too much cost may be prescribed for the project unknowingly by the client.
Construction agreements may not be flexible, causing problems.

Common mistakes made while drafting construction agreements

Not being specific or detail-oriented
Not establishing proper and efficient lines of communication
Not detailing how to make changes in the contract

A sample Construction Agreement

Sample construction agreements are widely available for the benefit of everyone who wants to draft a construction agreement for an impending construction project. These samples contain certain provisions which are a must for all construction contracts. Apart from those, the contracts can be amended and sub-clauses added or removed to cater to individual needs.

The following is a sample construction agreement-

CONSTRUCTION CONTRACT

THIS AGREEMENT is made and entered into this ____ day of________, 20XX, by and between _____________________________________ (hereinafter called “Owner”), and ________________, (hereinafter called “Contractor”), for the Construction Project known as: The Owner’s Representative (OR) is _____________________________. The Owner and Contractor agree as follows:

ARTICLE 1, THE WORK:

The Contractor shall complete all the work on the _________________________ as specified in the Scope of Work included and also contained in the RFP attached hereto and incorporated herein. The Work is generally described as ____________________________.

ARTICLE 2, TIME OF COMMENCEMENT AND COMPLETION:

2.1 The Work to be performed under this Contract shall be commenced upon receipt of a Notice to Proceed and completed by ______________. Start date is anticipated to be on or about ________________.

2.2 Except as otherwise required for the safety or protection of persons or the Work or property at the Work Site or adjacent thereto, all Work at the Site shall be performed between the hours of 7 AM and 5:30 PM, Monday through Friday unless otherwise provided in writing by Owner or OR, such consent not to be unreasonably withheld.

ARTICLE 3, CONTRACT AMOUNT AND BASIS:

The Owner shall pay the Contractor the amount of _____________________ for the satisfactory performance of the Work, subject to additions and deductions by Change Order as provided in the General Conditions, the following: The unit price set forth on the Bid Schedule shall be the basis for the contract price. Payment at the unit price will be based on actual measured quantities in the Work, or planned quantities as stipulated in the Project Special Provisions, except where the unit is a lump sum, in which case payment will be based upon the lump sum price as stated.

ARTICLE 4, PROGRESS PAYMENTS:

Based upon Applications for Payment submitted to the OR by the Contractor and Certificates for Payment issued by the OR to the Owner, the Owner shall make progress payments to the Contractor as follows: Monthly progress payment requests shall be remitted within thirty (30) days of issuance of Certificates for Payment by the OR to the Owner. Ten per cent (10%) of each amount certified for payment shall be retained by the Owner until final payment.

ARTICLE 5, FINAL PAYMENT:

After completion of the Work, provided the Contract be then fully performed, the Owner shall publish a Notice of Final Settlement twice at least _________ before the date of Final Settlement. The Owner shall withhold __________________________________________ as and when required

ARTICLE 6, CONTRACT DOCUMENTS:

6.1 The Contract Documents include …

6.2 The aforementioned documents form the contract and what is required by anyone shall be as binding as if required by all. The Contract Documents intend to include all…necessary for the proper execution and completion of the Work and the terms and conditions of payment, and also to include all Work which may be reasonably inferable from the Contract Documents as being necessary to produce the intended results.

6.3 The term Work as used in the Contract Documents includes…

6.4 If any of the covenants or provisions of this Contract shall conflict with any of the provisions of the Request for Proposals or the Contractor’s proposal, then this Contract shall control and shall be the governing document. If the Request for Proposals conflicts with the Contractor’s proposal then the Request for Proposals shall control, it is the intent that the work under the project is defined in this Contract and the Request for Proposals.

ARTICLE 7, OWNER’S REPRESENTATIVE (OR):

7.1 The OR will provide _______________________________________________

7.2 The OR shall at all times have access to ____________________________________

7.3 The OR will make periodic visits to the site to determine in general if the Work is proceeding per the Contract Documents. Based on on-site observations, the OR will keep the Owner informed ____________________________________________________________________. The OR will not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the Work. The OR will not be responsible for___________________________________________________________

7.4 Based on such observations and the Contractor’s Applications for Payment, the OR will determine the amounts owing to the Contractor and will issue Certificates for Payment.

7.5 The OR will be, in the first instance, the interpreter of the requirements of the Contract Documents. The OR will make decisions on all claims and disputes between the Owner and the Contractor.

7.6 The OR will have authority to reject __________________________________.

ARTICLE 8, OWNER:

8.1 The Owner shall provide _____________________________________________.

8.2 The Owner has secured __________________________________________________.

8.3 The Owner shall issue ______________________________________________.

ARTICLE 9, CONTRACTOR:

9.1 The Contractor shall perform the work as an Independent Contractor according to this Agreement.

9.2 The Contractor shall supervise and direct the Work, using the Contractor’s best skill and attention. The Contractor shall be solely responsible for all _____________________________.

9.3 Unless otherwise specifically noted, the Contractor shall provide and pay for ____________________________________________________________________________.

9.4 The Contractor shall at all times enforce strict discipline…

9.5 The Contractor warrants to the Owner and the OR that all materials and equipment incorporated in the Work will be new unless otherwise specified, and that all Work will be of good quality…All Work not so conforming to these standards may be considered defective.

9.7 The Contractor shall pay consumer taxes…The Owner is exempt from state and local sales and use taxes.

9.8 The Contractor shall give all notices and comply with laws…of any public authority bearing on the performance of the Work, and shall notify the OR if the Drawings, Specifications and Provisions are at variance therewith.

9.9 The Contractor shall be responsible for the…of all Contractor’s employees and all…

9.10 The Contractor shall review…approval of the OR for conformance with the design concept and with the information given in the Contract Documents. The Work shall be per approved samples and shop drawings.

9.11 The Contractor at all times shall keep the premises free from the accumulation of waste materials…

ARTICLE 10, DECISIONS ON DISPUTES:

10.1 The provisions of this Article shall govern the procedures to be followed in the event of a dispute.

10.2 The Representative shall be the initial interpreter of the requirements of the Contract Documents and judge the acceptability of the Work hereunder. Claims, disputes and other matters relating to the acceptability of the Work or the interpretation of the requirements of the Contract Documents about the performance and furnishing of the Work and changes in the Work and Contract Times will be referred initially to the OR in writing with a request for a decision. Written notice of each such claim, dispute or other matter will be delivered by the Contractor to the OR promptly after the occurrence or event giving rise thereto. The OR will render a decision in writing promptly after receipt of the submittal, allowing sufficient time for review of the matter. The OR’s decision on such a claim, dispute or other matter will be final and binding upon the Contractor.

10.3 When functioning under these provisions, the OR will remain impartial to both the Contractor and the Owner, and will not be liable in connection with any interpretation or decision rendered in good faith in such capacity.

ARTICLE 11, DELAY:

11.1 All of the Work will be completed and ready for final payment by the date specified in this Agreement.

11.2 If the Contractor is delayed at any time in the progress of the Work by changes ordered in the Work, by labour disputes,…informed…then the Contract Time shall be extended by Change Order for such reasonable time as the OR may determine.

ARTICLE 12, PAYMENTS:

12.1 Payments shall be made as provided in Article 4 of this Contract.

12.2 Payments may be withheld on account of __________________________________

12.3 Final payment shall not be due until ____________________________________

ARTICLE 13, PERMITS:

The contractor shall obtain and pay for all necessary permits and licenses relative to the Project.

ARTICLE 14, INDEMNIFICATION:

14.1 The Contractor shall indemnify and hold harmless the Owner and the OR and their respective officers… from and against all liability, claims and demands, on account of injury… if such injury, loss, or damage is caused in whole or in part by or is claimed to be caused in whole or in part by, the act, omission, error, professional error, mistake, negligence, or other faults of the Contractor or any Subcontractor of the Contractor, or any …

14.2 The Contractor agrees to investigate…In carrying out any of the provisions of this Contract or in exercising any power or authority thereby, there shall be no personal liability of the ____________________________________________________________________________.

14.3 The Contractor also agrees to bear all other costs…

ARTICLE 15, CHANGES IN THE WORK:

15.1 The Owner without invalidating the Contract may order Changes in the Work consisting of additions…

15.2 All such changes in the Work shall be authorized by a written Change Order signed by the Owner.

15.3 The Contract Sum and the Contract Time may be changed only by Change Order.

15.4 The cost or credit to the Owner, if any, from a Change in the Work shall be determined by unit prices if specified in the contract documents, or by mutual agreement.

ARTICLE 16, ACCEPTANCE OF THE WORK (WARRANTY):

16.1 The Contractor shall correct any Work that ___________________________________

16.2 No act of the Owner or the Owner’s Representative, either in superintending or directing the Work, or any extension of time for the completion of the Work, shall be regarded as an acceptance of such Work or any part thereof, or of materials used therein, either wholly or in part. Acceptance shall be evidenced only by____________. Before any final certificate shall issue, Contractor, shall ___________________________________. No waiver of any breach of this Contract by the Owner or anyone acting on Owner’s behalf shall be held as a waiver of any other subsequent breach thereof.

16.3 Contractor agrees to guarantee all work under this Contract for __________________ from the date of Final Settlement by the Owner. If any unsatisfactory condition or damage develops…

ARTICLE 17, SAFETY:

The Contractor shall be responsible for__________________________.The Contractor shall take all reasonable safety precautions and provide __________________________.

ARTICLE 18, PROPERTY INSURANCE:

18.1 Unless otherwise provided, the Contractor shall purchase and maintain property insurance upon the entire Work at the site to the full insurable value thereof. This insurance shall include______________________________________________________________________.

18.2 Any insured loss is to be adjusted with the Owner and made payable to the Owner as trustee for the insureds, as their interests may appear, subject to the requirements of any mortgagee clause.

18.3 The Contractor shall file a copy of all such policies with the Owner prior to the commencement of the Work.

18.4 The Owner and Contractor waive all rights against each other for __________________.

In witness whereof the parties hereto have executed this agreement as of the date first above written:

Signed and delivered for and on behalf of

(place for signature)

Owner Name:

Address: ______________________

Signed and delivered for and on behalf of

(place for signature)

Contractor company Name:

Director Name or Authorised person Name ______________________

Designation ______________________

Address ______________________

Conclusion

Thus, it is very clear for clients and contractors to outline rights and duties through a construction agreement before a construction project commences. With the changing landscape of the construction industry, there is a marked need to move from strict to much more flexible agreements. At the same time, a balance must be struck, ensuring that both parties are equally benefited from the agreement.

References

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Labour Law compliances for Indian startups

By

Sneha Mahawar

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May 6, 2022

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This article is written by Shivangi Lal pursuing a Diploma in International Business Law. This article has been edited by Zigishu (Associate, Lawsikho).

This article has been published by Sneha Mahawar.

Table of Contents

Introduction : Labour Law compliance

Labour laws are a set of rules that govern how employees are treated in the workplace. Labour is an organisation’s most valuable asset, and labour laws are enforced to guarantee that their rights are safeguarded and that they are not exploited. It governs businesses, employees, and labour unions. Noncompliance with the legislation may result in retaliation against the company.

Labour laws are enacted by both the state and the central government. Compliance with labour regulations is not limited to submitting returns; these records also serve as proof of compliance with the rules and must be provided to the authorities in the event of any inconsistencies. There are certain laws that can only be enforced under particular circumstances.

The Ministry of Labour & Employment has published guidance to the States/UTs/Central Labour Enforcers for a compliance regime focused on self and regulating inspections under various Labour Laws in an effort to enhance the Start-Up environment in the country and incentivize startups in establishing new start-up ventures and thus help facilitate the formation of career opportunities through them.

The advice to state governments is to create an administrative framework to oversee the inspection of start-ups under such labour regulations so that start-ups are motivated to be self-disciplined and follow the rule of law. These policies aim to protect enterprises against harassment by limiting discretion and arbitrariness. When there is a breach of these labour regulations, however, punitive action will be taken.

Eligibility criteria for startup recognition

For these exemptions, a startup is defined as a firm that was established or incorporated in India not more than five years ago and had an annual turnover of not more than Rs. Twenty-five crores in the previous financial year.
Using technology or intellectual property to drive innovation, development, deployment, or commercialization of new goods, processes, or services.
As long as the new business isn’t founded by splintering or reorganising an existing one.
Also, an organisation ceases to be a start-up if its preceding financial year’s turnover exceeds Twenty-five crores or if it has been completed five years after formation or registration.

Compliance under labour laws

It has been recommended that if such start-ups provide self-declaration for compliance with nine labour regulations during the first year from the date of the start-up, there would be no investigation under these labour laws, wherever applicable. The following are the labour laws that will be covered:

The Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996
The Inter-State Migrant Workmen(Regulation of Employment and Conditions of Service) Act, 1979
The Payment of Gratuity Act, 1972
The Contract Labour (Regulation and Abolition) Act, 1970
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
The Employees’ State Insurance Act, 1948

These start-ups are required to file self-certification through the Startup mobile app which allows entrepreneurs to fill up requisite forms and details on the application itself or the details can be filed on the online portal. Returns from the second year onwards, for a period of up to five years after the units are established, will only be inspected if a reliable and verifiable grievance of infringement has been filed in written form and authorization has been obtained from higher authorities.

The major acts included in the industrial law compliance rules which must be taken into very serious account are:

Other Construction Workers Regulation of Employment & Conditions Act, 1966

An Act which regulates the employment & condition of service of building & other construction workers. This Act also provides for the safety of the workers including their health & welfare measures as well.

Inter-State Migrant Workmen Act, 1979

An Act which was enacted in order to regulate the condition of service of the interstate Labourers. The sole purpose of this act is to protect the workers whose services are outside their native states. This Act was created to protect the rights of the workers as well as to provide the employer with workers outside the state whenever he/she faces a shortage of skills among the locally available workers.

The Payment of Gratuity Act, 1972

Gratuity is basically the payment that is to be made to an employee or the worker upon the termination of his/ her service. The act provides the employer to pay the amount of gratuity at the rate of 15 days per year of service of the last salary. The acts specifically say that gratuity should be payable within 30 days of the last employment of that worker & is payable to the employee only after the termination.

The Employees Provident Funds & Misc. Provisions Act, 1952

This act basically provides for the compulsory contribution of a fund for the future of that employee post his/her retirement. However, as per the Act, the employees’ provident fund is mandatory for all those employees earning less than 15,000 per month. Provident Fund is contributed from both sides at 12% of the basic salary.

The Employees State Insurance Act, 1948

The provisions under this Act provide for certain benefits which the employees enjoy in the cases of sickness, maternity & or employment injury. This act is applicable to any factory which has employed 10 or more workers at any point in time. This insurance fund comprises the contributions made by the employer & employee. As per law Employers, the contribution is 4.75% & the employee’s contribution is 1.75% of the total wages. However, there is some exception in this act which is that this act is only for the employees whose monthly wages are less than 15,000 INR or lesser. Another exception is that if the wages of any employer are less than 100 INR, he/she will be exempted from making the contribution & only the employer will be liable to make the contribution.

Industrial Employment (Standing Orders) Act, 1946

The sole purpose of this act is to provide the workers with sufficient knowledge of their work environment. The act basically requires the employers to define with sufficient precision all the conditions of the employment the workers would be facing after the employees under them.

Industrial Disputes Act, 1947

Provisions of this act provide for the investigation & settlement of all industrial disputes. The provisions of this act are to secure industrial peace & harmony by providing the machinery & procedure for the investigation & settlement of industrial disputes by negotiations. This act also lays down the provisions for the payment of compensation to the workmen for the unfair labour practices on the part of the employer or a trade union.

In the case of environmental Laws, startups falling under the white category as defined by The central pollution control board would be able to self-certify compliance only random checks would be carried out in such cases.

Environmental laws from which exemption is provided under the current scheme:

The Water (Prevention & Control of Pollution) Act, 1974.
The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003.
The Air (Prevention & Control of Pollution) Act, 1981.

CLRA compliance

CLRA compliance or the Contract Labour Regulation & Abolition Act which was passed to raise the standard of working conditions & prevent exploitation of Employees & is applicable to all organisations employing 20 or more people. The provisions under this act help to regulate the employment of contract labour in all the factories & industries & this act also provides for its abolition in certain circumstances. This act also provides a responsibility to the principal employer to provide the workers with canteens, restrooms, first aid facilities, payment of wages, etc. It ensures to provide the workers with all the basic amenities such as access to the canteen, drinking water, restrooms, etc. A landmark Case of Standard Vacuum Refining Company Vs its Workmen, AIR 1961 SC 895 laid the foundation of the CLRA Act. In this case, the court issued guidelines & laid down specific regulations to which every company should adhere now.

Government initiatives

The Indian government has created a single Shram Suvidha Portal to make reporting inspections and submitting yearly reports for compliance with labour rules easier. Startups can use the online system to file self-certification under applicable labour regulations and avoid inspections for up to 5 years. The following are the labour laws that will be covered:

The Building and Other Constructions Workers’ (Regulation of Employment and Conditions of Service) Act, 1996
The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
The Payment of Gratuity Act, 1972
The Contract Labour (Regulation and Abolition) Act, 1970
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
The Employees’ State Insurance Act, 1948

Further, the advisory has been issued to all the State and Union Territories to provide the facility of online self-certification to Startups under the applicable State laws. In this respect, 27 States have already complied with the advisory.

Conclusion

Labour law compliance is required of all companies and sectors, yet it is a source of harassment for new enterprises. So, with the express purpose of supporting and promoting startups, the government devised a strategy to self-certify nine labour laws and environmental regulations for a period of three years, ensuring that new entrepreneurs have fewer obstacles and get familiar with all labour law compliances during that time. The government’s decision to support startups in India is a wise one, as it will help to strengthen the startup industry, resulting in more job prospects.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

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Voidable contracts : all you need to know

By

Rachit Garg

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May 6, 2022

0

This article has been written by Oishika Banerji of Amity Law School, Kolkata. It provides a detailed analysis of voidable contracts and everything a reader needs to know about the same.

It has been published by Rachit Garg.

Introduction

A voidable contract is one that can be cancelled or changed under certain legal circumstances. Not all contracts are voidable and therefore, in order to discharge an obligation, a legal precedent must exist. A frequent technique to terminate a contract is to discover a flaw in it. The most straightforward approach to void a contract is when both parties agree to that voiding and are generally the best course of action that can be taken. A voidable contract can also be referred to as a formal agreement between two parties that can be declared void for a variety of legal grounds, including:

Failure by one or both parties to disclose a material fact.
A mistake, misrepresentation, or fraud.
Undue influence or duress.
One party’s legal incapacity to enter a contract (e.g., a minor).
One or more terms that are unconscionable.
A breach of contract.

What are voidable contracts

The term ‘voidable’ signifies ‘capable of being voided’. A voidable contract is initially thought to be valid and enforceable, but it can be rejected by one party if faults are detected. The contract remains valid and enforceable if a party with the authority to reject it chooses not to reject it despite the flaw. Most of the time, committing to a voidable contract hurts only one of the parties because that party fails to identify the other party’s deception or fraud.

In the case of Bawlf Grain Co. vs. Ross (1917), an intoxicated wheat producer engaged into a contract but failed to fulfil his responsibilities as the price of wheat increased. It was a landmark decision that stated that any contract entered into while a party is intoxicated is voidable at the aggrieved party’s discretion.

In general, we have a voidable contract when one of the contracting parties would not have signed the contract if it was not for the other party’s (other party to the contract) activities or omissions, such as fraud or misrepresentation. The parties initially regard the contract as legitimate and enforceable. However, the aggrieved party discovers grounds to nullify the contract and considers themselves not to be bound by its provisions as a result of the discovery of facts or information. When we have grounds for a voidable contract, it is one of the contracting parties who have grounds to void the contract because of the other’s acts. Rarely may both parties to a contract have valid reasons to declare the contract void. When confronted with a voidable contract, at his or her option, the aggrieved party can either accept or reject the contract.

Accepting a voidable contract

Even if a contracting party discovers faults that provide him or her grounds to cancel the contract after signing it, he or she may choose to accept the contract’s terms anyhow. Consider the case where you get into a contract that you would not have signed otherwise due to a party’s deception. Despite the fact that you have discovered the depth of the other party’s misrepresentation, you opt to continue to be bound by the contract’s terms. In this situation, you become obligated to the contract by accepting it or continuing to comply with its terms. A voidable contract is ratified and legally enforceable at this point.

Repudiating a voidable contract

A party who signs a contract with voidable grounds has the right to repudiate it. In other words, if voidable reasons are noticed, the party might reject the contract and argue that it is not bound by the contract’s terms. If one party claims they are not obligated by the conditions mentioned in the contract and the other party claims otherwise, renouncing a contract may result in a contractual dispute between the contracting parties. If the parties are unable to agree to accept the contract, amend its conditions, or cancel it peacefully, they may find themselves in court. If a party believes the contract is voidable or that the other party has legal grounds to void the contract, the party might initiate a suit of breach of contract against the other. When this happens, it’s not a comfortable situation to be in. If it does, you should get legal advice or representation from an attorney.

Voidable contracts based on formation defects

A contract may be voidable if it does not follow the statutory standards for its creation. Essentially, for a contract to be legally binding you need:

Offer.
Acceptance.
Consideration.
Object.
Legal capacity.

The contract will be voidable if any of these formation features are defective. If you engage in a contract with someone who is mentally ill, for example, you will be violating the legal capability criterion. A contract entered into with someone who lacked legal ability will not be considered valid and legally binding. As a result, the contract is voidable due to flaws in its creation.

Voidable contracts based on vitiated consent

A contract can also be voidable if a contractual party’s permission has been revoked. Consent to be vitiated indicates that a contractual party induced a party to sign a contract despite the fact that that party would not have signed if complete and truthful information had been communicated prior to the completion of the transaction.

Let us consider a scenario where the property seller is aware that his house’s foundation is not up to the mark and is potentially dangerous, but he fails to reveal this information to a possible buyer. The buyer agrees to purchase the property for a reasonable price but is unaware of the serious foundational flaw. The buyer would not have purchased the home if he had known about the existing flaw. This is a case where the buyer’s consent was void due to the seller’s deception.

Voidable contracts under the Indian Contract Act, 1872

Section 2(i) of the Indian Contract Act, 1872 defines voidable agreements as those which are valid as long as one of the parties or both parties can decide to void their agreement. Most cases involving a voidable contract involve a circumstance in which one of the parties did not give their consent. As a result, if the party accepts the contract’s terms, it stays valid; if they don’t, the contract between them is nullified. Coercion, deception, undue influence, and other elements play a vital role in determining whether a contract is voidable at the decision of either party.

For example, A threatens B with a gun and demands that she must sell her house to him for a pittance, and B agrees, terrified for her life. B was pressured into agreeing by A in this case, hence her permission was not freely given. As a result, she has the option of terminating the contract on this ground.

Lack of free consent (Sections 19 and 19-A):

These provisions state that any contract in which a party’s consent is not freely given is voidable at that party’s discretion. Consent gained through coercion, deceit, or undue influence in such situations, is illegal under the law.

Prevention of performance by the other party (Section 53):

When one party prohibits the other from completing his or her responsibilities under a contract based on a reciprocal promise, the contract becomes voidable at the choice of the party who was prevented from performing on their promise.

Failure to perform in fixed time (Section 55):

There are some contracts in which time is the essence, and they must be completed within that time frame. When a contract is not completed on time, the aggrieved party has the option to invalidate the contract.

Consequences of rescission (Section 64):

When a person, at whose discretion the contract is voidable, rescinds it, the other party is relieved of all contractual obligations. At the same time, the individual who has cancelled the contract is responsible for any advantages obtained.

What makes a contract voidable at the option of the other party

In Mohd. Hussain vs. Fida Hussain And Anr (1951), the Punjab & Haryana High Court had observed that in plain English, Sections 19 and 19A of the Indian Contract Act, 1872 state that where a party’s consent is obtained through coercion, fraud, or undue influence, the agreement is voidable at the discretion of the party whose consent was obtained in such a manner. In other words, Sections 19 and 19A declare that a contract entered under duress, fraud, or undue influence is voidable at the aggrieved party’s discretion. A party to a contract whose consent was obtained through deception may, if he/she so desires, insist on the contract’s performance and that he/she be placed in the position he/she would have been in if the representation made had been accurate.

Coercion

Section 15 of the Indian Contract Act, 1872 states that “coercion is the committing, or threatening to commit, any fact forbidden by the Indian Penal Code, 1860 or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatsoever, with the intention of causing any person to enter into an agreement”. It is immaterial whether the Indian Penal Code, 1860, is or is not in force in the place where the coercion is employed.

Take, for instance, A, while onboard an English ship on the high seas, coerces B into signing a contract by criminal intimidation as defined by the Indian Penal Code, 1860. A then sues B in Calcutta for breach of contract. A used coercion, despite the fact that his act was not illegal under English law and that Section 506 of the Indian Penal Code, 1860 was not in effect at the time or location of the act. Therefore, in this case, the contract will be voidable at the option of B, and the presence or absence of the Indian Penal Code, 1860 will render no effect.

Undue influence

Undue influence under Section 16 of the Indian Contract Act, 1872 necessitates the following ingredients:

The parties’ relationships are such that one of them can exert control over the other’s will. Control can be exerted in the following two ways:

Where the party holds a real or apparent authority over the other.
Where one party is in a fiduciary relation to the other party. For example, solicitor and client, trustee and trust, spiritual adviser and devotee, medical attendant and patient.
Such a person takes advantage of his/her dominant position to get an unfair edge over others.

Under Section 19A of the Indian Contract Act, 1872, an agreement induced by undue influence is voidable at the option of that party whose consent was taken by influencing him/her. Performance of such agreements may be avoided absolutely or on prescribing certain terms and conditions.

Fraud

A false claim, active concealment, promise without the purpose to carry it out, any other deceptive act, or any act considered fraudulent are all included in Section 17 of the Indian Contract Act, 1872 as the list of activities that constitute fraud.

The Madras High Court while deciding on the case of Kopparthi Venkataratnam And Anr. vs. Palleti Sivaramudu And Anr (1939) has observed that when consent to an agreement is obtained through coercion, fraud, or misrepresentation, Section 19 states that the agreement is a voidable contract at the discretion of the person whose consent was obtained in such a manner. Even if such consent was obtained using fraudulent means, such as misrepresentation or silence, as defined under Section 17 of the Act of 1872, the contract is not voidable if the person whose consent was obtained had the ability to learn the facts with ordinary diligence.

Misrepresentation

Misrepresentation under Section 18 of the Indian Contract Act, 1872, occurs when one party (or their agent) provides misleading information to the other party before the contract is established in order to encourage the other party to enter into the contract. If a person enters into a contract based on deception and suffers a loss as a result, they have the option to annul the contract or sue for damages.

The Lordships of the Privy Council has observed in the case of Lewis Pugh vs. Ashutosh Sen (1929) that if “fraudulent within the meaning of Section 17” qualifies “misrepresentation,” due diligence would be required in cases where misrepresentation became fraudulent, but not in cases where misrepresentation fell within Section 18 and was just short of fraud because the exception would be limited to the former kind only. Therefore, the case helped in understanding the overlapping relationship between fraud and misrepresentation under the Indian Contract Act, 1872, both of which contribute to rendering a contract voidable at the option of one of the parties to the same.

The doctrine of mutuality

The term ‘mutuality of contract’ is described in the Concise Law Dictionary as “the doctrine of mutuality indicates that the contract must be jointly enforceable by each party against the other.” A voidable contract is an exemption to the mutuality requirement. A voidable contract is defined in Section 2(i) as an agreement that is enforceable by law at the discretion of one or more of the parties, but not at the option of the other or others. Contracts voidable at the outset under:

Sections 19 (voidability of agreements without free consent) and 19-A (power to set aside contract induced by undue influence),
Voidable by subsequent default of one party under Sections 39 (refusal of a party to perform promise wholly),
Section 53 (impossibility created by an act of the party), and
Section 55 (failure to perform at time fixed, time being of essence).

Types of voidable contracts

There are basically three types of voidable contracts:

Initially voidable.
Subsequently voidable.
Voidable by law (contracts become voidable due to other laws in subsisting in the country e.g. Section 8 of the Hindu Minority Act, 1956)

Initially voidable contracts

Section 19 of the Indian Contract Act, 1872 deals with agreements reached by pressure, fraud, or deceit. This provision specifically states that a contract entered into by the parties without the free permission/consent of any of the parties, and the assent obtained through coercion, fraud, or deception is voidable at the discretion of the party whose consent was obtained through these means. If the person whose permission was obtained through fraud or deception wants the contract to continue, they must be placed in the position they would have been in if the misrepresentation made to them had been accurate.

The aforementioned provision has two exceptions, namely:

The contract is not stated to be voidable if the party whose assent was produced by silence to a fact or by misrepresentation, which is claimed to be under the ambit of fraudulent as per Section 17 of the Indian Contract Act, 1872, and the party has proper methods of knowing the truth in the regular scheme of things.
If the consent supplied by the relevant party was not obtained through deception or fraud, the contract is not voidable. Coercion, fraud, and misrepresentation are the three elements mentioned under Section 19 that render a contract voidable, as have been discussed previously.

Unilateral promises

A unilateral promise is a commitment made solely by one party in order to compel the other party to take some action. As the party makes no guarantee, the promisee is not obligated to act. However, if the promisee fulfils the promisor’s desire to act, the former can keep the promisor’s promise. Whereas voidable contracts are those in which there is a lack of mutuality and duty due to a factor outside of the bargain’s content. In concept, these two types of scenarios appear to be completely distinct.

At first, we’re dealing with a completely one-sided situation.
In the second, we have all of the affirmative elements of a legal contract, but one of the parties’ obligations is harmed or removed due to the inclusion of defence or negative aspect that has no bearing on the other’s responsibility.

Unilateral commitments necessitate some form of mutuality or reciprocity of engagement as the foundation of a contract in which one of the parties makes no specific promises in return.

Subsequently voidable contracts

Subsequently, voidable contracts are those types of contracts that turn about to be voidable following certain events that have taken place. These contracts are known by such a name since they begin as valid but include the option for one of the parties to cancel it or continue with it at a later time. Sections 39, 53, and 55 of the Indian Contract Act, 1872 apply to these contracts.

Section 39 (Effect of refusal of a party to perform promise wholly): The effect of a party’s refusal to fully perform a commitment is dealt with in Section 39 of the Indian Contract Act, 1872. If a party to a contract refuses to perform or is unable to perform, their promise, the promisee may terminate the contract unless they have shown their assent in its continuation by words or conduct.
Section 53 (Liability of party preventing event on which the contract is to take effect): As per Section 53 of the Indian Contract Act, 1872, when one party to a contract prevents the other from performing their promise, the contract becomes voidable at the option of the party who was prevented, and the party who was prevented is entitled to compensation from the other party for any loss they may suffer as a result of the non-performance of the promise.

Let’s take for instance, A and B agree to pay a thousand rupees for B to complete a specific task for A. B is ready and willing to complete the task, but A is preventing him from doing so. The contract is voidable at B’s discretion and if he chooses to do so, he is entitled to reimbursement from A for any losses he has suffered as a result of its non-performance.

Section 55 (Effect of failure to perform at a fixed time, in a contract in which time is essential): If a party to a contract promises to do something at or before a certain time, or to do certain things at or before certain times, and fails to do any of those things at or before the specified time, the contract, or the portion of it that has not been performed, becomes voidable at the option of the promisee if the parties intended for time to be of the essence of the contract.

Effect of such failure when time is not essential: If the parties did not intend for time to be of the essence of the contract, the failure to do so at or before the stipulated period does not render the contract voidable. However, the promisee is entitled to recompense from the promisor for any loss caused by such failure.
Effect of acceptance of performance at a time other than that agreed upon: If the promisee accepts performance of the promise at any time other than that agreed, the promisee cannot claim compensation for any loss caused by the promisor’s failure to perform the promise at the time agreed, unless he/she gives notice to the promisor of his/her intention to do so at the time of such acceptance.

Contracts voidable by law

When a person whose option makes a contract voidable, rescinds it, the other party to the contract is relieved of any obligation to perform any promise contained therein to which the former is a promisor. If a party rescinds a voidable contract and receives any benefit from another party to the contract, he must return that benefit to the person from whom it was received to the maximum extent possible. A voidable contract’s rescission can be communicated or revoked in the same way, and under the same conditions as a proposal’s communication or revocation.

Can a voidable contract be legally binding

If the offended party does not reject or repudiate the contract within a reasonable time after learning of the voidability reasons, the contract can become legally enforceable. So, if you uncover facts and information after a contract’s execution that you believe justifies the contract’s unenforceability, you should bring it up as soon as feasible. The freed party can formally accept or ratify a voidable contract. It is possible that the acceptance is unspoken.
If the aggrieved party to a contract in spite of discovering the other’s actions of deception or fraudulent behaviour continues to follow the contract’s terms, the contract may become legally enforceable once a reasonable period of time has passed.
It all depends on the facts and circumstances of each case, but you should be aware that a voidable contract can become legally binding. A void contract, on the other hand, can never become legally binding.

Void vis à vis voidable contracts

A void contract is one that cannot be enforced in a court of law. The contract is valid at the time of creation since it meets all of the necessary conditions for a valid contract, such as free consent, capacity, consideration, a lawful object, and so on. However, the contract cannot be completed due to a subsequent change in any law or the impossibility of an act that is beyond the imagination and control of the contracting parties and so it becomes void. Furthermore, neither party has the right to sue the other for breach of contract. Section 2(g) of the Indian Contract Act, 1872 defines void contracts.

A voidable contract is one that can only be enforced at the request of one of the two contracting parties. One party is legally permitted to decide whether or not to perform their part in this type of contract. The offended party has complete control over the course of action. Coercion, undue influence, fraud or misrepresentation and other factors may impact the consent of the concerned party, giving birth to the right.

The provisions under the Indian Contract Act, 1872, that deal with void and voidable contracts are not only straightforward but also quite clear. The fact that this law is still in effect today, with no need for modifications, is a testament to its importance. Furthermore, it takes a protective approach to the contract law in that it protects persons from agreeing to absurd, illegal, or immoral duties that may result in severe financial loss. It is very easy for some people to influence others who may be at a disadvantage in their bargaining position and thus be exploited. These kinds of clauses make it impossible for such agreements to have any legal or official authority.

To summarise, the laws on contracts concerning void and voidable contracts can render an agreement unenforceable by law, thereby declaring it to be invalid. When an agreement cannot be enforced by either party because it fails to meet the standards of a legitimate contract, it may be declared void. Voidable contracts, on the other hand, are lawful contracts that can be cancelled at the request of the suffering party. The provisions that concern these contracts outline the conditions that can lead to the dissolution of an agreement between two individuals. As a result, these rules are instrumental to contract law around the world.

Similarities between void and voidable contracts

The similarities between void and voidable contracts have been listed hereunder:

Both clauses of the Indian Contract Act, 1872, deal with the non-performance of a contract between parties who may or may not want it.
If a party to a voidable contract decides to repudiate it, it has the same impact as a void agreement, in which the agreement is deemed to have never occurred.
Both provisions are concerned with the establishment of a contract using unethical and illegal means that are contrary to public policy.
The major goal of including these restrictions was to ensure that people were not exploited as a result of a hastily constructed agreement.

Dissimilarities between void and voidable contracts

The differences between void and voidable contracts are provided hereunder:

A void contract becomes void the minute the parties agree to it, whereas a voidable contract remains enforceable until one of the parties decides to invalidate it.
An agreement that is voidable can be invalidated at the discretion of any party, but an agreement that already gives neither party a choice about the agreement’s enforceability is void.
Any of the parties are not bound by a void contract. A voidable contract, on the other hand, binds at least one of the parties.

Other laws, such as the Sales of Goods Act of 1930 or any other statute dealing with transactions between parties, are supplemented by the provisions on void and voidable contracts. They are a crucial component of comprehending how a contract is formed, as well as emphasising the dos and don’ts of the process. Finally, the law governing void and voidable contracts achieves a balance between flexibility and rigidity in its application allowing it to adjust to the realities of the case while retaining the contract’s terms and conditions.

Key takeaways about voidable contracts

A voidable contract is one that is initially valid but becomes voidable due to the discovery of grounds for voidability.
A contract can be void from the beginning or voidable after it has been signed.
A void contract is one that breaks the law and was never intended to be enforced in the first place.
A voidable contract is one that was initially deemed lawful by the parties but is later deemed unenforceable against one of the parties due to valid legal grounds.
A contract can be voided in the following circumstances:

Coercion,
Undue influence,
Misrepresentation, and
Lack of legal capacity.

A key feature of a voidable contract is that the party who believes it is not obligated by the contract, the unbound party, has the option to reject or accept it.
If the contract is accepted by the freed party, the contract becomes legally binding on both parties.
If the contract is rejected by the unbound party, the person will claim that the contract is unenforceable against him or her.
This frequently results in a lawsuit or legal conflict.
Finally, a court of law will have to decide whether or not the contract was voidable.
Consult a litigation lawyer if you signed a contract but do not believe it was legally constituted or should legally bind you.

Conclusion

As we come to the end of this article, it is evident to state that the concept of a voidable contract respects the freedom of the parties to the contract by means of giving significance to the willingness of the parties to the contract. Interestingly, Section 75 of the Indian Contract Act, 1872 upholds this belief as it talks about the parties who are rightfully rescinding a contract, are entitled to compensation for the loss suffered due to non-fulfilment of the contract. This underlying principle of voidable contract also throws light on the importance of ‘free consent’ in contract law jurisprudence. Thus, it will be appropriate to state that the concept of a voidable contract is one of the pillars of contract law.

References

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Enforceability of contractual restrictions on IPR patents

By

Sneha Mahawar

-

May 6, 2022

0

This article is written by Poonam Gulati pursuing LLM in Corporate laws and Diploma in Intellectual Property, Media and Entertainment laws course at Lawsikho.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Speculations regarding the enforceability of contractual limitations on challenging the validity of patents have been put to rest by the U.S. Court of Appeals for Federal Circuit in the case of, Nippon Shinyaku Co., Ltd. v. Sarepta Therapeutics, Inc., No. 2021-2369 (Fed. Cir. 2022), vide order dated February 8, 2022. This order declares that any restriction on the ability to challenge the validity of a patent shall be enforceable, thus making it clear that the parties may agree not to litigate and rightfully preclude from filing potential IPR patent challenges suits before the U.S. Patent and Trademark Office and add mutually acceptable covenants regarding contractual restrictions. Therefore, parties to the contract may sign specific covenants not to sue for and post the covenant period or to limit jurisdiction for future litigation to a particular forum by choice and expressly exclude other forums.

Inter Partes Review (IPR)

An IPR is a trial that determines the validity of a U.S. patent exclusively subject to the prior art of a patent or a publication. Any other consideration except the ‘prior act’ is not considered in an IPR petition and one must challenge that in a federal district court trial. An IPR may be challenged by any person or company and the patent owner has an opportunity to defend the patent rights and, with leave of the court, may choose to file a motion to amend claims without asserting prior art. The important takeaway here is that a competitor need not file a patent infringement lawsuit and may only challenge the validity of the patent or a publication via an IPR. IPR is an administrative trial process and usually concludes in a year and its filing does not pre-requisite the filing of a patent infringement lawsuit. IPRs are challenged before the U.S. Patent and Trademark Office (USPTO) and the administrative trail (IPR) is taken care of by the Patent Trial and Appeal Board (PTAB), a Section of the USPTO. The decision given by the PTAB may be appealed to the United States Court of Appeals for the Federal Circuit, and to the U.S. Supreme Court, thereafter.

IPR, PGR, and CBM are similar proceedings. A Post Grant Review (PGR) petition may be filed after 9 months of a U.S. patent being issued, challenging the validity of a patent only on any statutory grounds available for the same. A Covered Business Method (CBM) review may be filed in the case of patents involving financial transactions, this is a specialized proceeding for challenging the validity of U.S. patents.

Declaratory Judgment Action

“Neither party is seeking a judgment for money damages in a declaratory judgment action. Instead, the purpose of a declaratory judgment action is to determine the parties’ responsibilities in relation to a particular dispute.” Further, under Article III of the U.S. Constitution, “a federal court may only issue a declaratory judgment when there is an actual controversy.” Rule 57 of the Federal Rules of Civil Procedure and Title 28, Section 2201 of the U.S. Code govern declaratory judgments in federal court.

Forum non-conveniens

“A discretionary power that allows courts to dismiss a case where another court, or forum, is much better suited to hear the case. This dismissal does not prevent a plaintiff from re-filing his or her case in a more appropriate forum. See Res Judicata. This doctrine may be invoked by either the defendant or the court. See sua sponte.”

Discussion of facts, pleadings, and decisions

U.S. Court of Appeals for Federal Circuit in the case of, Nippon Shinyaku Co., Ltd. v. Sarepta Therapeutics, Inc., No. 2021-2369 (Fed. Cir. 2022), vide order dated February 8, 2022.

Parties entered into contact and executed a mutual confidentiality agreement (MCA) for the purpose of a potential business relationship concerning Intellectual Property in the field of Duchenne Muscular Dystrophy.

The relevant sections of the MCA are summarized as follows-

Section 6 of MCA establishes-

The covenant term shall be commencing on the effective date and concluding 20 days post:

either expiration of the term;
or the effective date of termination
The covenant not to sue in the U.S. Patent and Trademark Office (USPTO) or Japan Patent Office any of the following:

Patent validity challenges
Patent infringement litigation
Declaratory judgment actions
Or Re-examination proceedings before USPTO

Section 10 of MCA included-

Forum Selection Clause mentioned that any dispute arising regarding patents and other Intellectual Property disputes between the consenting parties post covenant term shall be filed within 2 years of the end of covenant term, only at the United States District Court for the District of Delaware
Post any filing at Delaware none of the parties can either seek transfer on the ground of ‘forum non-conveniens’ or contest personal jurisdiction.

The defendant filed 7 petitions for ‘inter partes review’ at the Patent Trial and Appeal Board (PTAB) in violation of the forum selection clause, on the day the covenant term clause ended and the forum selection clause took effect.
Consequently, the plaintiff filed a complaint at the United States District Court for the District of Delaware asserting claims for breach of contract and seeking declaratory orders for non-infringement and invalidity of the defendant’s patents and infringement of patent holder rights. He further filed for a permanent injunction and issuance directions to withdraw all 7 IPR petitions filed at the PTAB.

The District Court denied a preliminary injunction and decided the matter against the plaintiff and an appeal of the same was preferred by the plaintiff before the U.S. Court of Appeals for the Federal Circuit against the impugned order. The U.S. Court of Appeals for the Federal Circuit reversed the decision of the district court and remanded for entry of a preliminary injunction.

Both the courts tested for the four well-established preliminary injunction factors mentioned herein-

Likeliness to succeed on merits
To suffer irreparable loss as a direct consequence of the absence of the extraordinary relief
The tilt of balance of hardship in the favor of the plaintiff
Relief must be warranted in the public interest.

The District Court, after analysing the above-mentioned factors concluded that the first factor was most important and was not met with as the probability of success on merit was found absent and the remaining three factors were also not logically fulfilled in their opinion. The court did not agree with the literal meaning and implication of the relevant sections and said that “Section 6 expressly deferred the filing of IPR petitions for one year and twenty days only for them to be impliedly delayed for two additional years, likely making them time-barred and never available.” The effect of this covenant was that the IPRs were allowed to proceed after the covenant term had expired, this was not appreciated by the district court as it would have the effect of waiving the rights to file IPR petitions under 35 U.S.C. § 315(b)^. Thus, no relief was granted to the complainant.

The Appellate Court in the instant appeal discussed that the denial of a preliminary injunction will be reviewed by the Federal Circuit and the Third Circuit for abuse of discretion [Adams v. Freedom Forge Corp., 204 F.3d 475, 484 (3d Cir. 2000)] The interpretation of private contracts is ordinarily a question of state law… ” [Howmedica Osteonics Corp. v. Wright Med. Tech., Inc., 540 F.3d 1337, 1347 (Fed. Cir. 2008) ] Following the said standard, the underlying questions of law shall be reviewed ‘De Novo’ [Antares Pharma, Inc. v. Medac Pharma Inc., 771 F.3d 1354, 1357 (Fed. Cir. 2014)]

The Appellate Court opinions that the parties are obliged to follow the laws of the State of Delaware as per their contractual obligation and the contract must be interpreted in consonance with the same. The precedents quoted that-

“Delaware adheres to the ‘objective’ theory of contracts, i.e. a contract’s construction should be that which would be understood by an objective, reasonable third party.” [Estate of Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010)] Further, “Under Delaware law, we must “read a contract as a whole” and “give each provision and term effect, so as not to render any part of the contract mere surplusage.”[Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396–97 (Del. 2010)]. Importantly, “when the contract is clear and unambiguous, we will give effect to the plain meaning of the contract’s terms and provisions.”[Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del. 1992)]. “that “There is no public interest served by excusing a party’s violation of its previously negotiated contractual undertaking to litigate in a particular forum.” [Gen. Protect, 651 F.3d at 1366]

In simple words, observing the objective theory of the contract laws of Delaware and the intent of the contracting parties, the Appellant Court identified that:

Both parties were committed to the forum selection clause, thus the defendant was in breach of contractual obligation, therefore all actions including IPR petitions should have been filed according to the forum Clause.
They rejected the vaguely interpreted definition of ‘potential actions’ that made the reasonable reading of the contract nonsensical
The court in Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396–97 (Del. 2010) referred as the Kannuu Case precedent observed that usually, the forum clause is not worded in a manner that it may extend to IPRs, however in the instant case the language of Section 10 as the district court acknowledged that the clause “literally encompasses IPRs.” [Decision, 2021 WL 4989489]
The provisions of Section 6 and10 were found in harmony with each other because Section 6 simply prohibited the parties from litigating, directly or indirectly, during the covenant term and Section 10 indicated that once the covenant term as mentioned in Section 6 elapsed, the claims shall be raised only in United States District Court for the District of Delaware. This violation of the forum clause was made by the defendant and thus the plaintiff was likely to succeed on the merits of his claim for the breach of contract.
Irreparable harm was caused by denial of a preliminary injunction as such denial would result in a multiplicity of litigation in several jurisdictions and the idea behind the bargain-for-choice of the forum would be lost, as compelled by binding precedent.
Balance of hardship was found tilting towards the plaintiff as having contracted for freely for the selected forum should be adhered to, else would cause hardship [General Protecht 651 F.3d at 1365].
The intent of the legislation regarding the IPR patent challenge procedure allows parties to resolve the matter with efficacy, public interest thus lies with speedy resolutions and such opportunity must be so availed. It is thus established that forum selection clauses “are prima facie valid and should be enforced” [M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972)]

Conclusion

The decision of the court in the case discussed in this article concludes that the speculation regarding the enforceability of contractual restrictions wherein patent validity challenges may, by mutual consent, absolutely be barred from a challenge or be limited to challenge only in specified forums and expressly exclude other forums. They may even choose to apply the covenants of the agreement beyond its term to immunize post-term validity challenges with the USPTO. All such contractual restrictions regarding inter partes review (“IPR”) are enforceable in contractual relationships.

References

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25th Amendment of the Indian Constitution

By

Rachit Garg

-

May 5, 2022

0

This article is written by Abanti Bose, studying at Amity University Kolkata, India. This article provides a detailed understanding of the 25th Amendment of Indian Constitution including the causes, effects and constitutionality of this amendment.

It has been published by Rachit Garg.

Table of Contents

Introduction

The Constitution of India is the most extensive Constitution in the whole world. The makers of the Indian Constitution made it as adaptable as possible so that it could be amended when the necessity arose. Under Article 368, the Parliament has the power to amend or repeal certain provisions of the Constitution.

The 25th Constitutional Amendment which is known as the Constitution (Twenty-Fifth Amendment) Act, 1971 was passed to overturn the judgement of the Supreme Court in R.C. Cooper v. Union of India, (1970).

Earlier, Article 31 of the Constitution provided the fundamental right to property and expressed that any person whose property was acquired by the Government was entitled to adequate compensation. However, with this amendment, it substituted the word “compensation” in the Article with “amount” which meant that the government will only be liable to pay a nominal amount in the cases of acquisition or requisition of property of landowners for public purposes. The amendment also inserted Article 31C mentioning any law passed to implement the objectives under Article 39 (a) and (b) could not be questioned, challenged or reviewed before the court of law for violating fundamental rights under Articles 14, 19 and 31. Thus, changing the relationship between Fundamental Rights and Directive Principles of State Policy and creating a tussle between the Judiciary and the Parliament.

Eventually, the 44th Amendment changed the right to property as a constitutional right under Article 300A from a Fundamental Right.

Procedure to amend constitutional provisions

Article 368 states the procedure for amending the constitution of India. The steps to amend constitutional provisions are mentioned below:

A bill to amend a constitutional provision is introduced in either house of the Parliament.
The Bill must be passed by both absolute and special majority i.e., a total majority (irrespective of vacancies or absentees) and by a 2/3rd majority of people present and voting in both the houses.
Now, if the Parliament wants to amend;
- Article 54, Article 55, Article 73, Article 368, Article 241, or Article 162.
- Chapter IV of Part V, Chapter V of Part VI, or Chapter I of Part XI.
- Any of the Lists in the Seventh Schedule.
- The representation of the States in the Parliament.

Then such amendments ought to be ratified by not less than one-half of the State Legislatures.

Finally, the bill is presented to the President of India who shall give his assent and the Constitutional provision is amended in conformity with the terms stated in the bill.

Brief about R.C. Cooper v. Union of India, (1970)

In 1955, the Imperial Bank of India was nationalised under the State Bank of India Act, 1955 and seven of its subsidiaries were also taken over by the Government. The RBI also took prominent steps to reduce the number of commercial banking organisations in India from 566 in 1951, to just 89 by the end of the year 1969.

The then acting President of India, Justice M. Hidyatullah, issued the Banking Companies (Acquisition and Transfer of Property) Ordinance, 1969. The features of the ordinance are listed below:

Fourteen banks were listed in the Ordinance which was going to be nationalised. These banks were short-listed on the basis of deposits that they held. The minimum criteria of the deposits were held to be Rs. 50 crore.
All the directors of these banks were asked to vacate their offices. But the other employees continued working under the Indian Government.
The Second Schedule of the Ordinance mentioned the compensation which was considered to be paid to the banks that were nationalised. The Ordinance mentioned two prominent ways of providing compensation to the aggrieved banks, such as;
1. Where an amount of compensation could be fixed by an agreement; then the compensation would be determined by such agreement.
2. If no agreement could be reached in the specified period then the matter would be referred to a tribunal. The compensation fixed by the tribunal will be awarded after 10 years from the date when the agreement failed.

After this when the Parliament came into session the Indira Gandhi Government framed the ‘Banking Companies (Acquisition and Transfer of Property) Act, 1969 with all the similar provisions as were stated in the Ordinance.

Mr. Cooper who was the director of the Central Bank of India Ltd., and he also held shares in numerous banks such as the Central Bank of India, Bank of Baroda Ltd. and Bank of India Ltd., filed a writ petition before the apex court under Article 32 of the Constitution claiming that his Fundamental Rights have been violated under Articles 14, 19(1)(f) and 31(2) of the Constitution. The petitioner further questioned whether the Ordinance was promulgated properly and whether the procedure of ascertaining compensation was valid.

The Supreme Court held that a shareholder was not authorised to move to the Supreme Court for administering the Fundamental Rights in the name of his company, until and unless the action that was being complained of, directly or indirectly also violated the petitioner’s Fundamental Rights. The Court further held that the Act is violative of Article 31 as it talks about compensation of acquired property of the property owner. Therefore, the court struck down the said Act as there was a clear violation of the said provision. However, the Court stated that the Act is not violative of Article 19(1)(g) as the state has the right to completely or partially monopolise any business.

What was the cause of the 25th Amendment of Indian Constitution

The Constitution (Twenty-Fifth Amendment) Act, 1971 was passed by Parliament on 20 April, 1972. It sought to reverse the Supreme Court’s ruling in the case, R.C. Cooper v. Union of India (1970), where the Apex Court struck down the legislation i.e., Banking Companies (Acquisition and Transfer of Property) Act, 1969 because it violated the Indian Constitution. Thus, it triggered Parliament to pass the 25th Constitutional Amendment to overturn the Supreme Court’s decision.

The purpose of the 25th Constitutional Amendment was to strip the Supreme Court of the power to determine the quantum of compensation for the takeover of property for public use. It amended the word ‘compensation’ to the word ‘amount’ for property acquired or requisitioned for public purposes by the Government of India.

The Act also amended Article 31 of the Constitution and introduced Article 31C, effectively deterring citizens from challenging laws relating to the acquisition of property under Article 14, Article 19 or Article 31.

Understanding 25th Amendment of Indian Constitution

Article 31

Article 31 prior to the Amendment guaranteed not only the right of private ownership but also the right to enjoy and dispose of property without any restrictions other than reasonable restrictions. It expressed that no individual shall be deprived of their property except by the authority of law and if any person was deprived of their property then they are liable to adequate compensation.

Amendments brought forth in the Constitution (Twenty-fifth Amendment) Act, 1971

The 25th Constitutional Amendment sought to overcome the complications placed in the way of providing effect to the Directive Principles of State Policy. In clause (2) of Article 31, the word “compensation” for acquisition or requisitioning of the property was replaced with the word “amount”. It further stated that the said amount could be paid otherwise than cash. It read as;

“(2) No property shall be compulsorily acquired or requisitioned save for a public purpose and save by authority of a law which provides for acquisition or requisitioning of the property for an amount which may be fixed by such law or which may be determined in accordance with such principles and given in such manner as may be specified in such law; and no such law shall be called in question in any court on the ground that the amount so fixed or determined is not adequate or that the whole or any part of such amount is to be given otherwise than in cash:

Provided that in making any law providing for the compulsory acquisition of any property of an educational institution established and administered by a minority, referred to in clause (1) of Article 30, the State shall ensure that the amount fixed by or determined under such law for the acquisition of such property is such as would not restrict or abrogate the right guaranteed under that clause.”

Clause (2B) was inserted after clause (2A) which stated that Article 19(1)(f) shall not apply to any law relating to the acquisition or requisitioning of property for a public purpose.
The Bill also introduced a new Article that is Article 31C, mentioning any law passed to give effect to the Directive Principles contained in clauses (b) and (c) of Article 39 and contains a declaration to that effect, such law could not be challenged or reviewed by the Court for violating fundamental rights contained in Article 14, 19 or 31.

Analysis

The effect of such amendment by the legislature is to prioritise the Directive Principles of State Policy over Fundamental Rights. Before the amendment, Fundamental Rights prevailed over Directive Principles of State Policy, and if any law conflicted or violated any provisions of Fundamental Rights it would be struck down. But the 25th Constitutional Amendment challenged this dynamic as Article 31C gave precedence to clauses (a) and (b) of Article 39 over Articles 14, 19, and 31.

Article 31C also mentioned that any law made to give effect to the policy under Article 39(b) and (c), would not be open to judicial review.

Constitutionality of Article 31C

Kesavananda Bharati v. State of Kerala, (1973)

In this case, Keshvananda Bharati was the chief of Edneer Mutt, a religious sect in Kerala. In 1969, the Kerala State Government introduced the Land Reforms Amendment Act, 1969 enabling the government to acquire some of the sect’s land of which Kesavananda Bharati was the chief.

Subsequently, Kesavananda Bharati moved to the Supreme Court under Article 32 of the Indian Constitution for enforcing his rights which were guaranteed under Articles 25, 26, 14, 19 and 31. And thereby during this case, the constitutional validity of the 25th Constitutional Amendment was challenged.

It was held by the Supreme Court that Parliament cannot amend the basic structure of the Constitution which would make it lose its essence. Thus, the Parliament can amend Fundamental Rights as long as it does not alter the basic structure of the Constitution. The 25th Constitutional Amendment changed the dynamic between Fundamental Rights and Directive Principles of State Policy, giving the latter precedence over the former. Thereafter, the Court struck down the second part of the 25th Constitutional Amendment, and upheld the first part subject to two conditions; firstly, the “amount” given to the landowners after the acquisition of property for public purposes shouldn’t be unreasonable and second, the provisions are not barred from judicial review.

Conclusion

The makers of our Constitution gave enough power to the Parliament so that they could amend it to keep up with changing times. However, having unrestricted power could also lead to the totalitarian rule of the leading party, preventing the citizens from questioning such laws. The 25th Constitutional Amendment is an example of such a rule, which barred the citizens from questioning any laws relating to the acquisition of property by the Government of India. The 25th Constitutional Amendment not only altered the basic structure of the Constitution but also established the supremacy of the Legislature over the Judiciary. However, the judiciary took the necessary steps with landmark judgments to restore the basic structure of the Constitution of India.

References

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Forward Contract : what you need to know

By

Rachit Garg

-

May 5, 2022

0

This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article provides a detailed analysis of a forward contract which is a tailored agreement between two parties to acquire or sell an item at a predetermined price at a later period.

It has been published by Rachit Garg.

Table of Contents

Introduction

A forward contract is a contract between two parties to acquire or sell an item at a certain price at a future date. This is a more complicated investing technique that may not be suitable for the average investor. Put in another way, a forward contract is an agreement between the buyer and seller to buy or sell an underlying asset at a price they both agree on at a future date. The forward price is the name given to this pricing. The risk-free rate and the spot price are used to compute this pricing. The former refers to the current market value of an asset. The risk-free rate is the rate of return on an investment that assumes there is no risk. The buyer takes a long position in a forward contract, while the seller has a short one. Forward contracts are designed so that the parties involved can manage volatility by locking in pricing for the underlying assets. In that sense, a forward contract is a form of risk management.

What is a forward contract

A forward contract is a tailored agreement between two parties to acquire or sell an item at a predetermined price at a later period. A forward contract can be used for hedging or speculation, but because of its non-standardised character, it’s best for hedging. Forward contracts can be customised to a particular product, quantity, and delivery date. Forward contracts are considered over-the-counter (OTC) instruments because they are not traded on a centralised exchange. Forward contracts, for example, can enable agricultural producers and users to hedge against price changes in the underlying asset or commodity. When opposed to contracts that are marked to market on a regular basis, financial institutions that begin forward contracts have a higher level of settlement and default risk.

A forward contract, unlike a typical futures contract, can be tailored to a specific commodity, quantity, and delivery date. Grain, precious metals, natural gas, oil, and even poultry are all examples of commodities that can be exchanged. Settlement of a forward contract might be made in cash or by delivery. While the lack of a centralised clearing house makes it easier to personalise terms, it also raises the danger of default.

A forward contract is a sort of derivative. A derivative is a financial contract between two or more parties in which the value of the contract is linked to the value of an underlying asset or collection of assets. For example, commodities, foreign currencies, market indexes, and individual stocks, can all be used as underlying assets for derivatives.

Basic terms used in forward contracts

Here are a few terms, that a trader should be knowing before trading in forwards:

Underlying asset: The underlying asset refers to the one indicated in the contract. This underlying asset could be a commodity, a currency, a stock, or something else entirely.
Quantity: This mostly refers to the contract’s size, expressed in units of the asset being purchased and sold.
Price: It is also necessary to provide the price that will be paid on the expiration date.
Expiration date: This is the date on which the contract is finalised and the asset is delivered and paid for.

Types of forward contracts

Forward contracts are generally used by traders to protect themselves from currency and commodity market volatility. Forward contracts might incorporate a variety of assets, including equities, treasury, real estate, etc. Forward contracts can be used as a hedging tool. Investors, on the other hand, use it for speculation in order to profit from the movement of security prices. Because currencies make up the majority of forward contracts, the majority of forward contracts are currency-specific. Following are the types of forward contracts:

Window Forwards

Investors can acquire currencies using forward contracts with a variety of settlement dates. Essentially, such contracts allow investors to obtain a more favourable and convenient exchange rate than they would receive through a traditional forward contract.

Mr. X, for example, has three months to reach an agreement with his US-based supplier. The date, on the other hand, is not fixed. As a result, Mr. X chooses a window forward contract, which allows him to trade on any day between the 1st and the 30th of the next 4th month, but not later than the 30th.

Long-Dated Forwards

As the name implies, these contracts have a substantially longer settlement time than standard forward contracts. A normal forward contract usually has a 12-month expiration period. Long-dated forwards, on the other hand, can have a maturity date of up to ten years. Except for a later settlement date, long-dated futures have the same characteristics as normal forward contracts.

Non-Deliverable Forwards (NDFs)

Non-deliverable forwards are a distinct sort of forward contract from ordinary forward contracts. Physical delivery of the security/asset of monies is not required in such transactions. Rather, the parties simply trade the differential amount at the moment of settlement. The difference between the contract rate and the market rate at the time of settlement is calculated. These sorts of forward contracts are typically used by investors who do not have enough funds, do not want to commit funds, or do not want to block large amounts of money.

Assume that XYZ Inc. will receive 1 million BRL for a sale made this month (April) after three months. It goes to a Brazilian bank in order to enter into a forward contract of selling 1 million BRL after 3 months at a rate of 4 BRL for $1.

Now, there are 2 possibilities:

Case 1: After 3 months, $1 = 3.7 BRL, or
Case 2: After 3 months, $1 = 4.25 BRL.

XYZ Inc. would receive $250,000 for sure because of entering into an NDF contract.

In case 1, amount to be received by XYZ Inc. = $270,270 (1 million BRL / 3.7). Here, the spot price turns favourable for XYZ Inc. Now the Brazilian bank will pay the difference of spot rate and forward rate to XYZ Inc. which is $20,270 (i.e., 270,270 – 250,000).

In case 2, amount to be received = $235,294 (1 million BRL / 4.25) which is less than $250,000. Here, spot price is unfavourable for XYZ Inc. Now the difference paid by the bank is $14,706 (i.e., 250,000 – 235,294).

Flexible Forward

Investors can exchange funds more easily using this sort of forward contract. Alternatively, investors who use such a contract have the option to exchange funds before the settlement date. Parties can use this contract to either exchange funds immediately or make many payments prior to the settlement date.

Assume Mr. X imports $500,000 worth of goods from a US-based exporter to India. He gets into a flexible forward contract since he is aware of exchange rate fluctuations. This will allow him to make payments at different times over the contract’s duration, depending on when the exchange rates are favourable to him.

Closed Outright Forward

This is the most straightforward sort of forward contract. These forward contracts are also known as European contracts or Standard Forward Contracts. Investors can use these contracts to trade the underlying asset at a certain future date.

Assume you have established a business relationship with a foreign exporter. The payment deadline is the 24th of the following month. By entering into a closed outright forward contract for the 24th of the next month, you can lock in the exchange rate.

Fixed Date Forward Contracts

The underlying asset is only exchanged at a predetermined maturity date in this sort of forward contract. Alternatively, we may state that such contracts have a set maturity date. The majority of forward contracts are exclusively for defined dates.

Option Forward Contract

Flexible forward contracts are similar to these forms of forward contracts. A forward option contract allows participants to trade the underlying security at any time during a specified period.

Important clauses of a forward contract

Forward contracts are agreements in which the buyer or seller agrees to buy or sell a certain instrument or entitlement at a specific price at a future date. A company may employ forward contracts for hedging purposes, such as to safeguard against future foreign currency exchange rate uncertainties. Forward contracts can also be used to try to protect the value of the company’s current securities holdings in currencies other than the portfolio’s base currency.

General clauses

The general clauses that a forward contract has are discussed hereunder.

Title of agreement

The nature of the contract is reflected in the agreement’s title. There are no legal requirements as to how the agreement’s title should be written. However, once we read a title, we should be able to comprehend what the agreement is about rather quickly. The title is usually written in capital characters, in the middle, and underlined.

Date of execution and effective date

An agreement has an execution date that is the date on which the terms and conditions were agreed upon and signed, and an effective date that is the date on which the contract begins and the terms and conditions become legally binding.

Name of the parties

All contracting parties’ names and addresses should be clearly stated, with no spelling errors. This section or clause should include contact information such as the person’s or company’s name, address, fax number, phone number, and email address, as well as the company’s identification number and registered office, if applicable.

Recitals

Recital clauses provide background information on the party. This clause usually contains information about the parties’ occupations, businesses, brokers, exchange registration, broker registration number, and so on. Recitals may also contain information about the parties’ motivations for entering this contract. The term “WHEREAS” (which means “considering that” or “that being the case”) is usually used to start a recital clause. Recitals in a contract play an important function since they describe the nature of the parties’ contractual relationships as well as the contribution made by each party.

Definitions

Every agreement has its own set of words that have a distinct meaning associated with it. To distinguish it from other words, the initial letter of the word specified in the defining clause should be capitalised. Such words can be given either separately in defining clauses, as in the example above, or in double inverted commas and brackets.

Obligation

A forward contract is a customised derivative contract that binds counterparties to buy (receive) or sell (deliver) an asset at a predetermined price at a specified date in the future. A forward contract can be used for hedging or speculation, but because of its non-standardized character, it’s best for hedging. Every obligation must be specified clearly by both parties.

Confidentiality

All exchange of information between the parties to the agreement must be deemed to be confidential.

Term of contract

The term represents the duration of the contract period.

Termination

Even if the contract’s duration or term is set in stone, the contract can be terminated early by mutual permission of the parties or by the occurrence of a specific event, such as a change of ownership, death, disability, or insolvency of either party, or due to force majeure. Prior to termination, however, adequate written notice should be given.

Terms of settlement

The end of the contract is the settlement date for forwards. Many hedgers utilise forward contracts to reduce an asset’s price volatility. A forward contract is not vulnerable to price fluctuations because the terms are set when it is executed. In a forward contract, there are two options for settlement, namely, delivery or cash basis. If the contract calls for the seller to deliver the underlying item or assets to the buyer, the seller must do so. The buyer then pays the agreed-upon payment in cash to the vendor.

Representations and warranties

A representation is a statement that the facts stated in this contract are accurate, used to persuade another party to enter into a contract or take some other action. The term “representation” can refer to either a person or a company. Warranties, on the other hand, offer not only to provide assurance regarding the party/company or product, but also to indemnify in the event that the warranties provided fail to satisfy the criteria.

Consideration

Consideration means something in return. No contract is valid without consideration. Forward contracts can be tailored to a specific commodity, amount, and delivery date.

Indemnification

To indemnify means to compensate for a loss. Indemnity is a promise made by one party to another that the other party will be held harmless as a result of another party’s actions.

Force majeure

As we all know, some natural events are beyond our control. Floods, earthquakes, pandemics and other uncontrollable events are examples of uncontrollable events. Including a language like this in a contract allows the parties to operate without any ambiguity or confusion.

Governing laws

Governing laws are important in all types of contracts, but they are especially important in international contracts. Multiple sets of laws will apply if controlling laws are not adequately established, causing confusion and laying the groundwork for future disputes.

Jurisdiction

The term “jurisdiction” refers to the legal authority over a specific geographical area. The contracting parties may not live in the same city or country. As a result, it is critical to include this clause in the contract to determine where any litigation should be brought in the event of a dispute. It is preferable to employ exclusive jurisdiction to avoid difficulties. If the contract does not specify jurisdiction, the standards of jurisdiction set down in the Civil Procedure Code of 1908 will apply.

Signature

The contract must be signed by both parties in order for it to be legally binding. It might be either an electronic or a manual signature.

Parent clauses

The parent clauses of a forward contract are provided hereunder:

Miscellaneous

The company and the trustee both agree that when money is transferred from the trust account, the trustee will adhere to the security standards as provided in the agreement. The company and the trustee will only give authorised people access to confidential information about security processes. If any party has cause to believe that unauthorised persons have gained access to such secret information, or if its authorised personnel have changed, the other party must inform remaining parties immediately.

Purchase and sale terms and procedures

If any suit, action, procedure (including any governmental or regulatory investigation), claim, or demand is launched or claimed against any person in connection with which indemnity may be sought, such person (the “Indemnified Person”) must promptly notify the person against whom indemnification may be sought (the “Indemnifying Person”) in writing. Provided, however, that failure to notify the Indemnifying Person does not relieve it of liability to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defences) as a result of such failure. If any such proceeding is brought or asserted against an Indemnified Person, the Indemnifying Person shall retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person in such proceeding (who shall not, without the Indemnified Person’s consent, be counsel to the Indemnifying Person) and shall pay the fees and expenses of such counsel related to such proceeding, as incurred.

Parties

The underwriters and the company, as well as their respective successors, will benefit from and be bound by this agreement. Nothing in this agreement is intended or shall be construed to give any person, firm, or corporation any legal or equitable right, remedy, or claim under or in respect of this Agreement or any provision herein contained, other than the Underwriters and the Company and their respective successors, and the controlling persons and officers and directors and their heirs and legal representatives.

Services provided

The service that the seller wants to provide to the buyer is clearly aid down under this head.

Criteria for acceptability

The seller shall sell and deliver product to the buyer that fully conforms to the buyer’s quality specifications as will be provided in the appendix of the agreement entered between the two.

How does a forward contract work

The simplest way to understand how forward contracts work is by using an example. Consider the case of an orange grove owner who has 500,000 bushels of oranges ready to be sold in three months. However, there is no way of knowing how the price of oranges in the commodities market would fluctuate between now and then. The orange grower can lock in a specific price per bushel, when it’s time to sell the harvest by entering into a forward contract with a buyer. The buyer and seller’s outcomes are determined by the spot price of oranges. If the per bushel price at the moment of sale is the same as the contract price, the contract is said to be fulfilled.

If the contract expires with the spot price higher than the forward price, the seller must pay the buyer the difference between the forward and spot prices. If the spot price falls below the forward price, the buyer will be responsible for the difference. When the contract expires, it must be settled in accordance with the terms. Each forward contract might have its own set of terms. These derivatives aren’t traded on a stock market like stocks are. They are, instead, over-the-counter investments. This implies they are mostly employed by institutional investors like hedge funds and investment banks, and they are not as accessible to regular retail investors.

In a forward contract, there are two options for settlement, namely, delivery or cash basis. If the contract calls for the seller to deliver the underlying item or assets to the buyer, the seller must do so. The buyer then pays the agreed-upon payment in cash to the vendor. When a contract is concluded on a cash basis, the buyer still pays on the due date, but no assets are exchanged. The difference between the current spot price and the future price determines the amount of payment. This presupposes that the two prices diverge at the time of settlement. If there is no difference and they are the same, the contract is resolved without the need for a cash exchange.

Why use forward contracts

The ability to lock in pricing for a specific asset is a benefit for the seller in a forward contract. This allows you to manage risk by assuring that you can sell the asset at a price that you specify. Forward contracts can also be used by buyers to lock in pricing. A forward contract, for example, could allow you to buy the orange supply you need to keep creating juice at a fixed price if you operate an orange juice firm. This can help with expense management and revenue forecasting.

Let’s imagine you want to sell 100 tonnes of grain to a large store in the United States in 60 days for $150 per tonne. After the 60-day period has elapsed, you must provide 100 tonnes of maize, for which the store must pay $15,000 (100 tonnes x $150). Regardless of whether the price of corn is trading at $150 or not, you would be required to sell at the agreed-upon amount. This means that when you take delivery, you may find yourself selling at a higher or a cheaper price than the market price. If neither you nor the buyer want to swap the corn before the expiration date, you might settle in cash. There are no actual goods given in this case. The difference between the negotiated price and the current price will be the settlement amount; the buyer will pay the seller if the asset price falls, and the seller will pay the buyer if the asset price rises.

Pros of a forward contract

Forward contracts are simple to comprehend, making them an excellent tool for novices.
Forwards are commonly used for speculation or hedging since the contract price remains constant regardless of whether the asset price changes, traders can be certain of the price they will be purchasing or selling at.
Forward contracts, as previously stated, provide a great deal of flexibility because dates and amounts can be customised. Even though forward contracts have an agreed-upon expiration date, this does not imply that they must be maintained open indefinitely. If you wish to reduce your losses or capture winnings, most forward contracts can be closed early.

Cons of a forward contract

It’s critical to understand the risks that both parties face when they enter into a forward contract.

First, there is no guarantee of product quality because forwards are exchanged over-the-counter rather than on an exchange, and asset variation is not regulated. The exchange, on the other hand, would be unaffected if traders chose to settle in cash rather than taking delivery of the asset.
Second, there is the possibility of default. A forward contract’s value improves for one party while becoming a liability for the other when the price fluctuates. This implies that there is a degree of counterparty risk, in which the contract may not be honoured despite the fact that it is obligated.

Risks of forward contracts

As many of the world’s largest firms utilise forward contracts to hedge currency and interest rate risks, the market for forward contracts is enormous. The extent of this market is difficult to assess because the terms of forward contracts are only known by the buyer and seller and are not available to the general public.
In the worst-case scenario, the forward contracts market’s huge size and unregulated structure make it vulnerable to a cascade series of defaults. While banks and financial firms can reduce this risk by carefully selecting counterparties, large-scale default is still a possibility.
Another risk associated with forward contracts’ non-standard nature is that they are not marked-to-market like futures and are only resolved on the settlement day.
What if the contract’s specified forward rate differs significantly from the spot rate at the time of settlement? In this instance, the financial institution that originated the forward contract has a higher level of risk in the event of the client’s default or non-settlement than if the contract was marked to market on a regular basis.

After a general idea about the possible risks that attracts a forward contract, it is now necessary for us to know the three frequent types of risks that majorly surround a forward contract:

Regulatory risks

There is no regulatory authority that governs the agreement concerning a forward contract. It is carried out with the agreement of both parties involved in the contract. As there is no regulating authority, the danger of either party defaulting grows.

Liquidity risks

The lack of liquidity in the forward contract may influence whether or not to trade. Even if a trader has a solid trading opinion, liquidity may prevent him from executing the plan.

Default risks

In the event that the client defaults or does not settle, the financial institution that created the forward contract is exposed to a high amount of risk. The basic objective of forward contracts is to help buyers and sellers manage the volatility that comes with commodities and other financial transactions. Because they are over-the-counter investments, they are riskier for both parties. Forward contracts can be used by traders who seek to diversify their portfolios beyond stocks and bonds.

How is a forward rate calculated?

The answer to the question provided above is straightforward. The rates at which a certain currency that you want in the near future is determined are governed by market factors, namely demand and supply. The demand and supply factors influence exchange rates in a free-floating exchange rate system. Interest rates, inflation, GDP growth rate, monetary and fiscal policies, the balance of payment position, and other macroeconomic factors all influence supply and demand. Inflation and interest rates are two of the most crucial factors among these numerous. The relation between the above three is christened in the market parlance as follows:

Exchange Rate and Interest Rate – Interest Rate Parity (IRP)
Exchange Rate and Inflation – Purchasing Power Parity (PPP)
Interest Rate and Inflation – International Fisher Effect (IFE)

Interest Rate Parity (IRP)

To elucidate the impact of interest rate changes on foreign exchange when all other variables remain constant. As a result, if one country’s interest rate is lower than the other, the currency of the first country will be at a forward premium. In fact, IRP goes a step further and uses a formula to quantify the premium.

Purchasing Power Parity (PPP)

The relationship between exchange rates and inflation is expressed using parity theory, which assumes that all other variables remain constant. Money loses its purchase value as a result of inflation. As a result, if one country’s inflation is larger than another’s, its currency should devalue.

International Fisher Effect (IFE)

This is a parity relationship derived from IRP and PPP between interest rates and inflation. According to IFE, the actual interest effect should be the same in all nations.

The Interest Rate Parity theory is believed to be better than the other theories since it considers the economy’s running interest rate. In many circumstances, the forward rate is greatly influenced by the interest rate and the investor’s predicted income or loss reduction objective.

Possible mistakes that can be avoided while drafting a forward contract

A list of general mistakes that are encountered while drafting a forward contract, and which must be avoided are provided hereunder:

Appropriate template must be followed:

Googling and utilising the first template one comes across contributes towards being the gravest mistake while drafting a forward contract. Unless you have been forced to use a specific template (by your boss/firm/etc), the best strategy is to browse at least four to five templates, analyse their qualities, and then combine them into one that will be most useful to you.

Checklist of clauses for a contract:

Create a list of what should be included in your contract based on the Client’s requirements. You will not miss any of the contract’s required clauses if you do it this way.

Recitals:

Recitals are the first few paragraphs of any agreement. The recitals clearly identify the parties engaged in the transaction and establish the tone for the contract at the outset.

Clear definition of terms used in contract must be provided:

Ambiguity in term definitions is a thorny issue that no client likes to be on the receiving end of. Ambiguous phrases expose a party to litigation, liabilities, breach, and a great deal of chaos. It is necessary to have a clear and exact definition of terminology.

Conditions which qualify as breach & termination clause:

A drafter should always evaluate what constitutes a breach of the provisions of the current agreement they are constructing. This will be given in accordance with the client’s wishes. Non-payment of timely fees, non-delivery of services within the given time, the disclosure of confidential information, or the establishment of a competitor firm are all examples of circumstances in which the client may seek to terminate the agreement.

Meticulous mechanism for payments and consideration:

One of the most important things to remember while drafting is to give a complete system for the party to carry out its payments and consideration to the other parties. There is no contract if there is no proper consideration in exchange for a service delivered. Set the dates, intervals, amount, and medium, as well as the compensation method in the event of late payments. This will ensure the existence of a contract as well as prevent further payment disputes.

Dispute resolution mechanism:

Every good contract calls for a specific format for resolving disagreements. No one enters into a contract with the goal of producing complications or causing a disagreement. They are in it to get mutual benefits. A well-drafted contract should have an internal dispute resolution system, with a provision allowing the parties to go to an arbitration panel only if that procedure fails. This is preferable since litigation might be prohibitively expensive for the parties in the long term.

Schedules:

Schedules are finalised at the conclusion of a contract. You should always be cautious when drafting contract schedules. Most of the time, the timetables include all of the critical elements that make or break a deal. This is where the figures and project details are kept. One of the most serious flaws in a contract is failing to cover all of your clients’ criteria and in the form in which they want them to be addressed.

Buying forward : an insight

When an investor negotiates the purchase of a commodity at a price agreed upon today but receives delivery at a later date, this is known as buying forward. When investors and traders anticipate the price of a commodity will rise in the future, they purchase forward. Buying ahead is a notion that is frequently applied to currencies and commodities, but it may also be applied to nearly any security via a forward contract. Purchasing a commodity at a price agreed upon today for delivery or consumption at a later date is known as buying forward.
Buying forward is most frequently associated with currencies and commodities, but a forward contract can be used to buy practically any security. Buying forward allows the investor to lock up the commodity or security at a lower price now and then sell when prices rise.
When an investor anticipates a rise in pricing or an increase in demand levels for a certain good or investment, they may choose to buy forward. Buying ahead allows an investor to lock in a lower price for a commodity or security now and then sell when prices rise. The contract to acquire the goods or security might be sold to another party who will take real delivery, depending on how buying forward is done.
Buying forward used to entail purchasing a good when supplies were plentiful, accumulating it, and then selling when supplies ran out. Some commodities, but not all, could be handled in this manner.
Over time, the market changed, and the forward contract mostly supplanted physical stockpiling. A forward contract is a tailored agreement between two parties that specifies the asset to be purchased at a later period as well as the price to be paid.
As they influence production, forward contracts can have a significant impact on the market for a certain good. The natural breeding seasons, for example, cause seasonal glutes and falls in meat and cattle production. Producers might adjust their breeding cycles to come in line if they observe a lot of buying forward through contracts.
In order to promote off-season production, this form of buying forward normally necessitates paying a premium at first, but the obvious market signal will eventually benefit both buyers and suppliers.

Forward Contracts vs. Futures Contracts

Future contracts are a sort of derivative similar to forward contracts, although they are not the same. They also enable two parties to agree to acquire or sell an asset at a future date for a defined price. They are distinguished from forward contracts by three fundamental characteristics.

Futures contracts are traded on an exchange.
Rather than settling at the end of the contract, settlement occurs on a daily basis.
Futures contracts are not modifiable, but they are standardised.

Another significant distinction is risk and how it is managed by a clearing house. In an investment transaction, a clearing house acts as a go-between for the buyer and seller. It is in charge of ensuring that the contract is properly resolved.
Forward contracts do not go through a clearing house like future contracts do. This suggests that both parties to the forward contract are willing to take on more credit risk. The danger is that one party or the other will break the agreement’s terms. Building a premium into the forward contract to cover the chance of default is one method to mitigate this risk.

Forward contracts in India

A forward contract, as defined by the Forward Contracts (Regulation) Act, 1952, which governs commodities trading in India, is a contract for the actual delivery of goods, as opposed to a futures contract, which allows the buyer to pay the deal in cash. In the commodity market, forward contracts were introduced in 2014, but they are not permitted in the stock market. The majority of commodity forward contracts take place outside of trading platforms around the world. On major commodity exchanges like the Chicago Mercantile Exchange (CME Group) and the London Metal Exchange (LME), only futures and options are traded.

Master Circular on Risk Management and Inter-Bank Dealings issued by the Reserve Bank of India (RBI) on 1st July, 2009 stated that a person residing in India may enter into a forward contract with an Authorised Dealer Category-I bank (AD Category I bank) in India to hedge an exposure to exchange risk in connection with a transaction for which the Foreign Exchange Management Act, 1999, or rules, regulations, directions, or orders made or issued thereunder, permits the sale and/or purchase of foreign exchange.

Forward trading in various commodities is currently available through the National Commodity and Derivatives Exchange Ltd (NCDEX) and the National Multi-Commodity Exchange of India Ltd (NMCE). NCDEX features a basket of over 25 commodities for forward transactions, whereas NMCE recently debuted forward contracts in rubber. At the moment, the Multi-Commodity Exchange of India Ltd (MCX) does not provide forward contracts.

SEBI’s take on forward contracts in India

Sources directly involved in the conversations between Securities and Exchange Board of India (SEBI) and exchange officials claimed that the SEBI, which took over regulation of commodities markets as well, is not comfortable with forward contracts in commodity exchanges. SEBI’s concern, they claim, derives from two factors, one, unlike futures contracts, forward contracts are not standardised and forward contracts have higher counterparty risk.
SEBI’s main headache is that, despite being traded on an exchange platform, a forward contract is not a standardised contract with complete counterparty risk protection. In the securities market, such an instrument is not permitted, and SEBI does not wish to begin regulating commodities with such grey areas.
R.S. Loona, managing partner of Alliance Corporate Lawyers, a corporate law firm, said there have been concerns in the commodities market with forward contracts in the past, which SEBI may be concerned about. In the derivatives segment, SEBI now allows only futures and options.
SEBI will be able to monitor forward trading rather easily (in comparison to FMC) because of its resources. SEBI should look at forward trading with a better regulatory framework and complete counterparty risk assurance, which is given for any exchange-traded product, rather than starting to regulate commodities with any grey areas.

Key takeaways about forward contracts

A forward contract is a contract that allows you to buy or sell an underlying asset at a specific price on a future date.
Delivery or cash basis are the two options for settlement.
Forward and future contracts have distinct characteristics.
Trading these contracts has some risks.
Forward contracts are primarily used to assist buyers and sellers in managing the volatility associated with commodities and other financial transactions.

For instance, suppose you are a farmer who wants to sell wheat at the present rate of Rs. 18, but you are aware that wheat prices are expected to plummet in the coming months. In this scenario, you sign a contract with a grocery store to sell them a specific amount of wheat for Rs. 18 over the course of three months. This is a classic example of a forward contract.

Conclusion

Both buyers and sellers use forward contracts to manage the volatility associated with commodities and other alternative investments. Because they are over-the-counter investments, they are usually risky for both parties. They are not to be confused with futures contracts, despite their similarities. These are more accessible to regular investors who want to diversify their portfolios beyond stocks and bonds.

References

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Admissibility of Dying Declaration

By

Sneha Mahawar

-

May 5, 2022

0

This article is written by Shruti Chincholkar pursuing a Certificate Course in Competition Law and Enforcement.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

The process of the administration of justice involves various steps. From registration of FIR, investigation, and arrest of accused persons to the actual trial/hearing including submissions from both the parties (plaintiff and defendant in civil matters and prosecution and defence in criminal matters). The process also includes submission and admissibility of the evidence. Evidence is any document, object, or statement that confirms and proves a certain fact. The study of the law of evidence has the sole objective to prove the important facts of a legal case to satisfy the court of law to arrive at a decision.

A dying declaration is considered as judicial evidence. The meaning of judicial evidence is any documents, objects, or facts that can be accepted by a court of law as evidence of facts in any case.

The “hearsay evidence” is inadmissible in the court, which means if a person gives any statement or information without direct experience but from the word of mouth of some other person, then such evidence cannot be cross-examined, hence deemed inadmissible in the court of law.

A “dying declaration” has been ruled out by giving it admissibility in the court by the very presumption that an individual will not have an ulterior motive while expecting his own death. Considering the present scenario, “dying declaration” as a form of evidence has been denoted as a very important and indispensable end for providing justice. Various heinous offences wherein there are no witnesses, “truth sits on the lips of a dying person”, especially the victim. The need for a dying declaration in various cases on the principle of necessity has given it admissibility as evidence in the courts to determine the facts concerning the cause of the death of the declarant.

The statute governing the law of evidence in India states that the evidence must prove every important fact of a legal matter. The dying declaration and its admissibility have been provided in “subclause (1) of Section 32”.

“When it relates to the cause of death. —When the statement is made by a person as to the cause of his death, or as to any of the circumstances of the transaction, which resulted in his death, in cases in which the cause of that person’s death comes into question. Such statements are relevant whether the person who made them was or was not, at the time when they were made, under the expectation of death, and whatever may be the nature of the proceeding in which the cause of his death comes into question.”

Any person including a magistrate, family members, friends, public servants, or medical professionals who are mentally fit can record a dying declaration. The paper also analyzes the competency and persons making a statement of dying declaration. Corroboration is a very important rule concerning dying declaration but if the court is satisfied with the truthfulness and voluntary nature of the statement then it may pass its judgment without corroboration.

It is pertinent to note that corroboration was not compulsory before 1974. In “Rashid Beg v. State of Madhya Pradesh”, Supreme Court decided, “where the dying declaration is suspicious, it should not be acted without corroborative evidence”. Furthermore, in the case of Ramesh Kumar v. State of Chhattisgarh the court also observed the probability of a dying declaration with a motive to hide the truth. Furthermore, the court also held that “dying declaration” is hearsay evidence, which cannot be tested, and therefore cases should not solely be dependent on such evidence. In cases of dowry death wherein various young brides either get burned in a kitchen fire or try to commit suicide due to the physical and mental harassment by their husband or their in-laws. Various case laws suggest that dying declarations by these young brides as accidental deaths are false in nature. The researcher will provide a critical analysis of landmark case laws of recent times to understand the stand of courts on the reliability and admissibility of dying declarations.

The paper will also provide a critical analysis of the test of admissibility, evidentiary value, a test of reliability, and test of credibility, which is used by courts for determining the reliability and truthfulness of the statement made by the dying declaration in India. The paper will compare the differences between “Section 32(1) of the Indian Evidence Act, 1872” wherein wider interpretation and scope is given to dying declarations as an exception to the general rule. Whereas, “Rule 804 (b) (2) of Federal rule of evidence”, which states that an individual should make the statements only when he has knowledge of his impending death only in the cases of homicide.

After a thorough discussion through analysis of interpretation of, “Section 32(1) of the Indian Evidence Act, 1872”, the researcher will discuss loopholes and challenges. This research paper aims to understand the legal theory behind the dying declaration. It tries to critically analyze the loopholes in the “Section 32(1) Indian Evidence Act, 1872”. The researcher has also analyzed the current trend and stance of the courts through a critical analysis of the recent precedents and the nature of cases.

Keywords: – Dying declaration, Indian Evidence law, Justice

Concept of Dying Declaration

According to the Black’s Law Dictionary, “A statement by a person who believes that death is imminent, relating to the cause or circumstances of the person’s impending death. It is also termed as a deathbed declaration or ante mortem statement.” The validation of “dying declaration” comes from the Latin Maxim, “Nemo moriturus praesumitur mentire”, which means, “a person will not lie on his deathbed.”

The conception of legal theory behind the “dying declaration” requires the understanding of the rule of hearsay evidence and its exception. “The most fundamental principle of the law of evidence states that the direct evidence must be used to prove the facts of the legal matter”. Irrespective of the importance of the evidence, it is of no use unless it is admissible in a court of law. According to “McCormick” the hearsay evidence, “is testimony in court or written evidence, of a statement made out of court, the statement being offered as an assertion to show the truth of matters asserted therein, and thus resting for its value upon the credibility of the out-of-court asserter”.

“Dying Declaration” simply refers to a written or oral statement of the relevant facts made by an individual who is dead. The dying declaration has immunity from the principle against hearsay evidence. The dying declaration shall be deemed to be incomplete unless the full name and the detailed address of the declarant and the accused involved in it is given. Henceforth, where the declarant of dying declaration only said the first names like to the name of the accused, the court held that such dying declaration shall be regarded as incomplete and the prosecution version cannot be accepted. It is important to take into account that admissibility of dying declaration is not restricted to the individual actually causing the death of the declarant but its scope of admissibility is widened to other individuals who participate in causing the death of the deceased declarant.

The “dying declaration” by an individual should be only in relation to the reason of his death or any incidences consequential in the death of the declarant. The statement made by the person does not importantly need to be conscious or have knowledge of his/her intending death. The law of evidence expands the admissibility of dying declaration including civil and criminal in India In the case of Moti Singh v. State of U.P expanded the interpretation of this provision by stating that the phrase “any of the circumstances has broader amplitude”. The court has given a very broader interpretation to this subsection. The rule of proximity having nexus with the person’s death directly or indirectly is also covered by this provision. “There does not have to be a direct nexus between circumstances and death”. There are several principles on the admissibility of “dying declaration”, which are derived through various case laws.

Condition precedents of dying declaration In the Indian context

Although the dying declaration stands to not be recorded in the court, also nor it is available for the cross-examination by the accused, but still it stands to be admissible in evidence as opposed to the general rule against hearsay evidence. There are numerous grounds pertaining to the validity of the admissibility of a dying declaration in a court of law. The foremost ground is that the only principal eye-witness to the crime is the declarant (victim), then the next ground is the person being close to the impending death forms a sanction which is equivalent to the mandate of an oath. Lastly, “a man would not like to meet his maker with a lie in his mouth”.

Essentials of dying declaration

The below mentioned are quintessential are to be met:

Firstly, The declarant has to be aware or conscious that death is impending.
Secondly, The declarant shall only make a statement in respect of his/her belief for the reason or circumstances of his/her death.
Thirdly, The statement shall only be recorded by the individual whose circumstances of death are concerned.
Fourthly, The statement made by the declarant should be honest and credible.

It is also pertinent to note that in the case of Mallella Shyamsunder v. State of Andhra Pradeshthe apex court made two additions to the essentials of a dying declaration which are as follows:

(v) The declarant shouldn’t make the statement on tutoring or prompting.

(vi) The court has full authority to check the authenticity of the statement made by the declarant for checking whether it was tutored or was there any motive of revenge.

Recording of dying declaration : Procedure in law

There is no straight jacket procedure laid down for recording of a dying declaration by a declarant, and it is also not necessary to be recorded by a Magistrate. Going through the general principle, it is important to get the evidence of the person recording such a declaration from a certified medical professional. It also has to be acknowledged that the courts shall be cautious and scrutinise the dying declaration with required care in matters where the prosecution solely relies upon the dying declaration by the conviction of the accused. There is no rule mandating the corroboration of a dying declaration, it is a rule of prudence and not a rule of law. The accused can be convicted on the basis of a dying declaration only when the court acknowledges that the declaration made is voluntary without any tutoring and it is truthful in its whole content.

Recording of dying declaration by Magistrate

In various circumstances, the dying declaration is recorded by the Magistrate. The evidentiary value of a dying declaration is completely dependent upon the facts and circumstances of the matter. In addition. A dying declaration can alone be the basis for the conviction of the accused given its voluntary nature and the facts and circumstances of a particular case. Where the dying declaration was sufficiently proved; there was no doubt with regards to the medical evidence and such declaration was corroborated. Therefore, the court held the accused to be guilty on the basis of such a declaration.

In the case of Pandian K Nadar v. State of Maharashtraas well as Prem Chand v. State of U.P such declaration was recorded by the Special Executive Magistrate, who acknowledged that the declarant has the physical and mental competence to record the dying declaration which was also supported by the Police Officer. In such cases dying declarations were held to be valid despite the lack of evidence of a certificate from the medical professional. In the case of Amir Jamal Khan v. State of Maharashtra scenario where a Special Magistrate recorded a dying declaration despite he was not obliged to do so, such a dying declaration was held to be valid as all the due measures were taken care of which trusted the confidence. In the case where the dying declaration was discarded by the court where there was the absence of the signature of the deceased declarant as well as where the date and time of the recording were missing, such declaration was not admitted in the court of law because it gave the opportunity to blemish upon the its genuine.

Form of dying declaration- question-answer form

The form of recording a dying declaration is usually in a question-answer format. However, a dying declaration cannot be rejected on the only basis that it was not recorded in the question-answer format. A dying declaration should be recorded in a short and to-the-point matter. Duplication is strictly prohibited with regard to the dying declaration. In the matter of Ram Bihari Yadav v. State of Biharit was observed by the court that a statement recorded in a form of narration has the possibility of being more natural and reflects the truth of the cause of death of the declarant. However, it is the case where the witness who was the recorder of the dying declaration specifically stated that the deceased declarant gave answers to the questions. But the declaration which was submitted before the court was not in the form of a questions-answer, such declaration was discarded stating that it does not amount to the material fact.

Oral dying declaration

A dying declaration can be recorded orally. An oral dying declaration refers to the statement made by the declarant which isn’t recorded and it has to be represented by the witnesses out of the brain memory. The apex court has given a rule that the exact words of the declarant shall be reproduced before the court. Any discrepancies or contradictions in the reproduction of the exact words shall have an effect on the evidentiary value of such oral dying declaration. It is to be noted that an oral dying declaration may form a factor of conviction in a particular matter. However, such an oral dying declaration should entrust confidence and should be free from any imperfection. The courts follow the rule of prudence which states for corroboration of oral dying declaration for entrusting the court with confidence and credibility.

Fitness of the declarant

The physical and mental competence of the declarant making the dying declaration is a condition precedent for the recording dying declaration. The court has to be entrusted with satisfaction and confidence that the declarant was perfectly fit and capable to record his/her statement at the time of recording of the dying declaration. In the case of Dandu Lakshmi Reddy v State of APwhere, the parents of the deceased declarant said that their daughter had a mental illness, such facts cannot be kept aside by the court for reaching its admissibility as well as reliability. The quintessential way to prove the fit state of mind of the declarant is through presenting a certificate of fitness from the medical professional stating that the declarant is fit and capable for making such statements. However, the omission to submit the certificate of fitness isn’t a condition precedent for the rejection of such a dying declaration. The important aspect required by the court is that the individual who records such a dying declaration shall be confident and satisfied that the declarant was fit and mentally capable for making such statements. The presentation of a certificate of fitness can be regarded as a rule of caution. A credible and honest dying declaration can be accepted before the court even otherwise.

Admissibility of dying declaration in India

Section 32 of IEA states that statement made by a person relating

Section 32(1) in The Indian Evidence Act, 1872. 1 when it relates to the cause of death. —“When the statement is made by a person as to the cause of his death, or as to any of the circumstances of the transaction which resulted in his death, in cases in which the cause of that person’s death comes into question.”

The present chapter will present an interpretation of Section 32(1) IEA by the Indian Courts by understanding the different aspects and conditions of precedents for analysing the admissibility of a dying declaration.

Statements, written or verbal, of relevant facts

The foremost component of Section 32(1) states that a dying declaration can be recorded in writing as well as in oral form pertaining to the relevant facts. “Verbal” refers to the words. However, it is not mandatory that such words have to be spoken, signs and gestures of another individual like nodding or shaking the head also account under this expression. In the case where the deceased declarant was interrogated by several people shortly prior to her death about the cause of her injuries inflicted on her. She didn’t have the capability to speak but she made signs and gestures. Such evidence was held to be admissible as the signs and gestures made by her accounted for the answers to the questions of her own circumstances of death and came under the expression of “verbal statements”.

Cause Of death

The phrase used under the aforementioned provision basically means that a dying declaration will be admissible before the court only when the statements recorded by the declarant are the cause or reasons for his own death. The interpretation of “death” expands to both homicidal as well as suicidal death. It is also important to note that relevancy shall also be regarded to statements made by an individual pertaining to the reason of his/her when the reason for death comes into question irrespective of whether that individual was not under the expectation of death at the time of recording such statements. In addition, general connotations of the fear or suspicion of the person or otherwise which do not directly correlate with the cause of death are inadmissible in the court of law. However, the kind of information given by the deceased declarant pertaining to the circumstance of his death is admissible under evidence law.

The statements pertaining to the cause of death are not restricted to the mandate of a direct link between “circumstances” and death. In the case where the deceased declarant stated prior to her death that the accused was holding a gun who was standing in front of her and it was the reason for her death and henceforth was admissible under Section 32(1) of IEA.

The dying declaration where an individual makes a complaint regarding his apprehension of impending death by the person whose conduct is the root for such apprehension and is accused with the death of the declarant, such complaint shall be admissible in the court. In the case where the deceased wife made a complaint to the Police against her husband that she apprehends her own death by her husband, such statement was held to be admissible in court.

Circumstances of the transaction

The word “circumstances” has been given a restricted interpretation. It is more limited than “circumstantial evidence” and res gestae. “Circumstances of the transaction” under Section 32(1) means that circumstances should have some proximity between the event of death and it must only include events that resulted into the death of the declarant making such a statement. The admissibility of a dying declaration is only possible if the reason or occasion of the declarant’s death comes into question before the court. There is no compulsion as to making the statement post the transaction or event has been completed or the declarant making such statement shall be near death or “circumstances” only include the acts or omissions only done at the location or place where the death occurred.

The test of the reliability of dying declaration shall require the courts to keep into consideration, the facts and circumstances he chance for the dying declarant to observe such as at the time of the offence whether it was bright or dark, whether the competency and capacity to record statement is disturbed or not, whether there are any contradictions with respect to the dying declarations made more than one time or not and whether there was a motive of vengeance or tutoring from interested parties or not. In the judgment of Munnu Raja v. State of MP the court stated that the law pertaining to the admissibility of dying declaration should be applied and understood with caution because the declarant making such a statement shall not be cross-examined by the accused. In addition to this, the court also stated the requirement of corroboration for admissibility of dying declaration is not a rule of law but a rule of prudence.

“Proximity between the time of the statement and that of death”

The test of proximity was first questioned before the court in the case of Sharad v. State of Maharashtra. The court held that the dying declaration was admissible because the statements made by the declarant were not remote in duration to lack their proximity with the circumstances of the death. The court also went on to make several propositions: (I) A dying declaration shall be valid when it is made by a person regarding the circumstances or reason of his death, irrespective of whether such death is homicidal or suicidal in nature. (II) The test of proximity cannot be moulded into a straight jacket formula as it depends on the facts and circumstances of different cases. In the matter, the Hon’ble Supreme Court stated, “The prosecution had not examined the doctor who made the endorsement on the dying declaration that “the patient was in a fit state of mind to depose”. For example, when the death of the declarant is the result of a prolonged event, then a statement made on the occasion of the death or while recording such declaration must be understood and interpreted in its full context with the past events.

Admissibility of more than one dying declaration

The rule of law pertaining to the validity of a dying declaration states that the court must be satisfied with the credibility and truthfulness in the dying declaration without any prompting or tutoring and also states that the declarant making such declaration is physically and mentally competent and capable to record his/her statement. However, in the circumstance where the same declarant makes multiple dying declarations, such declarations will be taken into consideration as one for their validity and evidentiary value. In the case of Gangaram Gehani v. State of Maharashtra if there are contradictions between any of them on the material part, then the court should try to resolve such contradictions. If no premise could explain such contradictions, then such dying declaration might be rejected by the court. In a circumstance, where there is a reasonable justification, then such a statement can be equated with an omission stated in Section 161 of the Criminal Procedure Code, 1908 which shall be taken into account as a matter of fact. In the case where the deceased declarant did not make an entire statement in her first dying declaration and made it in the following dying declaration with the corroboration of medical evidence, then such dying declarations cannot be rejected by the court.

Conclusion

This chapter is of utmost importance as it explains the findings and analysis from this attempt of research conducted in this paper. It is well understood that a dying declaration stands to be an exception to the rule of the hearsay form of evidence in the courts. Although hearsay evidence is discarded from the court due to its inconclusiveness and lack of accuracy the dying declaration is admissible in the court without any rule as to the strict corroboration. The basic premise for this exception and its admissibility is that a person would not lie and enter the afterlife. Through understanding the concept and condition precedents, facets pertaining to law on dying declaration in India list out specific events or facts which are the reasons or circumstances of the death of the individual making such declaration. The court through various judgments has taken into account various measures for maintaining honesty and trustworthiness while recording dying declarations.

While analyzing the procedure for recording such a declaration it has to be noted that the court has given a wider interpretation rather than the format prescribed (question-answer), courts take into account the mental and physical competency of the declarant as well. The most important aspect which has been reiterated in several judgments is that the dying declaration should not be tutored or should have the motive of vengeance behind it. There are several tests including tests of reliability and credibility for entrusting the honesty of a dying declaration with the courts. However, there is a greater probability that a declarant can falsely make such a declaration with the motive of revenge or false information due to his/her misunderstanding of the chain of events. However, with understanding the analysis and interpretation of section 32(1) of the Act, it is clear that courts are becoming cautious to the trustworthiness of dying declarations due to their chances of being tutored or false. The research has listed down a few recommendations as follows:

The rule of corroboration is suggested to be complied with mandatorily in the cases where the prosecution solely relies on the dying declaration for conviction of the accused since such declaration is not cross-examined by the accused there is a high probability of its falsity and dishonesty.
The lawmakers shall give out detailed guidelines forming rules and regulations for a uniform procedure of dying declaration for less procedural discrepancies and a simpler method for courts to examine the same.
The test of reliability and credibility is not a straight jacket normative for checking the trustworthiness of a dying declaration. There is a need for stringent measures which shall make sure that the accused is not maliciously framed by the declarant due to his/her ill motives.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

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Competition Law and Intellectual Property Rights

By

Sneha Mahawar

-

May 4, 2022

0

This article is written by Shruti Chincholkar pursuing a Certificate Course in Competition Law and Enforcement.

This article has been published by Sneha Mahawar.

Table of Contents

Nature and object of IPR

An “Intellectual Property (IP) refers to the creation of the mind, such as inventions; literary and artistic works; design; and symbols and images used in commerce.” The primary object of IPR is to IP holders with an economic reward for their contribution to the invention or innovation. The particular economic benefit is only given to the IP holder restricting others in the economy. IP Holders are not limited to individuals but also include corporations and artificial legal entities. According to WIPO, “[IPR] is like any other property right. They allow creators, or owners, of patents, trademarks, or copyrighted works to benefit from their own work or investment in a creation. These rights are outlined in Article 27 of [UDHR], which provides for the right from the protection of moral and material interests resulting from authorship of scientific, literary or artistic productions.”

It has to acknowledge that IP rights are private rights of an individual for his creation, innovation, or invention. Its aim is to provide economic benefits to its holder. Various companies across the globe rely upon IPR for their revenueand distinguish themselves from their competitors using IP rights. However, it is pertinent to note that IPR also acts as a bait for further innovation However, it is also a means for commercialisation of inventions and innovation, which shall take place in the near future without even the existence of IP rights.

Nature and object of Competition Law

“Competition law provides the framework for competitive activity and the process of competition”. Competition law comprises several rules and regulations for maintaining fair competition and a market. It aims at protecting the competition for the welfare of consumers and the economy as a whole. The Competition law concerns itself with governing the conditions for sustaining competition in the market by prohibiting anticompetitive practices to avert the abuse of dominance. It aims at protecting the market, encouraging different players, and acknowledging their benefits of bringing innovation to the market. The primary objective of antitrust law is the welfare and protection of the end consumer in the economy.

It is to be acknowledged that IPR and Competition law have the common goal of the welfare of the consumers. IPR is also used as a motivator for innovation which further transforms into its commercialisation. On the other side of the spectrum, the antitrust regulation tries to avert anti-competition behaviour and abuse of dominance by protecting the welfare of end consumers and appreciating innovation. The overlap here is that IPRs are private rights and they benefit the holder economically and not the end consumers. However, from the perspective of the long run, IPR brings quality to the products and services purchased by the consumers resulting in their welfare.

Interlink between Competition Law and IPR in the Indian context

Overlap between IP rights and antitrust regime

An antitrust regime is a regulatory framework for overcoming an aspect of market failure which is the creation of a monopoly. On the other end, IPR is private rights given to the IP Holder which accounts for the monopoly in the market through the exclusivity given to the IP holders. Contrary to the popular notion that these two regimes are at the non-convergent ends of each other, they have been founded upon the similar object of protecting the welfare of consumers.

The most important case where this issue was addressed by the U.S v. Microsoft where the issue in question was whether Microsoft abused its dominant position by tying Internet Explorer with Windows by the misuse of its Ip rights. The Supreme Court of the U.S did not hold Microsoft to the abuse of its dominant position stating that there are two different markets and protecting its IP rights. However, the case of United States v. Line Material Co held that “the possession of a patent/intellectual property right does not exempt an entity from the applicability of antitrust/competition laws”.

There is also a notion that bringing IP rights into the paradigm with the Competition law will distort its whole purpose of exclusivity granted to the IP holders. This notion states that innovation will not expand if there are no IP rights to stimulate it. However, taking away IP rights completely from the scenario of competition law will not benefit consumers in the short-run as well as the long-run in a given economy. Also, innovation will always take place irrespective of the IPR. Therefore it has to be the interlink of IPR and antitrust law encouraging innovation as well as controlling the monopoly in the market for the protection and welfare of the end consumer.

Interlink between IPR and antitrust laws in India

The antitrust regime and IP laws in India have transformed over the course of the years. It is to be acknowledged that IP legislation in India lack in addressing the concern of concern between the two regimes. However, the statute regulating antitrust in India is the “Competition Act, 2000”. address the issue of overlapping IP rights and the antitrust law under Section 3(5) of the Act. CCI, although a nascent body is the regulator of the competition law in India. Due to the implementation of the antitrust law, companies and individuals cannot monopolise the market and get unfair gains due to the abuse of their dominant position.

The most significant ambiguity with regards to the Indian context, is the IP legislations don’t have any single provision with the phrase “competition” drafted in them. The issue here is, that an individual can misuse the IP rights and can sue another individual or corporation for the protection of the same. An inference can be drawn that IP rights have an upper priority over Competition law. However, it has to be noted that with the interpretation given to Section 3(5)(i) of the Act, the overlapping will be reconciled and the greater object of the welfare of consumers will be achieved.

“Section 3(5)” of the Act states that:

“(5) Nothing contained in this section shall restrict –

(i) the right of any person to restrain any infringement of or reasonable conditions, as may be necessary for protecting any rights which have been or may be conferred upon him under –

the Copyright Act, 1957 (14 of 1957);
the Patents Act, 1970 (39 of 1970);
the Trade and Merchandise Marks Act, 1958 (43 of 1958) Trade Marks Act, 1999 (47 of 1999);
the Geographical Indications of Goods (Registration Protection) Act, 1999 (48 of 1999);
the Designs Act, 2000 (16 of 2000);
the Semi-conductor Integrated Circuits Layout-Design Act (37 of 2000);”

The Act doesn’t interfere with the IP regime, however, the CCI profits from the “appreciable adverse effect on competition (AAEC)” due to the misuse of IP rights by its holder. The aforementioned provision is a rule of exception which allows for overriding IPR over the antitrust regime only in the circumstance of its “reasonable use”. The Act does not forbid domination of any company or individual in the market but it is against the abuse of the dominant position resulting in “appreciable adverse effect on the competition(AAEC)”. The legislation was passed when the paradigm of the economy shifted from a closed market to liberalisation of the market and its subsequent impact on the economy. Section 4(2) of the Act gives a strict interpretation leaving out the IP right when it comes to the circumstances involving abuse of dominance and imposition of unfair conditions on the other players or intermediaries or the consumers.

Henceforth, it can be understood that IP rights are duly protected in India unless the Ip holder abuses its dominant position which is detrimental for the welfare of the consumers. The above-stated section draws out the impact of antitrust legislation on the IPR. It takes into account the “right to protect IPR” rather than deciding whether the alleged infringement is under IPR or not, the jurisdiction of CCI is only restricted to dealing with antitrust regulations.

Interpretation by CCI : landmark judgments

“High-Level Committee Report on Competition Policy” recognises the core object of the IP rights which is a right of private nature given to the IP holder to protect his/her “innovation or invention” as a reward. However, it also recognises the misuse of IPR for engaging into anti-competitive behaviour. The judicial precedents also given by CCI are very significant to understand the relationship of IPR and antitrust laws in India.

The issue of overlap of the jurisdiction of the Copyright Board and CCI was raised in the case of Amir Khan Production v. The Director-General, wherein the jurisdiction of CCI was contested by the respondents as they argued that Copyright Board has the competent jurisdiction to decide the matter. However, the High Court’s rejection of the contention clearly stated that CCI has the jurisdiction for handling the matters of IPR as well as antitrust practices as per its own competence. This case has been very important for stating the scope and power of jurisdiction of CCI is matters involving the overlap of IP rights and Competition law. This affirmed the principle stated in the Kingfisher v. Competition Commission of India.

Furthermore, CCI clearly held that pricing the drugs exorbitantly high leading to the formation of a monopoly, subsequently resulting in abuse of its dominant position despite being protected by IPR shall render the jurisdiction of CCI. In the case of Super Cassette, the apex court held that “the owners of the IPR can enjoy the fruits of their labor by issuing licenses and charging royalty, but the same can be restricted and is not absolute in nature.” It is therefore inferred that forming a monopoly is not against the antitrust law however misuse of IP rights for the formation of it and abusing it shall give rise to the antitrust concerns which will be dealt by the CCI.

However, the courts have also acknowledged the significance of IP rights. In the case of FICCI Multiplex Association of India v. United Producers Distribution Forum where the issue that arose was whether the IP holder shall waive his Copyright because it leads to the detrimental impact of the competition in the particular market. It was held that the Copyright of the holder is not absolute and can be waived off over the antitrust law.

In the matter of Telefonaktiebolaget Lm Ericsson v. CCI, it was held that there are no provisions in the Patent Act, 1970 which bars the jurisdiction of CCI in the cases where there is the overlap of the two, therefore the jurisdiction of CCI cannot be questioned in such a case.

In the case of Department of Agriculture v Mahyco Monsantoand Nuziveedu Seeds v Monsanto, the CCI outrightly gave an order for an investigation into the matter where the complainant alleged the abuse of dominance by the respondents by the misuse of the patent granted to them. Also in the case of Phase Power Technologies Private Limited v ABB India Ltd it was the jurisdiction of CCI cannot be incompetent on the mere ground that there is a suit on patent infringement that is pending in the civil court.

Therefore, through the judicial its can be inferred that CCI recognises the “existence of IP rights” but in a ‘reasonable use’ if the use of IP rights is beyond the limit of reasonable then if the campy or individual indulges into any anti-competitive practice then CCI shall have authority over it.

Conclusion

The above critical analysis and discussion through the several judgments, principles and interpretations to various provisions of the Competition Act, 2002 highlight the complementary nature of these two regimes. There is an inference drawn that IPR and Antitrust cannot be enforced in ignorance of each other. Both are entangled with each other, although the premise for both IPR and Competition law is quite different but their ultimate object remains the same. On one side of the coin, IP rights giving protection to the IP holder permit the formation of monopolies and on the other side the Competition law protects consumers as well as the business environment from the anti-competitive behaviours and agreements by the businesses. However, the common goal of serving the welfare of the consumers binds both of them together and which is the very reason that they do not overlap each other rather they co-exist.

The very question of overlapping comes through the repercussion of misuse of the IP Rights granted to corporations and the individuals. The Competition Act, 2002 duly admits the existence of IP rights but in a ‘reasonable use’ beyond which such agreements or behaviour shall be rendered as anti-competitive. It is pertinent to note that CCI as well as the apex court in the series of precedents observed that misuse of IP rights is not the justification for the contravention of the Competition law. The CCI as the regulator and protector of competition in the economy has duly discharged its stance on the issue of overlap of the two law regimes. Therefore, it can be concluded that the two law regimes are not overlapping each other, rather the only concern which has been solved and interpreted is that the circumstance of unreasonable usage of IPR impacts the competition in the market detrimentally.

Recommendations

However, there are some recommendations that can be taken into account for better redressal of issues involving IPR and Competition law in context to India which are as follows:

There are no explicit regulations or guidelines which address the issue of overlap between Competition law and IPR. The relevant public authority should take into account the complexity faced by different stakeholders including CCI, consumers and businesses and formulate detailed guidelines on the issue by inferring the guidelines given by the US and EU.
There is no statute of IPR in India that deals with the concern of misuse of IP rights to hamper the competition in the market. There is a need on the part of lawmakers to amend the legislation and address the concern of misuse of IPR and its impact on competition law.
The CCI has been instrumental in understanding the overlap of both the law regimes, but several aspects of the issues especially Section 3(5) of the Act have not been given an interpretation in-depth for understating the reconciliation of conflicts between IP rights and Antitrust law regime.

References

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Contract of bailment and pledge

By

Rachit Garg

-

May 4, 2022

0

This article is written by Jai Ilesh Sheth, a student of Government Law College, Mumbai. This article talks about the contract of bailment and pledge, discusses and analyzes the law governing them in detail and also discusses a few important case laws about the topic.

It has been published by Rachit Garg.

Table of Contents

What is a contract of bailment

Bailment is defined in Section 148 of the Indian Contract Act, 1872 as, “A ‘bailment’ is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.” The person who delivers the goods is called the ‘Bailor’ and the person who receives the goods for the specific purpose is called the ‘Bailee’. It is a special type of contract which is covered under Chapter IX(Sections 148-171) of the Indian Contract Act, 1872.

Essentials features of a contract of bailment

A valid contract

As mentioned above, bailment is a special type of contract. Hence, all the essential elements of a valid contract must be present in it. The essential elements such as offer, consideration, contractual capacity, intention, etc. must be a part of the bailment. Without the presence of these essential elements , the contract cannot be enforceable in a court of law. However, out of these, a contract of bailment can be valid without consideration.

There are two types of bailment.

Gratuitous Bailment: Bailment without any consideration.
Non-Gratuitous Bailment: Bailment with consideration.

Delivery of possession

If you read the definition of bailment, you will understand that the most essential element of a contract of bailment is the delivery of goods from one person to another. As per Section 149 of the Act, “the delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf.” The delivery of the goods can be actual as well as constructive. Actual delivery means the goods are physically delivered by the bailor in the possession of bailee. Constructive delivery means that the goods are not expressly delivered but a few actions imply that the bailee is given the possession of the goods. It is important to note that the actual transfer of possession is necessary for bailment. Only giving the custody of the goods to a person does not make him the bailee.

Delivery upon contract

As mentioned above, the delivery of the goods from the bailor to the bailee must be after a contract is created between both the parties. The contract should have the details of the transfer of the goods and its return. However, the contract can either be “expressly signed by the parties” or “implied by the parties.

Exception: Lost goods found

When lost goods are found by a third party, they act as the bailee of such goods.

Duties of the finder:

To keep the goods safe.
Not use these goods for personal use.
Take adequate efforts to find the real owner of the goods.
Make sure that the goods are delivered to its real owner once found.

Rights of the finder:

To be compensated for the expenses and trouble taken to keep the goods safe and find the owner. (Section 168)
To sell the goods if:

The goods are of perishing nature.
The owner could not be found.

However, the proceeds from the sale must be transferred to the owner/bailor of the goods. (Section 169)

Purpose

There must be a specific purpose for which the goods are transferred from the bailor to the bailee. As per Section 153 & 154, the contract of bailment might be terminated if the bailee acts inconsistently or makes unauthorised use of the goods. Specific purpose is very important and the parties should abide by the contract.

Return of goods

After the purpose for which the goods were bailed is complete, the bailee will have to return the goods to the bailor. The method and the way of return will be as per the contract or bailor’s wish. As mentioned in Section 160, “It is the duty of the bailee to return, or deliver according to the bailor’s directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished.”

Duties of the bailor and the bailee

Duties of the bailor:

To disclose faults in goods

It is the bailor’s responsibility to inform the bailee of all the faults in the goods. If the bailor fails to do so, he is liable to the bailee for any loss caused by that fault.

For example: ‘X’ took a car from ‘Y’ to go for a vacation. ‘Y’ was aware that the brakes weren’t working properly. However, he didn’t inform ‘X’ about it. ‘X’ is involved in an accident due to the failure of brakes. ‘Y’ will be liable for all the losses ‘X’ faced in this accident.

To cover necessary and extraordinary expenses

The bailor has to pay the bailee all the necessary and extraordinary expenses incurred by the bailee to safeguard the goods bailed.

For example: ‘A’ gave his cat to his friend ‘B’ when he had to travel for work. ‘A’ will have to pay the expenses incurred in the cat’s daily necessities such as food, shelter, etc. ‘A’ will also have to pay any extraordinary expense like doctor’s bill, daycare, etc. if it was necessary to keep the cat safe.

To indemnify the bailee of all the losses

The bailor has to indemnify any loss incurred by the bailee if the bailor asks for his goods before the agreed time in the contract as per Section 159 of the Indian Contract Act. As per Section 164, the bailee can also claim losses from the bailor if the bailor intentionally bails goods with a defective title.

To collect the bailed goods

The bailor must collect his goods once the time for which the goods were bailed is expired. If the bailor fails to collect the goods on the expiry of the bailment period, he will be liable to pay for any losses incurred by the bailee.

For example: ‘X’ bailed his dog with ‘Y’ for a week, and returned after 10 days to get his dog back. ‘X’ will be liable to pay ‘Y’, the expenses incurred for the safekeeping of the dog for those 3 extra days.

Duties of the bailee:

To take proper care of the goods

As per Section 151 of the Indian Contract Act, 1872, “In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his goods of the same bulk, quantity and value as the goods bailed.” However, in Section 152, it is stated that “The bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in Section 151.”

For example: ‘A’ bailed his vehicle with ‘B’ for one week. If due to negligence of ‘B’, ‘A’s vehicle is damaged, ‘B’ will be liable to compensate for the same. However, if the vehicle is damaged due to some act of god such as an earthquake or a flood, ‘B’ will not be liable for such loss.

To use the goods for authorised purpose only

It is the bailee’s responsibility to use the goods only for the authorised purpose under a contract. If it is found that the goods are used for unauthorised purposes, the entire contract can be declared void by the bailor. As per Section 154, “If the bailee makes any use of the goods bailed which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them.”

Some examples:

(a) ‘A’ lends a horse to ‘B’ for his own riding only. ‘B’ allows ‘C’, a member of his family, to ride the horse. ‘C’ rides with care, but the horse accidentally falls and is injured. ‘B’ is liable to make compensation to ‘A’ for the injury caused to the horse.

(b) ‘A’ hires a horse in Calcutta from ‘B’ expressly to march to Banaras. A rides with due care, but marches to Cuttack instead. The horse accidentally falls and is injured. ‘A’ is liable to make compensation to ‘B’ for the injury caused to the horse.

To keep the bailed goods separate

All the goods bailed should be kept separately and safely by the bailee as it ensures the safe return of the goods. However, there are a few provisions related to the mixing of bailed goods.

Section 155: If the bailee, with the consent of the bailor, mixes the goods of the bailor with his own goods, the bailor and the bailee shall have an interest, in proportion to their respective shares, in the mixture thus produced.
Section 156: If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods, and the goods can be separated or divided, the property in the goods remains in the parties respectively; but the bailee is bound to bear the expense of separation or division, and any damage arising from the mixture.
Section 157: If the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods in such a manner that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.

To return any profits arised from the goods

If during the course of bailment, any profit has arisen from the bailed goods, the same should be transferred to the bailor by the bailee.

Example: ‘A’ bails his cow with ‘B’ for a period of 7 days. The cow gives milk daily. ‘B’ sold this milk during the period of bailment. The profit earned by ‘B’ during the sale of milk must be returned to ‘A’ while returning the goods.

To return the goods

The bailee must return the goods to the bailor once the purpose of the bailment is accomplished or the term of the contract expires. This return must be as per the bailor’s discretion.

Rights of the bailor and the bailee

Rights of the bailor:

To be compensated against unauthorised use

If the bailee uses the goods for a purpose that isn’t authorised under the contract, he should be liable for any damage that arises from such use.

For example: ‘X’ bailed his vehicle to ‘Y’ for one month. In the contract, it was agreed that ‘Y’ can use the vehicle for his personal use. However, ‘Y’ let his brother ‘Z’ drive the vehicle, and ‘Z’ crashed the vehicle. Now, ‘Y’ will be liable for the damage done to the vehicle.

To terminate the contract

As per Section 153 of the Act, “A contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment.”

Illustration: ‘A’ lets ‘B’, for hire, a horse for his own riding. ‘B’ drives the horse in his carriage. This is, at the option of ‘A’, a termination of the bailment.

To receive any profits arised from the goods

The bailor is entitled to any profit that arises from the goods when they are bailed. If the bailee refuses to pay such profits to the bailor, he may take appropriate action against the bailee to recover such an amount.

To get the goods returned on expiry of contract

The bailor has a right to receive the bailed goods upon expiry of contract. However, in case of a gratuitous bailment, the bailor can redeem the goods before the expiry of the contract. In any such situation, if the bailee incurs loss due to early return of the goods, the bailor is liable for the same.

Rights of the bailee:

To receive compensation

The bailee is entitled to receive compensation for losses suffered due to any defect in the goods. In case of gratuitous bailment, if the bailor asks for the goods to be returned before the expiry of contract and the bailee suffers loss because of this return, he can claim for compensation against those losses from the bailor.

To receive expenses incurred

The bailor has to pay the bailee all the expenses incurred for the caretaking of the goods bailed. The bailee is also entitled to receive any extraordinary expenses spent by him during the term of bailment of the goods.

To stop delivery of goods

The bailee is given the right to stop the delivery of goods if the bailee is of the knowledge that the bailor doesn’t have a title over the goods. The bailee can also stop the same if any third party claims their title over the goods.

To lien the bailed goods

A lien is a legal right against the assets that are used as collateral to satisfy the debt. The bailee has been given the right to lien the bailed goods if the bailor has withheld any compensation or payment that he is liable to do.

Different types of lien are:

Particular lien:

As per Section 170 of the Indian Contract Act, 1872, “Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them.”

For example: “A”delivers a rough diamond to “B”, a jeweller, to be cut and polished, which is accordingly done. “B” is entitled to retain the stone till he is paid for the services he has rendered.

General lien:

As per Section 171 of the Indian Contract Act, 1872, “Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to that effect.”

For example: “A” borrows Rs. 1000 from the bank without security. Later he takes one more loan of Rs 5000 from the same bank against a security of gold. “A” pays back Rs. 5000 but yet has not paid Rs 1000. So the bank can retain gold (general balance of the account) for the previous loan.

Relevant case laws

Contract of pledge

Contract of pledge is a subset of a contract of bailment. Here, the goods bailed are kept as a security for a debt or a performance of a promise. Pledge is defined in Section 172 of the Indian Contract Act,1872 as “The bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’. The bailor is in this case called the ‘pawnor’. The bailee is called ‘pawnee’.” It is covered under Chapter IX (Section 172- Section 181) of the Indian Contract Act, 1872.

Essential features of a contract of pledge

A valid contract

Similar to the contract of bailment, all the basic essentials of a valid contract should be present in a contract of pledge. Without these elements, the contract will be void and won’t be enforceable in a court of law.

Delivery of possession

It is necessary that the possession of goods be delivered from the pawnor to the pawnee. As mentioned in the definition, pledge is a bailment and this is an essential element of bailment. The delivery can be either actual or constructive. However, there might be exceptions where the possession remains with the pawnor.

Ownership cannot be transferred

In the case of pledge, mere possession of the goods is transferred to the pawnee. The pawnor of the goods is still the owner. The pawnee has possession of the goods but has limited interest in the goods.

Security against debt

The goods must be pledged as security against an outstanding debt of the pawnor. This outstanding debt can also be a promise for specific performance.

Return of goods on repayment

Once the debtor the specific performance against which goods are pledged as security is repaid or completed, the goods must be returned to the pawnor in the manner specified by him.

Duties of the pawnor and the pawnee

Duties of the pawnor:

To compensate expenses

The pawnor has the responsibility to compensate the pawnee for all the ordinary and extraordinary expenses made by the pawnee in order to ensure the well-being of the pledged goods.

To repay the entire amount due along with interest

The pawnor has to repay the amount which is due to the pawnee. This amount is the total of the principal amount as well as any interest accrued on that amount during the course of the contract.

To disclose all the faults in the goods

The pawnor before entering into a contract has to disclose all the faults in the goods to the pawnee. If the pawnee incurs any loss later due to those faults, the pawnor will be liable for those.

Duties of the pawnee:

To take reasonable care of the goods

It is the pawnee’s responsibility to take care of the goods that are pledged. The care taken by the pawnee must be just, fair and reasonable. It should be as the pawnee took care of his personal belongings. If due to negligence of the pawnee, the goods are damaged, he will be liable to compensate the pawnor.

For example: If ‘A’ pledges his watch with ‘B’ for a sum of Rs. 100. Then ‘B’ must take reasonable care of A’s watch as if it is B’s own watch. The condition of the watch should not deteriorate or be worse than at the time when it was pledged.

To use the goods only for authorised purpose

The pawnee can use the goods pledged if only it is authorised by the pawnor. If the goods are used for any purpose that is not authorised, the pawnee will have to compensate the pawnor against the same.

For example: ‘A’ pledges his car with ‘B’. ‘A’ authorises ‘B’ to use the car for his personal use. ‘B’ allows his cousin ‘C’ to drive the car and the car then gets damaged. ‘B’ will have to compensate ‘A’ for the damages

To return the goods

As per the contract, once the amount against which the goods are pledged is repaid, the goods must be returned to the pawnor. This return must be as mentioned in the contract or as per the pawnor’s directions.

To return any profits arised from the goods

If at any time during the contract, the pawnee earns profit from the pledged goods, the same shall be returned to the pawnor during the termination of the contract.

Example: ‘X’ pledged his property with ‘Y’. The property was given on rent to ‘Z’. The rent received on the property must be returned to ‘X’.

To keep the goods separate

It is the pawnee’s duty to keep the pledged goods separate from his own goods. If he mixes the pledged goods, all expenses to separate them will be borne by the pawnee. If separating is not possible, the pawnee will be liable for all the damages.

Rights of the pawnor and the pawnee

Rights of the pawnor:

To redeem the goods

As per Section 177 of the Act, ”If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them, but he must, in that case, pay, in addition, any expenses which have arisen from his default.”

For example: ‘A’ gave his watch to ‘B’ as a security against INR 800 that is due. They agreed that the amount should be repaid within 1 month. If ‘A’ fails to do so, he can redeem his watch even after the expiry of the contract given that ‘B’ has not yet sold the watch. However, if ‘B’ had to incur any expenses to safekeep that watch, the same will have to be paid by ‘A’.

To get the goods back

Once the pawnor pays back the amount due along with the interest to the pawnee, he has the right to get the goods back. After clearing the entire due against which the goods were held as security, the pawnee cannot retain the pledged goods.

Rights of the pawnee:

To retain the goods

The pawnee has the right to retain the goods until the amount owed by the pawnor is paid in full or the promise is completely performed. This amount includes the expenses incurred by the pawnee as well as any interest accrued on that amount. This is mentioned in Section 173 of the Act.

For example: ‘A’ pledged his house with a bank for a loan of INR 2,50,000. The interest on the same was INR 10,000. The bank can retain the pledged house until ‘A’ repays the entire amount along with the interest i.e. INR 2,60,000.

As per Section 174,”The pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee.’”

To get compensation for extraordinary expenses

It is implied that the pawnor will be liable to pay for all the necessary expenses needed for the safekeeping of the goods. As per Section 175, if any extraordinary expenses arise, the pawnor will only be liable for the same as well. However, the pawnee cannot retain the goods for non-payment of such expenses.

To sell the goods

As mentioned in Section 176, “If the pawnor makes default in payment of the debt, or performance; at the stipulated time or the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.” It is important to note that the pawnor must be given proper and enough notice before selling the goods. It is further mentioned, “If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.”

For example: ‘X’ pledged his watch with ‘Y’ as security against INR 10,000. ‘X’ defaulted the payment even after enough notices. ‘Y’ went to sell his watch. If the watch is sold above INR 10,000, the surplus amount must be returned to ‘Y’. However, if the watch is sold for less, ‘X’ will still be liable for the difference.

Relevant case laws

Lallan Prasad v. Rahmat Ali and Anr., 1996

Facts of the case

In this case, the plaintiff advanced INR 20,000 to the defendant against a promissory note and a receipt. An agreement was signed by both the parties where the defendant agreed to pledge his aeroscapes as collateral against his debt. As per their agreement, the defendant had to deliver the aeroscapes to the appellant and the goods would remain in his custody.

The plaintiff filed a lawsuit claiming that the above-mentioned goods were never delivered to be in his custody and therefore, this agreement cannot be considered as a contract of pledge. He claimed that he was entitled to recover the amount loaned by him.

Issue involved in the case

Whether pledged goods were delivered in the plaintiff’s custody?
Was the plaintiff entitled to any compensation as he claimed that there was no contract of pledge since the goods were not delivered?

Judgement of the Court

The judgement was in the favour of the defendant. It was held by the Supreme Court that the pledged goods were delivered to the plaintiff. This meant that this agreement did ripen into a contract of pledge. The Court also stated that the plaintiff was not entitled to any compensation on his stance that the goods were never pledged to him.

The Morvi Mercantile Bank Ltd. And Anr. v. Union of India, 1965

Facts of the case

In this case, a firm operating in Mumbai entrusted their goods worth INR 35,500 to Railways for its delivery to Delhi. The firm got their receipt for these goods from the Railways. In order to get an advance of INR 20,000 from the plaintiff, the firm pledged these receipts as collateral for the same.

The goods were lost by the railways and they offered to compensate with certain parcels to the plaintiff. The plaintiff rejected this and claimed that those weren’t the goods that were pledged to them. The plaintiff, hence, sued the railways to recover INR 35,500 against the value of goods pledged to them including the damages.

Issues involved in the case

Whether railway receipts can be considered as valid goods under contract of pledge?
Whether the plaintiff was the pawnee of the goods or the documents of the good’s title?
Whether the plaintiff could sue for the entire value of the goods or only what was advanced by him?

Judgement of the Court

The Supreme Court of India ruled in favour of the plaintiff. It was held that railway receipts can be valid as goods under a contract of pledge. It was also held that the plaintiff was the pawnee of the goods and not merely its documents of title. It was stated that since the pawnee in a contract of pledge has the authority as the owner of the goods, the plaintiff will be allowed to sue for the entire value of the goods and not just the amount he has advanced.

K. M. Hidayathulla v. the Bank of India, 2001

Facts of the case

In this case, on 10th December, 1993, the petitioner pledged certain gold jewels with the respondent. These jewels were pledged against a certain amount. The petitioner failed to repay the amount within the agreed time. The bank held an auction for the jewels on 20th May, 1997 to recover the debt. The petitioner claimed that as per Section 176, the bank had the right to either file a suit against him for recovery or sell the jewels via an auction after giving reasonable notice to the petitioner, however, it must have taken place within the prescribed time for filing the suit.

Issues involved in the case

Whether any such condition was mentioned in Section 176 of the Act?
Whether the pawnee could auction the goods after the prescribed period?

Judgement of the Court

The judgement passed by the Madras High Court was in the favour of the bank. It was held that the bank had two remedies; either to file a suit for recovering the debt or selling the goods after reasonable notices to the pawnor. It was found that there was no connection between the two remedies. Merely because the period for filing a suit had passed, it did not mean that the other alternatives could not be used. It was held that if the pawnee resorted to any alternate course of sale, the prescribed period should be extended for the same.

Difference between a contract of bailment and pledge

Contracts of bailment and pledge are special types of contracts that are regulated under the Indian Contract Act, 1872.

Contract of Bailment	Point of difference	Contract of Pledge
When certain goods are transferred from one party to another for a specific purpose, it is called a contract of bailment.	Meaning	When certain goods are transferred from one party to another as a security against a debt, it is called a contract of pledge.
It is covered under Sections 148-171 of the Indian Contract Act, 1872.	Provisions	It is covered under Sections 172-179 of the Indian Contract Act, 1872.
The sole purpose for bailing the goods is for the safe custody of the goods or repairs, at most times.	Purpose	The sole purpose to enter into a contract of pledge is for security against a debt.
The party which bails the goods is known as the ‘bailor’ and the party with whom the goods are bailed is known as the ‘bailee’.	Parties	The party which pledges their goods is known as the ‘pawnor’ or the ‘pledger’ and the party which receives the goods is known as the ‘pawnee’ or the ‘pledgee’.
The presence of consideration in a contract of bailment is mandatory.	Consideration	The presence of consideration in a contract of pledge is mandatory.
The goods cannot be sold by the bailee in such contracts.	Right to sell	The goods may be sold by the pawnee or the pledgee.
The goods can be used by the bailee only for specific purposes known to both the parties or not otherwise.	Right to use	The goods cannot be used by the pawnee or the pledgee.

Conclusion

It is true that we don’t even realise that we enter into these contracts in our life. Contracts of bailment is a field which has been entered by arguably the most number of people unknowingly. Even when we simply give our product to be serviced, we enter into a Contract of bailment with the other party.

After analysing and understanding the essentials and differences between contracts of bailment and contracts of pledge, I can conclude that the scope of bailment contracts is very wide. However, contracts of pledge are very limited in nature. After looking at the similarities between both, we can deduce that all the contracts of pledge are contracts of bailment but not all contracts of bailment are contracts of pledge.

References

https://indiankanoon.org/doc/171398/
https://static.careers360.mobi/media/uploads/froala_editor/files/Part-2-Unit-2%3A-Bailment-and-Pledge.pdf
https://lawtimesjournal.in/contract-of-bailment-and-pledge/
https://blog.ipleaders.in/bailment-and-pledge/#:~:text=Introduction,person%20as%20security%20against%20loans.

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Types of agreements under Indian Contract Act, 1872

By

Sneha Mahawar

-

May 4, 2022

0

This article is written by Arya Mittal from Hidayatullah National Law University. The article seeks to explain all types of agreements such as valid agreements, void agreements, voidable agreements, etc in light of the Indian Contract Act, 1872.

This article has been published by Sneha Mahawar.

Introduction

Agreements are one of the most important aspects of our day-to-day lives. We enter into numerous agreements daily. These agreements are entered into consciously or subconsciously. Under the law, agreements confer a number of rights and obligations upon the parties. Thus, it is crucial to understand the types of agreements, and what agreements may be enforceable in a court of law in order to protect our rights and discharge the obligations so as to avoid any legal action against ourselves.

Different types of agreements

Valid agreement

A valid agreement may be defined as an agreement that, if enforceable by law, shall become a contract and make the parties to the agreement binding to the conditions thereof. An agreement is defined under Section 2(e) of the Indian Contract Act, 1872 (the Act). It states that “Every promise and every set of promises, forming the consideration for each other, is an agreement”. Thus, more than often, a valid agreement becomes a contract.

The essential conditions of a valid agreement include:

The agreement shall have a valid consideration.
The parties shall be competent to contract as per Section 11 and Section 12 of the Act.
The consent of the parties is free and uninfluenced.
The object of the agreement is lawful.

Section 11 of the Indian Contract Act, 1872

Section 11 of the Act provides the conditions for the competency of the parties to contract. To constitute a valid agreement, the parties shall be competent. Every person who is a major as per the provisions of the Majority Act, 1875, of a sound mind, and has not been expressly barred to enter into a contract by the law, shall be competent to contract. Thus, an agreement with a minor is not a valid agreement.

Section 12 of the Indian Contract Act, 1872

Section 12 of the Act provides that a sound mind for the purpose of a contract shall mean to be the capacity of the mind to understand the consequences of the agreement. A person who is of an unsound mind usually, but is of sound mind at the time of entering in an agreement, such agreement shall be a valid one. Similarly, a person who is usually of a sound mind, but of an unsound mind, while entering an agreement, such agreement shall be void.

Void agreement

A void agreement has been defined under Section 2(g) of the Act. It states that “An agreement not enforceable by law is said to be void”. In addition to the definition, the provisions of the Act declare certain agreements to be void, as the objects of such agreements are unlawful. These agreements include:

S. No.	Description	Illustration
1.	Agreements of which consideration or objects are unlawful in part as mentioned under Section 24 of the Act	A offers to purchase a lawful plot of land and an unlawful parking space from B for a sum of Rs. 20 lakhs. The agreement shall be void as one of the objects is illegal.
2.	Agreements without consideration under Section 25 of the Act	A, without any reciprocal promise, agrees to pay a sum of Rs. 5000 to B. This shall be a void agreement.
3.	Agreements restraining marriage under Section 26 of the Act	A restrains his daughter B to marry C, who is a physically disabled person. This shall be a void agreement.
4.	Agreements restraining trade under Section 27 of the Act	A enters into an agreement with B to restrain B from establishing a competing business in his locality. This agreement shall be void as it puts a restraint on the trade of B.
5.	Agreements restraining legal proceedings under Section 28 of the Act	An agreement between A and B provides that any dispute arising out of the course of the agreement shall be settled mutually and neither of the two shall approach the Court. This clause makes the whole agreement void.
6.	Agreements with an uncertain meaning under Section 29 of the Act	A agrees to sell to B “a hundred tons of oil”. There is nothing whatsoever to show what kind of oil was intended. The agreement is void for uncertainty
7.	Agreements of wagering under Section 30 of the Act	An agreement to pay a sum of money to either of the parties on the basis of winning or losing of a cricket team shall be deemed void.
8.	Agreements to perform an impossible duty under Section 56 of the Act	A and B contract to marry each other. Before the time is fixed for the marriage, A goes mad. The contract becomes void.

Section 24 of the Indian Contract Act, 1872

As per the provision, if an agreement is entered into by the parties, and a part of the consideration or object of the agreement is unlawful, then such agreement shall be void. However, an exception to this notion is a derivative form of the doctrine of severability. If a valid consideration or object of the agreement can be severed from the invalid part, the performance of such valid part shall be enforceable.

In the case of Bank of India Finance Ltd. v. Custodian (1997), BoI Finance Ltd. had entered into agreements with its customers, which were found to be violative of certain guidelines issued by the Reserve Bank of India. The question before the Court was the validity of the contracts which have already been executed. The Court upheld the validity of such agreements and it was held that where the transactions arising out of an agreement, and the agreement is found to be invalid, such transactions shall still remain valid.

Section 25 of the Indian Contract Act, 1872

The provision provides that agreements without any consideration shall be considered void agreements. However, the requirement of consideration is an exception in certain cases. These exceptions have been provided under Section 25 and can be understood as follows:

In a case where the promisor and the promisee have mutually agreed to exclude consideration from their agreement, and such condition of the agreement is provided in writing, duly stamped and registered under the law, then such agreements shall not be void. It is pertinent to note that the exception for the necessity of consideration in such cases shall be out of love and affection between the parties. Additionally, an agreement without consideration is a promise that is done to compensate for any prior deeds of the promisee that have been done voluntarily, and shall not be void. Lastly, an agreement that is a promise to pay, in full or in part, any payment to a creditor any debt due, but such debt has been barred by limitation, such agreement shall not be void.

In Rajlukhy Dabee v. Bhootnath Mookerjee (1900), the parties agreed to live separately on the condition that the husband shall pay monthly maintenance to his wife. It was a registered document in writing. The document also contained certain disputes and disagreements between the parties. However, the Calcutta High Court held that the agreement is a void agreement for the reason that there was no love and affection between the parties.

Section 26 of the Indian Contract Act, 1872

Section 26 of the Act provides that every agreement, in any manner, restraining a person to marry shall be void. Such restraint may be from marrying any particular person, or a person from a certain class of persons, or from marrying for a particular period or marrying at all. The only exception to this provision is restraining a minor from marrying any person. Such agreements shall be valid, as child marriage is itself a crime.

It is pertinent to note that only agreements restraining the parties from marriage shall be void. In a case where certain rights of the parties shall cease upon entering a marriage shall and has not been held to be void.

Section 27 of the Indian Contract Act, 1872

Section 27 provides that any agreement, restraining a person from carrying on any profession, trade or business of his choice, shall be void. However, it is not a straight-jacket rule applied to each case, rather it has an exception. If an agreement is entered into by the parties, one of which is buying the goodwill of another’s business, it may contain a condition where the buyer shall not engage in a similar business as that of the seller.

In Madhub Chander v. Raj Coomer (1874), the facts included two rival shopkeepers from a locality. The defendant, in this case, agreed to pay a sum of money to the plaintiff if the latter did not operate his shop in the same locality, to which he agreed. The defendant later refused to pay the sum of money, and hence was sued by the plaintiff. The Court held that the agreement was a void agreement, as it contained a provision for restraint of trade or business. Thus, in India, any agreement restraining any trade or business, either partially or completely, shall be void.

Section 28 of the Indian Contract Act, 1872

Section 28 of the Act provides that the agreements that restrict any of the parties to seek legal remedies or restrain legal proceedings shall be considered void agreements. However, there are exceptions provided by the law, wherein the parties may be restrained from approaching the Court. The first exception is an agreement with an arbitration clause. The second exception includes questions that have already arisen. The third and final exception to this provision is a guarantee agreement by a bank or a financial institution.

Section 29 of the Indian Contract Act, 1872

Section 29 of the Act provides that the agreements, the meaning of which is uncertain or cannot be ascertained, shall be considered as void agreements. Agreements require specific and defined objectives in order to confer definitive rights and obligations upon the parties. Any vagueness in an agreement may act as a factor for rendering the agreement void.

Section 30 of the Indian Contract Act, 1872

Section 30 provides that all the agreements by the way of wager shall be void. The term “wager” has not been defined under the provision. Hence, it shall be according to the judicial precedents. In Carlill v. Carbolic Smoke Ball Company (1892), Hawkins J. observed that “A wagering contract is one by which two persons professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent on the determination of that event, one shall pay or hand over to him, a sum of money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties. It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known. If either of the parties may win but cannot lose, it is not a wagering contract.”

Thus, the essential features of a wagering contract are the uncertainty of an event, mutual chances of both parties to gain something, no control of either party, and there shall be no other interest of the parties.

Wagering Agreements

Wagering Agreements is when the first party promises to pay the second party on the occurrence of a certain event and the second party agrees to pay to the first party on the event not happening. It is between two parties of rational mind who understand they shall get profit or that shall face loss. As stated above, all wagering agreements fall under Section 30 and they are considered void. An example of a wagering agreement is the following. A and B agree with each other that if a ball hits a pot, A will pay Rs. 100 to B and if the ball does not hit the pot, B will pay A Rs. 100. Such an agreement is a wagering agreement and hence is void.

In order for a wagering agreement to be considered so, the following elements should be present.

Both parties should have an equal opportunity to win or lose.
The event the wager is done on should be out of the control of both the parties.
The only interest of the parties to enter the agreement should be to win or lose. No other motive should be present.
The wager agreement is fully dependent upon the happening of the futuristic event.
There should be a promise made by both the parties to pay the money or the consideration according to the conditions of the agreement.

Contingent Agreement

Contingent Agreements are under Section 31. Unlike wager agreements, they are valid contracts. Contingent agreements shall be executed on the basis of a promise which is contingent on the happening or non-happening of an uncertain future event. For example, A promises B to pay Rs 2000 in case there is water damage to A’s house. The essentials of this agreement are stated below.

There must be a valid contract to do or abstain from doing something.
The condition for which the contract has been entered into must be a future event, and it should be uncertain.
The event on which the agreement is based should not be a part of the collateral.
The event should not be dependent on the promisor.

Despite being very similar in nature, contingent and wagering agreements are very different in nature.

Contingent Agreements	Wagering Agreements
A contingent agreement is valid.	A wagering agreement is void
In a contingent agreement, the future uncertain event is merely collateral.	In a wagering agreement, the entire agreement is based on an uncertain event.
In a contingent agreement, the parties have a real interest in the happening or non-happening of the event.	In a wagering agreement, there is no interest in the event. There is merely an interest in gaining or losing profit.
Not all contingent agreements are wagering agreements.	All wagering agreements are contingent contracts

Voidable agreement

A voidable agreement may be defined as an agreement that may be revoked by either of the parties to the agreement due to various legal reasons. Such an agreement, when enforceable by law, shall be termed as a contract voidable at the option of a party.

Section 19 of the Act provides that where the consent of a party has been procured by either coercion, misrepresentation or fraud, such party shall have an option to retaliate from the agreement as and when it deems fit. Similarly, under Section 19A, when the consent of a party to an agreement is obtained through undue influence, such a party has an option to revoke the agreement and has an option to set aside the contract completely.

Section 53 of the Act provides that “When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract.”

In addition to the above-stated situations, where the promisor fails to perform his duty, as per the agreement of which time is an essential condition, within the stipulated time, then the agreement is voidable at the option of the promisee.

Difference between void and voidable agreements

Void Agreements	Voidable Agreements
Considered invalid from the start.	Declared invalid by the parties later on due to certain reasons.
Invalid at face value.	Valid at face value.
No performance is possible.	Performance is possible until declared invalid.
It is non-existent and cannot be upheld by any law.	It is an existing agreement and is binding to one party involved in the contract.

Express and implied agreements

As stated above, an agreement may be defined as a promise coupled with consideration. Section 9 of the Act provides the meaning of express and implied promises. It states that any promise made through words by the parties shall be considered as an express promise, and any promise made other than words shall be considered as an implied promise. Thus, an express agreement shall be an agreement wherein the promise is express, and an implied agreement shall be an agreement wherein the promise is implied.

Illegal Agreements

Any agreements against the provisions of the law in force in India shall be considered an illegal agreement. Either of the two conditions, illegal object or illegal consideration, shall render the agreement illegal. Even if the content of an agreement compels the parties to perform an illegal act, it shall be an illegal agreement.

The difference between illegal and void agreements is that the latter is not necessarily against the provisions of the law in force, while the latter is explicitly against the provisions of the law. In other words, every illegal agreement is a void agreement, while every void agreement is not an illegal agreement.

Conclusion

The various types of agreements described under the Indian Contract Act, 1872, are very crucial and important in the day-to-day lives of each and every person. An understanding of the types of agreements shall help one protect his rights and discharge his duties in accordance with the law. Moreover, it is pertinent to note that an agreement should only be entered into by a person if such agreement is enforceable in a court of law. The courts have, time and again, rejected to provide relief to the parties stating the non-enforceability of the agreements.

References

Avtar Singh, Contract and Special Relief (12th ed., 2021, Eastern Book Company)
Nilima Bhadbhade, Pollock & Mulla, Indian Contract & Specific Relief Acts (15th ed., 2017, LexisNexis)
Beatson (ed.), Ansons’ Law of Contract, (1998), Oxford, London

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iPleaders

Construction agreements : all you need to know

Introduction

Most important clauses of construction agreements

Identifying details of both parties

Description of property and project

Licences and permits

Incentives

Projected timeline and date of completion

Estimated cost and payment schedule

Right to stop work

Right to stop payment

Act of God

Contingency plans

Change order provisions

Indemnities

Remedies for breach

Dispute resolution mechanisms

Warranty

Disposal of materials and condition upon conclusion

Signature and date by both parties

Types of construction agreements

Lump-sum/ fixed sum construction agreement

Cost-plus construction agreement

Time and materials construction agreement

Unit pricing construction agreement

Advantages of construction agreements

Disadvantages of construction agreements

Common mistakes made while drafting construction agreements

A sample Construction Agreement

CONSTRUCTION CONTRACT

ARTICLE 1, THE WORK:

ARTICLE 2, TIME OF COMMENCEMENT AND COMPLETION:

ARTICLE 3, CONTRACT AMOUNT AND BASIS:

ARTICLE 4, PROGRESS PAYMENTS:

ARTICLE 5, FINAL PAYMENT:

ARTICLE 6, CONTRACT DOCUMENTS:

ARTICLE 7, OWNER’S REPRESENTATIVE (OR):

ARTICLE 8, OWNER:

ARTICLE 9, CONTRACTOR:

ARTICLE 10, DECISIONS ON DISPUTES:

ARTICLE 11, DELAY:

ARTICLE 12, PAYMENTS:

ARTICLE 13, PERMITS:

ARTICLE 14, INDEMNIFICATION:

ARTICLE 15, CHANGES IN THE WORK:

ARTICLE 16, ACCEPTANCE OF THE WORK (WARRANTY):

ARTICLE 17, SAFETY:

ARTICLE 18, PROPERTY INSURANCE:

Conclusion

References

Labour Law compliances for Indian startups

Introduction : Labour Law compliance

Eligibility criteria for startup recognition

Compliance under labour laws

Other Construction Workers Regulation of Employment & Conditions Act, 1966

Inter-State Migrant Workmen Act, 1979

The Payment of Gratuity Act, 1972

The Employees Provident Funds & Misc. Provisions Act, 1952

The Employees State Insurance Act, 1948

Industrial Employment (Standing Orders) Act, 1946

Industrial Disputes Act, 1947

CLRA compliance

Government initiatives

Conclusion

Voidable contracts : all you need to know

Introduction

What are voidable contracts

Accepting a voidable contract

Repudiating a voidable contract

Voidable contracts based on formation defects

Voidable contracts based on vitiated consent

Voidable contracts under the Indian Contract Act, 1872

What makes a contract voidable at the option of the other party

Coercion

Undue influence

Fraud

Misrepresentation

The doctrine of mutuality

Types of voidable contracts