This article is written by Pallavi Chandrasekhar, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction

Indian and American companies enter many contracts with each other like technology services, employment agreements, etc. In the event of a dispute between the parties, a question on which law would govern the contract in the event of an ambiguity would arise. It is thus essential to see the subtle differences between the contract laws of the two countries.  

Indian Contract law is codified in the Indian Contract Act, 1872. The gaps in the legislation are covered by judicial precedents. Indian contract law is uniform throughout the country. American contract law, however, differs from state to state especially regarding contracts for services. For example, the State of New York has the “four corners” rule which disallows parol evidence. It states that extrinsic evidence is not allowed to create problems for an agreement which prima facie appears to be complete and accurate. Some other American states might allow extrinsic evidence and not follow the ‘four corners’ rule.

Indian contract law

Indian contract law is governed by the Indian Contract Act of 1872 and judicial precedents.  Under Section 2(h) of the Indian Contract Act, an agreement that can be enforced by law is called a contract and Section 10 under the same act states agreements that are made by free will of competent parties, for a lawful consideration and object are contracts.  Like most contracts, Indian contracts also require an offer, acceptance, consideration, competent parties to contract, and in the event of breach the party suffering can seek for damages or specific performance.  

American contract law

American contract law on services, land use and sale of land are governed by common law or judicial case law and some of these principles have been codified by some legal scholars as the Restatement (Second) of Contracts. This treatise is persuasive and not binding in nature. It is often used by law students to understand the basic tenets of contract law.  However, sale of goods is governed by the codified Uniform Commercial Code (UCC) Article 2. 

Under the UCC, goods are defined as all movable items at the time of sale other than the money that must be paid under the agreement. It also includes unborn animals, growing crops, and things attached to land that can be severed from the land. They also must exit and be identified before any interest in them can be established and transferred (UCC 2-105(1)). Goods that do not exist and cannot be identified are called ‘future gods’ (UCC 2-105(2)).

Furthermore, if the subject matter is of mixed nature, which might include both goods and services, the courts would apply the ‘predominant factor’ test to see which laws would apply.  The courts will see what the predominant goal of the purchaser is. If the purchaser intends to buy a good through the contract and services are merely secondary to the good, the courts will apply the UCC. Similarly, if the purchaser wants to buy services and goods are just accompanying the service, the courts will apply common law.

Similarities

• Both India and US contracts have competency to contract requirements wherein the parties must not be minors, must not be coerced, misrepresent facts related to the contract etc.
• Both jurisdictions have monetary damages and specific performance contracts as remedies. 
• The United States has the defense of unconscionability for breaching a party’s obligations under a contract. It also has procedural conscionability and substantive unconscionability.  Procedural unconscionability exists when the aggrieved party does not have a meaningful choice while signing the contract. Substantive unconscionability is when the terms of the contract unreasonably favor one party.

Under Indian contract law, unconscionability doctrine comes under the undue influence defense of Section 16 of the Act. Section 16 of the Act defines undue influence as a relation between the parties to an agreement where one can dominate the others will and uses that to their unfair advantage.

• Remedies of promissory estoppel and unjust enrichment are there in both jurisdictions.

Third party beneficiary provisions are also there in both countries.

Differences

• In the US, under the statute of frauds signed and written agreements are required. India has no such statute of frauds. Most contracts under statute of frauds include marriage contracts, contracts that are not required to be performed within a year of their making, contracts related to land, contracts for an executor, guarantee or surety contracts, sale of goods contracts for a price of more than USD 500.  

But India does not require any written signed agreements to make the contract enforceable.  It only requires signed and written agreements for sale of land above Rs. 100/- for the registration of the agreement, recording its contents, and to be presented in a court of law as evidence. Under Section 17 of the Indian Registration Act, 1908; instruments regarding immovable property- its sale, gift, lease, etc. requires compulsory registration and stamping, instruments regarding sale of immovable property above Rs. 100, lease deed exceeding one year, etc.

• India does not have a separate legislation for sale of goods or services.  All contracts whether for goods, or services or a combination of both are governed by the Indian Contract Act and judge made law.

In the United States, on the other hand, sale of goods is governed by UCC and contract for services is governed by common law. A hybrid object of good and service would be covered by the ‘predominant factor’ test as mentioned above.

• American common law has imposed a good faith dealing requirement on parties entering a contract with each other. The Indian Contract Act nor judicial precedent specifically talk about good faith or fair dealing being applicable to all contracts.  Some sections of the Indian Contract Act such as those dealing with bailee or employer and agent.  

In the case of Association of Unified Telecom Service Providers of India v. Union of India, AIR 2014 SC 1984, the Indian Supreme Court spoke about an implied covenant of good faith and fair dealing between the parties in every contract. However, this observation was later sidelined as just an observation and not the core ratio of the decision. But the doctrine of utmost good faith has been recognized in insurance contracts between parties.

• Monetary damages in the United States can be classified into three types- expectation interest, reliance interest, and restitution of interest. Expectation interest is the default damages awarded to an aggrieved party by the court. Award of expectation interest damages would restore the aggrieved party to the state she was in had the contract been performed. Reliance interest damages are paid when the aggrieved party makes an expenditure for the performance of the contract.  In this scenario, the courts endeavor to restore the aggrieved party to a position she was in prior to the contract. Restitution damages are equal to the value of benefits that are conferred upon the other party in the transaction. This is usually awarded by the court when the aggrieved party has partially performed the contract.

Neither the Indian courts nor the Contract Act have classified damages as is done in the States. In India instead, liquidated damages, and unliquidated damages are sought by parties. Section 74 of the Indian Contract Act stipulates that in the event a party has breached a contract, compensation can be sought by the aggrieved party and shall not exceed the amount specifically mentioned in the contract regarding such breach.

Conclusion

In December 2019, India and the United States signed several agreements for cooperation in defense, industry, science and technology, space research, joint defense exercises, water conservation, disaster management etc. These would include signing of technology transfer agreements, defense manufacturing agreements, several memoranda of understanding, etc. Companies and individuals entering the American markets have to be careful regarding the regulatory American framework. This is particularly true for Indian pharmaceutical and information technology sector entering the American markets and signing agreements. Indian entities are already aware that America in general is a litigious society and any breach of contractual terms including its representations and warranties can be very costly to Indian companies doing business in the United States. 

However, these transactions would be dramatically hit by the COVID-19 pandemic world over. There would be fewer people to people (P2P) and people to business (P2B) and business to business (B2B) exchanges because of the virus spread. This would imply fewer new contracts being signed between the two nations.  

The contracts already in force are not getting performed in India or in the States. It must be seen whether companies and individuals using the force majeure clause in their contracts escape from paying damages or whether performance has been suspended till the global pandemic is over. Further, the decision of which party would have to pay damages due to delays also has to be discussed. Recently the Delhi High Court in the matter of Halliburton Offshore Services Inc. vs. Vedanta Limited & Anr. [O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020] has ruled that every breach and non-performance of contract cannot be justified using the COVID-19 as a force majeure condition. It said that other factors would have to be considered whether the parties were genuinely prevented from performing their obligations under the agreement due to the pandemic.

References

1. https://www.nybarexam.org/Content/NewYorkCourseMaterials.pdf
2. https://www.lawctopus.com/academike/introduction-to-contracts/
3. Kaplan LLM Bar Notes
4. https://www.legawise.com/whether-all-agreements-should-be-on-stamp-paper-and-registered
5. https://indiacorplaw.in/2018/12/doctrine-good-faith-fair-dealing-lacuna-indian-contract-law.html
6. https://blog.ipleaders.in/unconscionability-grounds-avoiding-agreement/
7. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Law_of_Damages_in_India.PDF
8. https://economictimes.indiatimes.com/news/politics-and-nation/india-and-usa-conclude-several-landmark-agreements-in-22-ministerial-dialogue/articleshow/72892719.cms?from=mdr
9. https://www.mondaq.com/india/litigation-contracts-and-force-majeure/951384/can-every-breach-or-non-performance-be-justified-or-excused-on-invocation-of-covid-19-as-a-force-majeure-delhi-high-court-verdict
10. https://www.dnaindia.com/business/interview-the-key-difference-between-india-and-the-us-is-law-enforcement-1294666

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