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Commercial Agreements and Contracts - India

Commercial Agreements & Contracts

Commercial Agreements and Contracts in India

Commercial agreements and contracts are very essential as they legally determine and create liability over parties who enter into agreements for transacting a business, sealing a deal, selling and buying of movable and immovable goods, renting and leasing of properties etc. In each and every aspect of a commercial transaction the formation of contracts is indispensable.

A commercial contract may refer to a legally binding between parties in which they are obligated to do or restrain from doing stipulated acts and include all aspects of a business, such as hiring, wages, leases, insurance, loans and employee safety. Negotiations are the starting point of any commercial relationship and these are drafted to record the negotiations between the concerned parties in writing so as to give them a legally binding nature.

An agreement is a promise or a set of promises forming the consideration for each other. It is important to note that all Contracts are Agreements but all Agreements are not Contracts and only the ones that enforceable by law are called contracts.

The contract law in India is codified in the Indian Contract Act, 1872 which governs the formation of contracts, execution of contracts, performance of contract and the effects of breach of contracts.

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Commercial Agreements & Contracts Faqs

Understanding Anticipatory Breach of Contract

Anticipatory breach is a special remedy in which the promisee foresees the breach, due to the conduct or expressions of the Promisor before the performance of a contract occurs. This provision allows the promisee to take recourse to alternative steps in order to mitigate his losses beforehand without waiting for the actual date of performance on which such breach is to actually c. As per the most significant case relating to anticipatory breach, Hochestor v. De La Tour [1], Lord Campbell CJ made a very important observation that forms the genesis of the concept of anticipatory breach. He stated that a ‘contract is contract from the date it is made and not from the date its performance is due’. Hence, even though the performance becomes due on a future date, the obligations are still initiated on the date of creation of the contract.

An illustration of anticipatory breach is given below –

X promises to sell certain goods to Y at the end of every month. X and Y are both situated in the same country. At the start of one month, X makes a public proclamation that it is ceasing its domestic operations and shall only be exporting all its products. If Y is aware of this proclamation, it does not have to wait till the date when the actual delivery becomes due. It can anticipate, in advance that there shall be a breach of the contract on the date of delivery or before the actual performance becomes due.

Provisions of the Laws

Anticipatory breach, though not per se defined under the contract laws in India, is incidentally covered under the following provision of the Indian Contract Act, 1872 and the Sales of Goods Act, 1930

  1. Section 39 of the Indian Contract Act, 1872:

Effect of refusal of party to perform promise wholly. —When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.

  1. Section 60 of Sales of Goods Act, 1930

Repudiation of contract before due date. —Where either party to a contract of sale repudiates the contract before the date of delivery, the other may either treat the contract as subsisting and wait till the date of delivery, or he may treat the contract as rescinded and sue for damages for the breach.

Options available to the aggrieved Parties/ Promisee

Both the above sections provide that the aggrieved promisee has two options, namely, at his own accord he may either rescind the contract or wait for its actual breach. In a landmark English the case of Avery v Bowden [2] where the promisee by his conduct portrayed that he shall allow the contract to subsist until actual breach, and where before occurrence of the actual breach the contract was frustrated due to impossibility, the Court held that the promisor’s obligations were discharged due to impossibility and since the promisee opted not to act for anticipatory breach he could not claim damages, as the contract was frustrated before the date of performance.

Acceptance by the Promisee: In the case of State of Kerala v Cochin Chemical Refineries Ltd., [3] it was held that by refusing to advance the loan which the state had undertaken to advance, its obligation to purchase groundnut cake from the company did not come to an end. Also, the Court observed that repudiation just by one party alone does not bring an end to the contract. There has to be repudiation, on one side and acceptance of repudiation on the other. This law was emphasized by Lords in White and Carter (councils) ltd v Mc Gregor 1962 AC 413: (1962) 2 WLR 17: (1961) 3 All ER 1178(HL). 

Damages for Anticipatory Breach:

Further, in the case of Jawahar Lal Wadhwa and Anr. Vs. Haripada Chakroberty[4] it was observed by the Court that “It is settled in law that where a party to a contract commits an anticipatory breach of the contract, the other party to the contract may treat the breach as putting an end to the contract and sue for damages, but in that event he cannot ask for specific performance.”

Also, in the case of Manindra Chandra Nandy and Ors. Vs. Aswini Kumar Acharyya,[5] it was observed that upon anticipation of breach the injured party can immediately sue for damages. The Court held that:

Calculation of damages: The damages for breach of a contract by renunciation thereof before performance is due, are measured by what the injured party would have suffered by the continued breach of the other party down to the time of complete performance, less any abatement by reason of circumstances of which he ought reasonably to have availed himself. The substance of the matter then is, that the damages are assessed as on the date of the breach; nevertheless, they are to be a compensation for the loss caused by depriving the plaintiff of the benefit of the contract as it was originally made.

When anticipatory breach becomes effective: The doctrine of anticipatory breach is not a doctrine which fictitiously moves the performance ahead to the time on the repudiation and regards the repudiation as a failure to perform the contract. The anticipatory breach takes effect as a premature destruction of the contract rather than as a failure to perform it in its terms.

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[1] 1853 2E & B678

[2] 1855 5E & B 714,

[3] AIR 1968 SC 1316 

[4] Civil Appeal No. 2678 of 1985

[5] AIR1921Cal185, 25CW N297, (1921)ILR 48Cal427, 60Ind. Cas.337

As contracts create a legal relationship between parties, they play an essential role in any transactions or deals entered into by companies or individual persons. Hence, it is essential that all the terms and conditions of the contract are drafted with utmost precision and legal vetting of contract is done carefully and efficiently. Some typical stipulations in a contract may be definitions, object of the agreement, rights and liabilities/ obligations of parties, confidentiality clauses, protection of IPR, dispute settlement mechanism etc.

Commercial agreements and contracts are an indispensable aspect of any transaction or deal. Hence, drafting of commercial agreements and contracts with utmost precision and with all necessary stipulations is vital for any organization. Contracts being documents which are created with the intent to create legal relationships, play a crucial role in governing relationships like employer and employee, licensor and licensee, insurer and insured, builder and buyer etc.

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Discharge of a contract under the Indian Contracts Act, 1872

Discharge of a contract is when both the parties release each other of their obligations. It can be discharged in these ways:

  1. Discharge by performance.
  2. Discharge by mutual agreement.
  3. Discharge by the impossibility of performance.
  4. Discharge by lapse of time.
  5. Discharge by operation of law.
  6. Discharge by breach of contract.

Different ways of Discharge of a contract under the Indian Contracts Act, 1872

Discharge by performance

When both the parties have completed their performance or their obligations towards each other then a contract is discharged by performance.

Discharge by mutual agreement

If both the parties agree at the same thing in the same sense then the contract is dissolved by mutual agreement.

Discharge by the impossibility of performance

A contract with an impossible act is considered illegal but if after the contract is made the act becomes impossible then the parties have to discharge the contract due to this reason. If any party was aware of the impossibility of the act or had the apprehension will have to compensate the other party at such event.

Discharge by lapse of time

Due to the different limitation period on different contracts if that said time is completed then neither of the party can enforce the other party for the performance of the contract. This is called discharge by lapse of time.

Discharge by operation of law

Discharge by operation of law takes place when there is an alteration in the contract without the consent of either of the party or in case of death/ insolvency of either of the party.


Discharge by breach of contract

When there is a default from either side of the party in either not performing or payment then the contract is said to be breached and the party sustaining loss has a right to get damages.

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Essential Features of a Contract

All contacts are agreement but all agreements are not contractsThis implies that for an agreement to become a contract there are essential considerations and stipulations which have to be complied. Thus, an agreement which is legally enforceable is a contract.

All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.

According to Section 14 of the Indian Contracts Act, 1872, Consent is said to be free when it is not caused by-

  1. Coercion, as defined in section 15, or
  2. Undue influence, as defined in section 16, or
  3. Fraud, as defined in section 17, or
  4. Misrepresentation, as defined in section 18, or
  5. Mistake, subject to the provisions of sections 20, 21, and 22.

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation, or mistake.

The Act defines an agreement as every promise and set of promises forming consideration for each other (Section 2(e)) and a contract as an agreement enforceable by law (Section 2(h)).

Balfour v. Balfour (1919)2 K.B. 571- In this case, a husband promised to pay maintenance allowance to his wife every month. When he failed to pay the amount, the wife brought an action to enforce the agreement. However, the Court was of the view that as the agreement was of a domestic nature, it was not enforceable under law.

The essential elements of a valid contract

  • A valid offer and acceptance
  • The intention to form a legal relationship
  • Capacity of the parties to contract
  • A lawful consideration
  • Free consent of parties
  • A lawful object
  • Agreement nit expressly declared to be void

Void and Voidable Contracts– Void contracts are those contracts which cannot be enforced by a Court of law and voidable contracts are those which are enforceable by law at the option of one or more parties but not at the option of others is a voidable contract.

Express and Implied ContractsExpress contracts are those where the proposal or acceptance of any promise is made in words and a contract which is not express is an implied contract or contracts which are inferred from the circumstances of a case.

Offer and Invitation to Offer– An offer is a proposal and is definite whereas an invitation to offer is to invite someone to make a proposal and is done with an intent to induce a negotiation.

In Harvey v. Facey [(1893) A.C. 552], the Court explained the difference between offer and invitation to offer. In this case, the Plaintiffs sent a telegram to the Defendant asking “Will you sell us the Bumper Hall Pen? Telegraph lowest cash price.” The Defendants telegraphed “Lowest price for Bumper Hall Pen as £900.” The Plaintiffs sent another telegram to the Defendant saying- “We agree to buy Bumper Hall pen for £900 asked by you, please send us your title deeds.”

In the case the Privy Council observed that the first telegram had asked two questions, one regarding willingness to sell and the other regarding lowest price. In reply only lowest price was quoted and this quoting of the price was not an offer. The third telegram from the Plaintiffs saying “we agree to buy” was only on offer and not the acceptance of an offer. Since this offer had not been accepted there was no binding contract between the parties.

Special and General Offers– When an offer is made to a specific or special person, it is known as a specific offer but when the same is not made to any particular person but to the public at large it is known as general offer.

Acceptance­– As per the Act, when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise (Section 2(b)).

Essentials of a valid acceptance are as under:

  • Acceptance should be communicated by the offeree to the offeror
  • Acceptance should be absolute and unqualified
  • Acceptance should be made in some usual and reasonable manner
  • Acceptance shall be made while  the offer is still subsisting

Revocation of Offer and Acceptance– As per the Act, a proposal can be revoked at any time before the communication of its acceptance is complete as against the proposer nut not afterwards. Similarly, an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards.

Privity of Contract – Privity of contract means that a stranger to a party cannot sue. According to this doctrine, only those parties who are a party to a contract can sue each other and a stranger to a contract cannot sue those parties. This is done to protect the interest of parties to the contract.

Coercion – According to Section 15 of the Indian Contracts Act, 1872, Coercion is the committing, or threatening to commit, any act forbidden by the Indian Penal Code or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

Undue Influence – According to Section 16 of the Indian Contracts Act, 1872, the following acts are called as undue influence;

  1. A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.
  2. In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another-
  3. where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or
  4. where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.
  5. Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.

Fraud – According to Section 17 if the Indian Contracts Act, 1872, Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

  1. the suggestion as a fact, of that which is not true, by one who does not believe it to be true;
  2. the active concealment of a fact by one having knowledge or belief of the fact;
  3. a promise made without any intention of performing it;
  4. any other act fitted to deceive;
  5. any such act or omission as the law specially declares to be fraudulent.

Misrepresentation – According to Section 18 of the Indian Contracts Act, 1872, Misrepresentation means and includes-

  1. the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;
  2. any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him; by misleading another to his prejudice, or to the prejudice of anyone claiming under him;
  3. causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.

Standard Form Contracts- are one of the most sought after contract these days. When large number of contracts have to be entered by a person then from a practical point of view and for convenience a standard form of contract is used. Thus, a contract with standard terms and conditions are drafted by one party and on the same terms contract is made with numerous persons having similar interest in the contract.

Such contracts may include Insurance Contracts, Property Development Contracts etc. It is a contract between two parties, where the terms and conditions are set by one of the parties to the contract and the other party has little or no say regarding the terms and conditions of the Contract.

Remedies for breach of contracts

Remedies available to the party suffering loss under the Act are following:

  1. Compensation of loss and damage for breach of contracts.
  2. Compensation of breach of contract where penalty is stipulated.
  3. Right for rescission of contract

Compensation of loss and damage for breach of contracts

Compensation for loss and damage are of 4 kinds:

  1. Liability for Special Damages.
  2. Liability for Exemplary Damages.
  3. Liability to pay Nominal Damages.
  4. Liability to pay damages for deterioration caused by the day.

Right of Rescinding – When there is a breach of contract then the aggrieved party has the right to cancel the contract and sue the other party for damages under the provisions provided by the Indian Contracts Act, 1872.

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To know more about Commercial Contracts & Agreements in India, read below:

Commercial Contracts in India

Commercial Contracts & Agreements in India

Merger & Acquisitions in India

Joint Ventures in India

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