LAW RELATING TO CONTRACTS – PRACTICAL ISSUES

Soliciting tender is an invitation to offer.

Notice Inviting Tender (NIT) and the tender documents provide the manner in which the tender has to be submitted. The tender documents have to be completed in the specified manner. The tender also may have to be accompanied my Earnest Money Deposit (EMD).

The important question is whether the party inviting tender can reject a tender, if it does not meet the requirements?

M/s.BISMI ABDULLAH AND SONS V. THE REGIONAL MANAGER, FCI, TRIVANDRUM (1986)

(Case of non payment of security deposit – Clause in tender document ‘tenders not accompanied by the required amount of security deposit liable to be rejected’ – B’s tender accepted by FCI without security deposit - B does did not want to go ahead with the contract & contests that a valid contract was not formed – Held it was upto FCI to reject the tender, since they hadn’t a valid contract had come to be formed.)

Auctions

An auction is concluded with the auctioneer striking the hammer, bonding the last bidder & the auctioneer. Thus the striking of the hammer is an implied acceptance of the offer put up by the last bidder.

VERGHESE V DIVISIONAL FOREST OFFICER, TRICHUR (2003)

(Case of failure to remit balance bid amount  & failure to execute an agreement within 15 days from the date of intimation of confirmation orders – Verghese fails to remit as per bid conditions  despite extension of period – fails to execute agreement – but plucks the usufruct – DFO re-auctions – Verghese contests the right to re-auction – Argues that there is no concluded contract  as bid amount is not deposited & agreement is not executed– held, mere fact that plaintiff was reluctant to execute the agreement would not mean that there was no concluded contract, moreover, Verghese was the one who committed the breach.)

Contracts entered into with the Government of India

Article 299 of the Constitution of India imposes restrictions on how government contracts would be made. Article 299 of the constitution requires that contracts of the Govt. must be executed in the name of the President or Governor as the case may be.

It follows that if the contract between Govt. & another person is not in full compliance with Article 299 it would be no contract at all and could not be enforced either by the Govt. or by the other person as a contract.

In view of the mandatory terms of Article 299 no implied contract could be spelled out between the government and another person at the stage of bidding for Article 299 in effect rules out all implied contracts between Govt. and another person.

SARDAR SUCHA SINGH V.UNION OF INDIA (1986)

(Case of acceptance of tender by chief engineer eastern command vide letter of acceptance stating that S Singh’s tender has been accepted by him on behalf of the President of India and also stating  the requirement of a sum of Rs. 700 as additional security – S Singh contends (a) No contract was executed (b) Additional deposit meant that the acceptance was conditional – Held that (a) Section 175(3) of the Government of India Act, 1935 does not requires the execution of a formal document. (Two essential requirements enjoined by the said provision were that acceptance must be in writing and that it must be in the name of the Governor General.) (b) The letter requiring the deposit of further sum of Rs. 700 was after the tender was accepted and a contract came into existence.)

CHAIRMAN-CUM-MD, T.N., TEA PLANTATION CORPORATION LTD.V. M/s SRINIVASA TIMBERS (1998)

(Case of tender with conditions (a) Successful tenderer to pay sale value of timber minus EMD within 15 days of receipt of confirmation order (b) Execute the agreement within said period (c) the period of contract will be from the date of execution of the agreement – Corporation cancels the order after there is a delay in remittance of amount & execution of agreement in spite of extensions of time – Contention as to whether contract was formed – Held contract is not concluded. {When the requirement is in compliance of tender conditions subject to execution of a formal agreement, such a contract is not a concluded contract & cannot be executed or enforced})

The significance of ‘Letter of Intent’.

A letter of intent is customarily employed to reduce in writing a preliminary understanding of parties who intend to enter into contract, or who intend to take some other action.

WELLMAN HINDUSTAN LTD., Vs. NCR CORPORATION (1992)

(Case of letter of intent signed by the two corporations with a view to jointly establish a company in India with 60:40 share to manufacture, and market the product of NCR – Parties incorporate a company called NCR India Pvt. Ltd. – Land identified and purchased by Wellman – Govt. clearance was also obtained for the joint venture – NCR develops cold feet and wanted to ‘wriggle out  from the joint venture on the plea that they did not want to risk investing six million dollars in India’ – Contention was whether the letter of intent create a contract between the parties?)

M/S. PROGRESSIVE CONSTRUCTIONS LTD. Vs. BHARAT HYDRO POWER COPRORATION LTD.(1995)

(Case of following terms in a tender (a) Bid shall be accompanied by EMD (b) Acceptance of bid will be intimated to successful bidder through an award & the award shall conclude the contract (c) Award shall mean acceptance by MD BHPCL (d) Effective date of agreement shall mean date of the letter of intent/award – PCL bids for construction of dam – BHPCL issues a letter of intent for the construction of the dam & requires PCL to reach Calcutta for finalising & signing a formal contract – contract could not be signed as parties could not sort out the discrepancies – BHPCL cancelled the contract – Was the contract formed when the letter of intent was issued? – Held that a concluded contract was reached between the parties - formal contract had remained to be signed because there were minor discrepancies or variations in the terms which were being negotiated between the parties - finalisation of the details would not adversely effect the conclusion of the contract which had stood arrived at with the acceptance of tender and award/letter of intent issued by the respondent to the petitioner.)

The law as it stands, based on court rulings, is that a term of a letter of intent may of course negative the contractual intention but it would be open to the courts to hold the parties bound by the terms of the terms of such letters, especially:

1. If the parties had acted on these terms for a long period of time or
2. If they had expended considerable sums of money in reliance of them.

Place of formation of contract

A crucial issue in the formation of a contract is the place of formation of the contract.

Contracts are voluntary acts. Parties are free to set their terms. As a result, every business contract has stipulations on the applicable law and jurisdiction of the court.

Based on Civil Procedure Code, every suit shall be instituted in a Court where defendants reside or cause of action arises.

In suits arising out of contract, the cause of action arises within the meaning of Section 20(c) of the CPC out of any of the following place:

• The place where the contract was made;
• The place where the contract was to be performed or came to be performed;
• The place wherein performance of the contract any money due thereunder expressly or impliedly has to be carried out. 

Jurisdiction of Courts

In cases where two or more courts can validly have jurisdictions, the parties are free to limit jurisdiction to one among them.

M/S. PROGRESSIVE CONSTRUCTIONS LTD. Vs. BHARAT HYDRO POWER COPRORATION LTD.(1995)

(BHPCL Ltd is in Calcutta – PCL’s registered office is in Hyderabad & Administrative office is in Noida – tender floated in Calcutta - Letter of intent issued from Calcutta - Negotiation took place in Calcutta -Dam to be built in Assam – Arbitration clause says venue of arbitration shall be Guwahati/Calcutta – further provides that if the dispute is referred to court, the jurisdiction will be the court within state of Assam – Held the court of jurisdiction will be Calcutta.)

MESSRS HANIL ERA TEXTILES LIMITED Vs. M/s. PURAMATIC FILTERS PVT.LTD.(2004)

(HETL is from Mumbai – Oder placed with PFL’s office in Mumbai – Advance paid in Mumbai – PFL’s HO is in Delhi –Materials dispatched from Delhi – Delivery of material at Patalganga – Clause in agreement states thus ‘Any legal proceedings arising out of the order shall be subject to the jurisdiction of the courts in Mumbai’ – When HETL did not pay the balance amount PFL filed a suit in Delhi – Case admitted – HETL Appeals – Held that part of the action arose in Delhi & part in Mumbai but there was a clear intention to confine the jurisdiction of the Courts in Bombay to the exclusion of all other Courts.)

Contracting with Government Bodies – Importance of Article 14 of the Constitution

The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth

M/S ERUSIAN EQUIPMENT AND CHEMICALS LTD. V. STATE OF W.B (1974)

(Party getting tender contracts from Govt. of West Bengal subsequently was not awarded the contract despite having made the best bid as the State Government had blacklisted the plaintiff as there was a case of violation of FERA pending against the party – state govt. argues that it could choose any person for entering into a contract – held that  the state govt. will give an opportunity to the petitioners to represent their case, and the authorities will hear the petitioners as to whether their name should be put on the blacklist or not – state government’s argument dismissed as the option of choosing any person does not lie with the state government.)

R.D.SHETTY V. INTERNATIONAL AIRPORT AUTHORITY OF INDIA (1979)

(Case as to whether an instrumentality of State-Authority calling for tenders of a job could accept a tender not conforming to conditions in notice – IAAI had stipulated in notice inviting tenders the condition for eligibility being ‘Registered 2nd Class Hotelier having at least 5 years experience’ – Tender accepted was of a person not fulfilling this condition – Contention is that if this was the case R D Shetty, who was not a ‘Registered 2nd Class Hotelier having at least 5 years experience’ could also have applied – held that IAAI could not discriminate.)

Impossibility & frustration of a contract.

TAYLOR Vs. CLADWELL(1863)

(Case of burning down of Music Hall – The destruction of the music hall was the fault of neither party, and rendered the performance of the contract by either party impossible - held that both parties were excused from their obligations under their contract.)

KRELL Vs. HENRY(1903)

(The defendant, CS Henry, agreed by contract on June 20, 1902, to rent a flat located at 56A Pall Mall from the plaintiff, Paul Krell, for the purpose of watching the coronation procession of Edward VII scheduled for June 26 and 27. The housekeeper of the premises informed Henry that he would have an excellent view of the procession from the room. The parties agreed on a price of £75, but nowhere in their written correspondence did either of them explicitly mention the coronation ceremony. Henry paid a deposit of £25 to Krell for the use of the flat, but when the procession did not take place on the days originally set (on the grounds of the King’s illness), Henry refused to pay the remaining £50. Krell brought suit against Henry to recover the remaining balance of £50, and Henry countersued to recover his deposit in the amount of £25. – Held that parties had not made any provision for the unexpected in their contract – if parties foresee but make no provisions their contract is frustrated.)

OCEAN TRAMP TANKERS CORPORATION V V/O SOVFRACHT (1964)

(Ship hired to transport iron from a port in black sea to Vishakhapatnam -  customary route was the Suez Canal – Govt. of Egypt nationalised the Canal – UK & France began to build up military forces in Cyprus – by the time ship neared the canal Egyptian anti aircraft guns were in action against hostile reconnaissance planes – Shipping company claimed frustration of contract – held there is no frustration - difference in time was 108 days from Genoa via the Suez and 138 days via the Cape - goods would not be adversely affected - the only trouble was it took longer – court firmly rejected, however, that frustration can only apply where the event is unforeseen or unexpected.)

Force Majeure: (a clause that lists the events which could cause impossibility)

A superior force, an event that no human foresight could anticipate or which if anticipated, is too strong to be considered, e.g. an industrial strike which leads to loss of profits. Circumstances must be abnormal and unforeseeable, so that the consequences could not have been avoided through the exercise of all due care.

STATE OF UTTAR PRADESH Vs. ALLIED CONSTRUCTIONS (2003)

(Under a contract entered into by and between the appellant and the respondent, the respondent undertook construction of bridge-cum-fall - While the work was in progress, the work area was flooded in the night of August 25 and 26, 1991 - The respondent-contractor herein filed a claim on account of loss sustained by him due to flooding of the work area - the matter was referred to an arbitrator - arbitrator gave an award for payment of a sum of Rs. 12,55,365/- together with interest at the rate of 18 per cent from 1.11.1991 till the date of the award and 6 per cent thereafter - the respondent filed the award for being made rule of the Court - appellant herein filed a petition, inter alia, on the ground that the arbitrator has misconducted the proceedings, inasmuch as the force majeure contained in Clause 47 disentitled the respondent from making any claim which was on account of unprecedented rain – having failed in lower courts State of UP petitioned the Supreme Court – Held that State of UP could not prove that flood which has caused loss was due to unprecedented rain & that it was an act of God.)

Compensation & Damages

FATEH CHAND Vs. BALKISHAN DASS (1963)

(BD sells his rights in land & building to FC – terms: 24,000 first installment – BD to give possession to FC – FC to get the sale deed down within next two months and pay balance of 87,500 – if registration was delayed contract deemed to be cancelled – FC to give back the possession, 24,000 paid to be forfeited & 25,000 to be paid as additional damages – Held: (a) The forfeiture of money if found reasonable will be allowed by court of law  (b) in present case as there was no loss sustained and the property had not depreciated in value, damages were disallowed.)

MAULA BUX Vs. UNION OF INDIA (1969)

(MB enters into a contract with the government of India to supply potatoes, poultry, eggs & fish at the Military HQ, UP Area – MB required to deposit 18,500 for due performance of the contract – contract provided that it could be rescinded & security deposit be forfeited in case of ‘neglect or delay to comply with any demand or requisition’ – MB made persistent delay in making regular & full supplies of the commodities agreed to be supplied – Government of India rescinded the contract & forfeited the money – Held that the loss has to be proved if it can be determined – if no attempt is made to prove loss, money cannot be forfeited.)