Tag Archives: Contract Act

Arbitration Clause – Incorporation in a Contract by reference

In M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696, the scope and intent of Section 7(5) of the Arbitration and Conciliation Act, 1996 was summarized as follows:

  • An arbitration clause in another document, would get incorporated into a contract by reference, if the following conditions are fulfilled:
  • The contract should contain a clear reference to the documents containing arbitration clause,
  • The reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract,
  • The arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.
  • When the parties enter into a contract, making a general reference to another contract, such general reference would not have the effect of incorporating the arbitration clause from the referred document into the contract between the parties. The arbitration clause from another contract cannot be incorporated into the contract (where such reference is made), only by a specific reference to arbitration clause.
  • Where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration), then, the terms of the referred contract in regard to execution /performance alone will apply, and not the arbitration agreement in the referred contract, unless there is a special reference to the arbitration clause also.
  • Where the contract provides that the standard form of terms and conditions of an independent trade or professional institution (as for example the standard terms and conditions of a trade association or architects association) will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, shall be deemed to be incorporated by reference. Sometimes the contract may also say that the parties are familiar with those terms and conditions or that the parties have read and understood the said terms and conditions.
  • Where the contract between the parties stipulates that the conditions of contract of one of the parties to the contract shall form a part of their contract (as for example the general conditions of contract of the Government where the Government is a party), the arbitration clause forming part of such general conditions of contract will apply to the contract between the parties.” Inox Wind Ltd. Thermocables Ltd., (2018) 2 SCC 519.
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Bank Guarantee – Invocation of

In U.P. State Sugar Corporation v. Sumac International Ltd., (1997) 1 SCC 568 it was stated that the law relating to bank guarantees is well settled. When on the course of commercial dealings an unconditional bank guarantee is given or accepted, beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. Bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. Any other view would frustrate and defeat the very purpose of such unconditional bank guarantee furnished by the party concerned. It was also observed that when an injunction is sought, Court should be slow in granting an injunction to restrain the realization of such a bank guarantee. There are two exceptions recognized, (1) a fraud in connection with such a bank guarantee and (2) where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned.
In Dwarikesh Sugar Industries v. Prem Heavy Engineering Works (P) Ltd., (1997) 6 SCC 450, it was held as under:
“If the bank could not in law avoid the payment, as the demand had been made in terms of the bank guarantee, then the Court ought not to have refused an injunction which had the effect of restraining the bank from fulfilling its contractual obligation in terms of the bank guarantee. An injunction of the court ought not to be an instrument which is used in nullifying the terms of a contract, agreement or undertaking which is lawfully enforceable.”
In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company¸ (2007) 8 SCC 110, the principles to be followed in the matter of injunction to restrain encashment of a Bank Guarantee or a Letter of Credit were laid down as under:
“(1) While dealing with an application for injunction in the course of commercial dealings and when an unconditional bank guarantee or Letter of Credit is given or accepted, the Beneficiary is entitled to realize such a Bank Guarantee or a Letter of Credit in terms thereof irrespective of any pending disputes relating to the terms of the Contract.
(2) The Bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(3) The Courts should be slow in granting an order of injunction to restrain the realization of a Bank Guarantee or a Letter of Credit.
(4) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the partries to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.
(5) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.
(6) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned.”
In Adani Agri Fresh Ltd. v. Mahaboob Sharif and Others, 2016 (114) ALR 871, it was held that bank guarantee is an independent contract between the bank and the beneficiary thereof. Bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance bank has given guarantee is immaterial and of no consequence. Drake and Scull Water and Energy India Pvt. Ltd. v. Paschimanchal Vidyut Vitran Nigam Ltd., 2018 (128) ALR 843.

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Principle of – Business Efficacy

A commercial document cannot be interpreted in a manner to arrive at a complete variance with what may originally have been the intendment of the parties. Such a situation can only be contemplated when the implied term can be considered necessary to lend efficacy to the terms of the contract. If the contract is capable of interpretation on its plain meaning with regard to the true intention of the parties it will not be prudent to read implied terms on the understanding of a party, or by the court, with regard to business efficacy as observed in Satya Jain v. Anis Ahmed Rushdie, (2013) 8 SCC 131, as follows:
“The principle of business efficacy is normally invoked to read a term in an agreement or contract so as to achieve the result or the consequence intended by the parties acting as prudent businessmen. Business efficacy means the power to produce intended results. The classic test of business efficacy was proposed by Bowen, L.J. in Moorcock, (1889) LR 14 PD 64 (CA). This test requires that a term can only be implied if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties cannot as reasonable businessmen have intended. But only the most limited term should then be implied—the bare minimum to achieve this goal. If the contract makes business sense without the term, the courts will not imply the same. In Moorcock, (1889) LR 14 PD 64 (CA), it was held as under:
“In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both the parties who are businessmen; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances. Transmission Corporation of Andhra Pradesh Ltd. v. GMR Vemagiri Power Generation Ltd., (2018) 3 SCC 716.

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Arbitration – Independence and Impartiality are two different concepts

Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings.
The United Kingdom Supreme Court has highlighted this aspect in Hashwani v. Jivraj, (2011) 1WLR 1872 in the following words:
“the dominant purpose of appointing an arbitrator or arbitrators is the impartial resolution of the dispute between the parties in accordance with the terms of the agreement and, although the contract between the parties and the arbitrators would be a contract for the provision of personal services, they were not personal services under the direction of the parties.” Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665.

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Pre – Existing Duty Doctrine

Pre-existing duty doctrine is a principle under the Contract Act and states that if a party to a contract is under a pre-existing duty to perform, then no consideration is given for any modification of the contract and the modification is therefore voidable. In the 13th edition of Pollock and Mulla Indian Contract and Specific Relief Act in Vol. 1, it is mentioned at page 101 about the pre-existing obligation under law, which provides that:
“The performance of what one is already bound to do, either by general law or by a specific obligation to the other party, is not a good consideration for a promise; because such performance is no legal burden to the promisor, but rather relieves him of a duty. Neither is the promise of such performance a consideration, since it adds nothing to the obligation already existing.” Anuradha Samir Vennangot v. Mohandas Samir Vennangot, (2015) 16 SCC 596.

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Waiver of A Right

In P. Dasa Muni Reddy v. P. Appa Rao, (1974) 2 SCC 725 it was held as under:
“Waiver is an intentional relinquishment of a known right or advantage, benefit, claim or privilege which except for such waiver the party would have enjoyed. Waiver can also be a voluntary surrender of a right. The doctrine of waiver has been applied in cases where landlords claimed forfeiture of lease or tenancy because of breach of some condition in the contract of tenancy. The doctrine which the courts of law will recognize is a rule of judicial policy that a person will not be allowed to take inconsistent position to gain advantage through the aid of courts. Waiver sometimes partakes of the nature of an election. Waiver is consensual in nature. It implies a meeting of the minds. It is a matter of mutual intention. The doctrine does not depend on misrepresentation. Waiver actually requires two parties, one party waiving and another receiving the benefit of waiver. There can be waiver so intended by one party and so understood by the other. The essential element of waiver is that there must be a voluntary and intentional relinquishment of a right. The voluntary choice is the essence of waiver. There should exist an opportunity for choice between the relinquishment and an enforcement of the right in question. It cannot be held that there had been a waiver of valuable rights where the circumstances show that what was done was involuntary. There can be no waiver of a non-existent right. Similarly, one cannot waive that which is not one’s right at the time of waiver. Some mistake or misapprehension as to some facts which constitute the underlying assumption without which parties would not have made the contract may be sufficient to justify the court in saying that there was no consent.”
It is important to note that waiver is an intentional relinquishment of a known right, and that, therefore, unless there is a clear intention to relinquish a right that is fully known to a party, a party cannot be said to waive it. But the matter does not end here. It is also clear that if any element of public interest is involved and a waiver takes place by one of the parties to an agreement, such waiver will not be given effect to if it is contrary to such public interest. All India Power Engineer Federation v. Sasan Power Ltd., (2017) 1 SCC 487.

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