Practical Insights on Drafting of Commercial Contracts

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A. Ramasubramanian, B.E MCIArb FICA

I. PROLOG

CONTRACTS – THE PIVOT

Over the last decade, substantial quantum of commercial disputes opted for Alternative
dispute resolution (ADR) than the litigation which incurs enormous time and whopping an
average 39% cost of the claim value! It is obvious from the milestone amendments to the
Arbitration and Conciliation Act 1996 to facilitate seamless remedy via ADR mechanism
for the business community.

Whether it is a Project or commercial transaction, disputes are inevitable due to various

factors; However, a diligently drafted Contract that balances the rights and liabilities of the
stake holders ensures timely remedy and thus accomplishment of the Project within the
anticipated time becomes a reality.

Hence it is quintessential to draft the Contracts with exemplary terms that protects the
rights of the parties and fosters business relationship for symbiotic growth. For this
reason, a well drafted Contract is otherwise termed as ‘Vedas’ for a Project or
Commercial transaction that stipulates ethical way forward and balanced remedy for the
malaise of the stakeholders.

It is pertinent to mention at the time of epidemic caused by COVID-19 that a well drafted
Contract, only can resurrect the dormancy due to lockdown and mitigate the
insurmountable losses.

CONTRACT versus CONTRACT ACT:

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Contract – Section 2(e) of the Indian Contract Act, 1872 defines an agreement as “every
promise and every set of promises forming consideration for each other”;An agreement
which is enforceable by law is called a Contract.

Section 10 of the Act stipulates the conditions of enforce ability. Pursuant to this section,
an agreement is a contract when it is made for some consideration, between parties who
are competent, with their free consent and for a lawful object. There are many types of
Contracts on a different basis.

It is apt to state that Indian Contract Act 1872 is the Genus and Contract is the
species to the Act;
Therefore, it is pertinent that the terms of the Contract shall not contravene the
provisions of the Act or otherwise the Contract will not stand before the Court in
case of any disputes arising among the stakeholders.

OTHER RELEVANT STATUES:

1. Sale of Goods Act

2. Negotiable Instrument Act 1881

3. Indian Carriage of Goods by Sea Act, 1925 (COGSA)

4. Industrial Disputes Act, 1947

5. The Arbitration and Conciliation (Amendment) Act 2019,

6. The Arbitration and Conciliation Act 1996

7. [1]United Nations Commission on International Trade Law (UNCITRAL)Legal Guide

onDrawingup International Contracts

8. Society of Construction Law Protocol

9. Rome Convention on the Law Applicable to Contractual Obligations 1980

II. TYPES OF CONTRACT

1. EXCUTED CONTRACT

When both the parties have completely performed their respective obligations under the
contract, it is said to be executed contract. It means that whatever was the object of the
contract has been carried out. In most executed contracts the promises are made and
then immediately completed.

The buying of goods and/or services usually falls under this category. There is no
confusion about the date of execution of the contract since in most cases it is
instantaneous.

2. EXECUTORYCONTRACT

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An executory contract is one in which one or both parties are yet to perform their
obligations. In such Contracts, the consideration is the promise of performance or
obligation. In executory contracts, the consideration for the promise made is carried out
sometime in the future.

Example – Delivery within 5 days and payment to be made after 15 days. The contract is
executory. Another good example of an executory contract is that of a lease and
Construction contracts.

3. CONTINGENT CONTRACT

‘A contingent contract is a Contract to do or not to do something, if some event collateral

to such contract does or does not happen’.

In simple words, contingent contracts, are the ones where the promisor perform his
obligation only when certain conditions are met. The contracts of insurance, indemnity,
and guarantee are some examples of contingent contracts.

4. COST PLUS CONTRACT

In a construction cost-plus contract, the buyer agrees to cover the actual expenses of the
project. These costs include labor and materials, plus other costs incurred to complete
the work. The “plus” part refers to a fixed fee agreed upon in advance that covers
the contractor’s overhead and profit.

5. FIXED PRICE CONTRACT

A fixed-price contract is a type of contract in project management wherein the payment

does not depend on the resources or the time spent. It involves setting fixed price for the
product, service or result defined in the contract.

6. LUMPSUM CONTRACT

In this type of contract, the contractor offers to do the whole work as shown in drawings
and described by specifications, for a total stipulated sum of money.

7. REMEASUREABLE CONTRACT

In re-measurable contracts, works will be carried out based on the pre-agreed unit rates.
All the Payments will be paid based on the actual work done after measuring the work
done. So the final value of the project will be derived based on the unit prices and exact
quantities.

8. CONSULTANCY CONTRACT

The consultancy contract is made between the company and consultant. It outlines the
scope of work to be performed by them and other terms and conditions related to their
appointment in the company.

9. COMMERCIAL CONTRACTS

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A commercial contract refers to a legally binding agreement between parties in which they
are obligated to do or restrain from doing particular things. Commercial contracts can be
written, verbal, or implied in a formal or an informal manner.

10. E-CONTRACTS

E-contract is one of the divisions of e-business. It holds a similar meaning of traditional

business wherein goods and services are switched for a particular amount of
consideration. The only extra element it has is that the contract here takes place through
a digital mode of communication like the internet. It provides an opportunity for the sellers
to reach the end of consumer directly without the involvement of the middlemen.

11. GOVERNMENT CONTRACTS

As the name suggests a Government contract is a contract in which one of the parties is
the Government. The State, as well as the Central Government, maybe the party in
a Government contract.

III. ELEMENTS OF CONTRACT – FUNDAMENTAL POLICIES

Freedom of Contract

The very essence of Contract is upholding the stake holders freedom to Contract for
mutual consideration; For example, economic intercourse is most efficient when its
participants desire it and are free to bargain with each other to reach mutually desirable
terms.

Morality of Promise

There is also a longstanding moral dimension of contract in law: that there is an ethical as
well as legal obligation to keep one’s promises. Thus, contracts should be honored not
only because reliability is necessary to foster economic interaction, but simply because it
is morally wrong to break them.

Another fundamental value of contract law is that a person should be held accountable for
words or acts affirming their intent to contract, and that the other party, acting reasonably,
should be entitled to rely on that affirmation of assent. An objective test of
reasonableness is thus often used to evaluate a party’s conduct.

For example, a party’s intent in entering a contract is often evaluated in light of the
person’s state of mind as made apparent to the outside world (as opposed to the true and
actual state of mind of the party at the time).

Stakeholders’ balancing of power:

Modern contract law is also sensitive to the imposition of contractual obligations through
coercion, dishonesty or lack of meaningful choice resulting from power imbalance.

Economic Aspects of Contract Law

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Because contracts are concerned with economic exchanges, contract law must inevitably
be economic in its purpose. After all, the goals of contract law include facilitating trade
and commerce, regulating the way people deal with each other in the marketplace and
enforcing commercial obligations.

SOURCES OF CONTRACT LAW

Contemporary contract law seeks to respect free markets, regulate the freedom of
powerful contractors, safeguard the rights of weaker parties, and affect social policy
concerning matters of consumer protection, employee rights, and business
ethics.Comparing the Civil and Common Law Approaches to Contract Law

The system known as the “Common Law’ developed in England, and be came adopted in
Britain’s colonial territories. Thus, the common law of England has remained the basic
legal system in most of Britain’s ex-colonies, including India Therefore the term“common
law”, used in the broadest international sense, designates a country whose legal system
is based on the common law of England.

The Meaning of “Common Law”

In addition to characterizing the English and American legal systems on an international

level, the term “common law” refers to those portions of law basedupon decisions of the
courts (as distinct from those created by legislation).

In common law countries, many statutes govern aspects of contracts. These statutes tend
to codify the common law by taking rules and principles already developed by judges and
putting them into statutory form, in order to clarify the law or make it more accessible.

United Nations Convention on Contracts for the International Sale of Goods- CISG

The United Nations Convention on Contracts for the International Sale of Goods (CISG)
applies to international sales transactions involving countries that are signatories to the
treaty. The Convention covers only issues of contract formation and the rights and duties
of the parties. It does not address matters touching on contract validity, such as fraud, or
illegality. It also excludes product liability issues.

JUDICIAL OPINIONS

A fundamental principle of justice is the equal treatment of people in like situations.

As common law developed, it became established practice for court decisions to be

recorded so that they could be used as the basis for resolving later cases. Thus, a court
decision not only settled the dispute between the immediate parties, but it alsoformed a
rule to be followed in the next case involving similar facts.

SOURCES OF CONTRACT

1. Tender submission / quotations

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2. Negotiation / Communication

3. Letter of Acceptance

4. Minutes of Meetings

5. Contract Act

6. Risk Identification and Transfer

7. Material / Project Specifications

8. Statutory Provisions

9. Scope of Work / Supply

10. Protocols – Domestic and International

IV. GENERAL WRITING PRINCIPLES

Contract Drafting Process:

Before writing, clarity about what parts the contract must be included and what situations
the contract must cover. Parties requirement should be crystalized; Precisely because
this is an obvious point, it is often overlooked.

Try outlining the contract to make sure that all the needed pieces are included and are
organized logically.

The following guidelines may be helpful in beginning to draft a contract:

1. Draft Contract shall be revised many a times to cover all aspects ;Trying to get all the
details right in the first draft, it is likely to miss some important larger points.

2. Clear, simple, businesslike language is mandatory. Much progress has been made in
this area, particularly in the areas of insurance and finance. Be careful not to slip back
into overuse of “legalese”. Use only the technical terms you need and define them if
necessary.

3. Each clause shall define only one thing, not more. Outlines can help you here by
breaking down the whole contract into a series of small points.

4. When revising, check for ambiguities:

a. Check to make sure that you have used only one term for one item or person.
Referring to the same person, item or concept by two different terms creates an ambiguity
that invites misunderstandings later. If needed, include a definition section to define all
your key terms, so that the reader understands any unusual terms.

b. Check also to be sure that you have not used one term for several different items or
persons. This can create unwanted ambiguities.

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5. After fine tuning each clause in the contract, reread the document as a whole,looking
for larger contradictions between parts of the contract, rather than wording problems
within one clause.

6. Team members shall cross check the contents. No one person can imagine all the
pitfalls that the parties to any contract are hoping to avoid. No one person canimagine all
the ways some reader can misconstrue a point.

Importance of Multiple Drafts

Always try to write more than one draft of any given legal piece.
Let the first draft be creative, thorough and imperfect. Include everything you think
necessary to the piece and all things that you think might be useful.
Then use second, third, fourth and other drafts for rewriting, revising, and updating.

Guidelines for Revising Drafts of Contracts

Revising occurs after rewriting in the writing process. Revising concentrates on small-
scale organization, sentence structure, transitions, paragraphing, grammar, and
punctuation.

There are two points to remember about revising.

i. First, do not revise while you write; this slows down both the writing and the revising
processes. When you are writing, concentrate solely on your ideas, no matter how
unpolished your writing may seem. Revise later.

ii. Second, when you revise, do it in stages. It is exhausting and inefficient to try to revise
on every level at once. Use your time for revising to move from general writing problems
to more specific ones.

1. ACCURACY: No amount of readability will replace accuracy, so make sure you check
first for the content of each legal point. Ask yourself the following questions:

a. Is the content accurately stated?

b. Could any points be misunderstood because of ambiguity?

c. Are irrelevant facts or other irrelevant information excluded?

d. Are terms of art used correctly?

e. Are key terms used correctly?

f. Are paraphrases accurate?

g. Are names of parties and their status correct?

h. Are the citations accurate?

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2. ORGANIZATION:

a. Are paragraphs internally logical?

b. Are there clear and precise transitions between paragraphs and sentences?

3. READABILITY:

a. Are subjects and verbs close together?

b. Are unnecessary modifiers eliminated?

c. Are sentences not overly long?

d. Are lists clearly structured?

e. Are unnecessary prepositional phrases eliminated?

f. Is the text generally concise?

4. STYLE:

a. Is style consistent?

b. Is the tone and level of formality appropriate and consistent?

Try to give each of these categories your full attention for the specific amount of time you
have allocated for the task. After you have finished revising, you can move on to fine
tuning the draft.

OTHER POINTS

i. No archaic terms (e.g., hereinafter, hereby)

ii. No legal pairs (e.g. good and sufficient)

iii. No Latin or foreign expressions (e.g., bona fide)

iv. Plain English, not legalese

BASIC LANGUAGE GUIDE

1. Avoid Archaic terms

2. Passive to Active

3. Sentences: short is sweet

4. Sentences: subjects and verbs together

5. Sentences: compound verbs together

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6. Sentences: put verbs early

7. No Inconsistency

8. make verbs strong

9. Prefer the present tense

10. Use plain English

USING DEFINED TERMS

Obvious goal in drafting a transactional document is to make it unambiguously and

accurately. Future readers should know exactly what our document means— regardless
of whether those future readers are your client, you client’s successors, some other party,
or a judge. A good technique for achieving this goal is the use of defined terms.

When should you use defined terms?

A. As soon as you know you will refer to the same concept more than once in a
document; and

B. When it takes more than a few words to explain the concept

How do defined terms work?

A. “External” defined terms are unique to the external circumstances of this particular
transaction (names of parties, location of real property, etc

How can defined terms simplify transactional documents?

A. They can assure that any particular laundry list will appear only once in a document.
This preserves simplicity, certainty, and consistency.

B. If properly structured, defined terms can allow you to make a necessary change only
once—by fine-tuning or modifying a defined term—as the terms of the transaction are
negotiated and modified over time.

C. Defined terms can help you prevent a maze of cross-references.

V. BASIC ATTRIBUTES OF THE CONTRACTUAL RELATIONSHIP

A Contract may be defined as an exchange relationship created by oral or written

agreement between two or more persons, containing at least one promise and
recognized in law as enforceable. The essential elements of a contract thus include: an
oral or written agreement; the involvement of two or more persons; an exchange
relationship; at least one promise; and enforce ability.

An oral or written agreement

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A contract is created only because the parties, acting with free will and intending to be
bound, reach agreement on the essential terms of their relationship. It is the element of
agreement that distinguishes contractual obligations from many other kinds of legal duty
that arise by operation of law from some act or event, without the need for assent.

Determining whether the parties actually agreed to a contract is not always easy.

The law generally gauges intent objectively in deciding whether a person agreed to a
contract. That is, the person’s overt acts (i.e., words and conduct) are evaluated to decide
whether they reasonably signified intent to enter the transaction.

Although oral contracts may be enforceable under some situations, in other situations
certain types of contracts must be recorded in writing and signed in order to
be enforceable.

Two or More Persons

While it requires two parties to create a contract, it should be noted that a contract is not
confined to two participants. There can be as many parties to a contract as the needs of
the transaction dictate. In fact, multiparty contracts are common.

Mutual Relationship

By entering into an agreement, parties bind themselves to each other for the common

purpose of the contract. Thus, the essence of a contract is the relationship. Some
contractual relationships last only a short time and require only a minimal interaction.
Other contractual relationships, however, can span many years and require constant
dealings between the parties, regulated by detailed provisions in the agreement.

Promise

For a contract to exist, there must be promise. A promise is an undertaking to act or

refrain from acting in a specified way at some future time. This promise may be made in
express words or implied.

Legal Enforceability

Legal Recognition of enforceability is a hallmark of contracting that it creates rules binding

on the parties and confers on them rights and obligations cognizable in law. The
fundamental role of contract law is to ensure that promises are upheld. Without legal
enforceability of promises,only instantaneous exchanges could ultimately occur—with
devastating effects on society.

Where promises are broken, the power of legal enforcement enables the disappointed
party to sue. Once it is established that a contract was entered into and breached courts
can enforce the contract by providing a remedy for the breach.Such remedies can include

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monetary compensatory damages, specific enforcement of the promise,and other types
of damages. Legal enforceability thus serves to deter breaches of contract because a
reluctant party knows that failure to perform canresult in litigation with costly results.

VI. ELEMENTS OF CONTRACT- OVERVIEW.

The components of a contract will vary depending on the nature and complexity of the
transaction it reflects.

a) Title

The title should reflect the subject matter of the transaction and, if appropriate, the
parties.

b) Preamble (Recitals)

Most transaction agreements begin with some form of a preamble that identifies the
purpose of the document and describes the transaction, the intent of the parties and any
assumed facts underlying the transaction. The preamble identifies the parties and the
date of the transaction as well as the nature of the transaction.

c) Definitions

The use of defined terms can simplify a document immeasurably. While the number and
extent of the definition section depend upon the nature of the agreement, virtually all
contracts will include some defined terms.

d) Consideration

Although it need not be complicated, the consideration should be explicitly stated since
agreements must be supported by consideration. This may be expressed as an exchange
of dollars or of goods, or perhaps an exchange of mutual promises.

e) Covenants

The covenants signifies the promises that are being made by the parties.

Examples include promises to deliver certain goods or to refrain from particular activities.

f) Representations and Warranties

Representations and warranties identify the assumed facts underlying the agreement.

These sections represent the real heart of the deal and tend to be heavily negotiated.

An example would be a representation and warranty that the goods to be sold are in
working order.

g) Indemnification

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The indemnification portion of the contract deals with the allocation of liability in the event
that all does not go as planned. Questions to be addressed in this portion of the contract
include who will be liable for what, and to what extent.

h) Breach and Cure

Although promises are not necessarily made to be broken, that possibility must be
considered when drafting a contract. What will constitute a breach of the agreement?

What opportunity will the parties have to “cure” the breach?

i) Termination

This section should identify under what circumstances the parties can terminate the
agreement and the procedures for termination.

j) Remedies

The remedies section addresses the consequences in the event of termination. This
section should specify what the parties are entitled to in the event of breach or
termination. It may identify a dollar amount, a formula, or simply a mechanism for
determining the appropriate remedy (such as arbitration).

Additional Important Contract Provisions

A number of other standard provisions are important to include in drafting contracts.

These include:

Assignment
Choice of Law
Amendment and Waiver
Arbitration
Integration and Severability
Notice
Authority to Sign

VII. TYPICAL CONTRACT DOCUMENT STRUCTURE: (INFRASTRUCTURE

PROJECT)

VOLUME 1: FORM OF AGREEMENT & CONDITIONS OF CONTRACT

Part 1: Form of Agreement

Part 2: General Conditions of Contract

Part 3: Letter of Acceptance

VOLUME 2: APPENDIX A – SCOPE OF WORK & TECHNICAL INFORMATION

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Part 1: Scope of Work

Part 2: General Requirements

Part 3: Site Specific Information

Part 4: Heath& Safety, Environment & Sustainability Regulations & Requirements

Part 5: Risk Management

VOLUME 3: APPENDIX A – SCOPE OF WORK & TECHNICAL INFORMATION

Part 1: Particular Specifications

VOLUME 4: APPENDIX A – SCOPE OF WORK & TECHNICAL INFORMATION

VOLUME 5: APPENDICES B TO F

Part 1: Appendix B – Schedule of Prices and Rates

Part 2: Appendix C – Insurance

Part 3: Appendix D – Contractor Technical Proposal

Part 4: Appendix E – Contract Execution Plan

Part 5: Appendix F – Administrative Procedures

Attachment 1 – Advance Payment Bank Guarantee

Attachment 2 – Bank Guarantee (Performance Security)

Attachment 3 – Contract Variation Form

Attachment 4 – Completion Certificate

Attachment 5 – Discharge Certificate

Attachment 6 – Instruction Form

VIII. ESTABLISHING CONTRACTUAL RELATIONSHIP

It is the pinnacle of skill of an ace Contract Administrator to draft the relationship among
the stakeholders in such a way that it flows like the rivers enter in to the sea; The
definition of relationship among the stakeholders shall be subtle at the same time
consummate. It shall never disintegrate the degree of relationship that has been
established at the Contract formation stage unto the performance of the Contract.

Five essential elements of a valid contract include:

1. Competent Parties

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2. Subject Matter

3. Legal Consideration

4. Mutuality of Agreement

5. And Mutuality Of Obligation.

Competent Parties

Competency of parties includes being of adult age (18 years of age in some jurisdictions)
and being in complete control of mental faculties. This means that the contracting party
must not have a mental defect that would affect his/her ability to understand and
appreciate what he/she is doing.

Subject Matter

The contract must clearly and sufficiently set out the subject matter of the agreement.The
subject matter may not be illegal or for an illegal purpose.

Legal Consideration

Simply stated, consideration is the inducement to a contract. It is the cause, motive,price

or impelling influence, which influences a contracting party to enter into a contract. Legal
consideration is consideration recognized or permitted by the law as valid and lawful. It is
also referred to as good or sufficient consideration. The most common form of
consideration is money. However, goods or services or a combination thereof may also
constitute valid consideration.

Mutuality of Agreement

For a contract to be valid and enforceable, the parties must be in agreement as to their
respective rights and duties under the agreement. Mutuality of agreement isalso referred
to as a “meeting of the minds.”

Mutuality of Obligation

The doctrine of mutuality of obligation provides that neither party to a contract is bound
unless both parties to the contract are bound. Thus, if performance of an obligation
(which is the consideration of the particular contract) is elective, rather than mandatory,
and the other party is required to perform some duty, then the rewould be no mutuality of
obligation and, accordingly, no valid enforceable contract.

IX. PLANNING AHEAD FOR PROBLEMS

Termination Provisions

When negotiating a contract, special attention should be given to “exit provisions”.Well-

drafted termination provisions are among the most valuable contractual protections.

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Termination for Cause provisions

Termination “for cause” refers to a material breach that is not cured within as pecified
period.

Opportunity to Cure provisions

Termination sections often grant the damaged party the right to terminate the agreement
in the event of a material breach of the agreement by the other party.

With respect to curable breaches, such provisions typically provide that the damaged
party shall have the right to terminate the contract if the breach is not cured within a
specified time period.

Events Triggering Termination

Contracts also often grant the parties the right to terminate upon the occurrence ofcertain
specified events. These can include (but are not limited to):

a. Insolvency, bankruptcy, or liquidation

b. Merger of the other party

c. Change of control of the other party

d. Changes in governmental regulations

e. Failure to meet certain specified performance levels

IMPRACTICALITY OF PERFORMANCE

Impracticability applies when events following contract formation are so different from the
assumptions on which the contract was based, that it would be unfair to hold the
adversely affected party to its commitments.

There is an important difference between mistake and impracticability. A mistake causes

a defect in contract formation, permitting a party to be excused from accountability for a
manifestation of assent. Impracticability, on the other hand, has nothing to do with any
problem in formation and presupposes that a binding contract was made. Rather, it is
concerned with whether a post-formation change of circumstances has such a serious
effect on the reasonable expectations of the parties that it should be allowed to excuse
performance. Similarly, the doctrine of frustration of purpose is also concerned with a
post-formation change of circumstances but in a slightly different context than the doctrine
of impracticality of performance.

Elements of the Excuse of Impracticality

The excuse of impracticability can be available to the party who is adversely affected by
the change in circumstances. However, all elements to this excuse must be satisfied in
order for a party to be relieved from performance.

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These elements include:

1. After the contract was made, an event occurred, the non-occurrence of which was a
basic assumption of the contract.

2. The effect of the event is to render the party’s performance“impracticable”, i.e., truly
burdensome.

3. The party seeking relief was not at fault in causing the occurrence.

4. The party seeking relief must not have borne the risk of the event occurring.

Understanding the Limitations on the Excuse of Impracticability

Impracticability arises from the occurrence of an event which event must be so contrary to
the assumptions of the contract that it changes the very basis of the exchange. An event
is unforeseen by the parties if they themselves did not

contemplate it as a real likelihood. Most occurrences external to the contract could quality
as events, such as: war, a natural disaster, a strike, and so on. A change in the law or
government regulation could also be an event. On the other hand, a change in market
conditions would not generally be regarded as a contingency beyond the contemplation of
the parties. A person should not be able to take advantage of his own wrongful or
negligent act, and a party who makes performance more difficult or disables himself from
performing, cannot expect to be excused from liability. Risk allocation is often the
dispositive issue in impracticability cases.

Thus, if the party adversely affected by the event has expressly or impliedly assumed the
risk of its occurrence, then the non-performance cannot be excused even when all the
other elements of an impracticability defense are satisfied. Thus, careful drafting is
required with respect to risk allocation in a contract.

FRUSTRATION OF PURPOSE

Similar to impracticability, frustration of purpose is concerned with a post-formation event,

the non-occurrence of which was a basic assumption on which the contract was made.
This event must not have been caused by the fault of the party whose purpose is
frustrated; and that party must not have borne the risk of its occurrence.

The essential difference lies in the effect of the event. Frustration of purpose arises when
the impact of the event is on the benefit reasonably expected by a party in exchange for
the performance, rather than directly affecting the performance of the adversely affected
party by making it unduly burdensome. In this case, the event so seriously affects the
value or usefulness of that benefit that it frustrates the contract’s central purpose for that
party. As to the purpose that has been frustrated, the purpose must be so patent and
obvious to either party that it can be reasonably regarded as the shared basis of the
contract.

RISK ALLOCATION IN CONTRACTS

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Risk allocation is often the dispositive issue in mistake and impracticability cases.The
analysis of risk allocation is relatively straightforward: if the party adversely affected by
the event had expressly or impliedly assumed the risk of its occurrence,the non-
performance cannot be excused even if all other elements of a defense or excuse are
satisfied.

The first place to look in determining risk allocation is the contract itself. If the parties
realized that a particular future event could affect performance, the contract may include
an express and specific term assigning risk.

Even if the parties do not have a particular contingency in mind, the contract may have a
more general provision allocating the risk of disruptions or calamities. Such general
provisions are called force majeure clauses.

FORCE MAJEURE CLAUSES

Force majeure is a term used to describe a “superior force” event. Force majeure clauses
have two purposes: they allocate risk and put the parties on notice of eventsthat may
suspend or excuse service.

The essential requirement of force majeure is that the invoking party’s performance of a
contractual obligation must be prevented by a supervening event that is unforeseen and
not within the control of either party.

Typical force majeure provisions include: “acts of God”, superseding governmental

authority, civil strife and labor disputes. However, there is no uniform set of events that
constitute force majeure. Instead, force majeure remains a flexible concept that permits
the parties to formulate an agreement that corresponds to their unique course of dealings
and industry idiosyncrasies.

Moreover, recent world events have increased the necessity of including additional
unthinkable events, such as terrorism and the risk of biological and chemical warfare.

Negotiating Force Majeure Clauses Parties negotiating a force majeure clause must
scrutinize the events and allocation of risk to assure that the clause is not one-sided or
unenforceable.

Drafting a Force Majeure Clause

The terms of the Force Majeure clause shall corroborate with the Indian Contract Act
1872 and appropriate to the respective trade. For example, Force Majeure clause for an
export import Contract will not suit for a Construction Contract wherein the circumstances
vary altogether.

In drafting force majeure clauses, parties may rely on general clauses or specifically
enumerate which events will constitute force majeure. A prudent force majeure clause
specifically enumerates the events that will prevent performance and entitle aparty to

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suspend or excuse an obligation. Force majeure clauses may also include language that
is industry specific.

Invoking a Force Majeure Clause

Generally, a party may invoke a force majeure clause if an enumerated event occursthat
is out of the party’s control and prevents performance of a contractual obligation. The
burden of proof is on the party seeking to invoke the force majeureclause. The force
majeure event may either suspend or excuse a party’s performance.

Sample Force Majeure Clause

Neither party shall be liable in damages or have the right to terminate this Agreement for
any delay or default in performing hereunder if such delay or default is caused by
conditions beyond its control including, but not limited to Acts of God, Government
restrictions, wars, insurrections ad/or any other cause beyond the reasonable control of
the party whose performance is affected.

Additional Risk Allocation Clauses

In addition to a force majeure clause, a contract may impliedly place risk on a party by
means of a provision such as a warranty, an undertaking to obtain insurance, or some
other commitment from which the assumption of risk may be inferred. It isgood planning
for the parties to consider potential risks and to provide for them clearly in the contract.
This reduces the possibility of later disputes and litigation.

Clauses that Address the Possibility of Future Litigation

Too often, a situation that might have been quickly and easily resolved by simply referring
to well-drafted contract language turns into costly and time-consuming litigation. Whether
the contract is simple or complex, clauses that address the possibility of future litigation
should never be overlooked.

Forum Selection Clause

Forum selection clauses specify the place where lawsuits will be filed in the event a
dispute arises between the parties to a contract. Specifically, the parties utilize such
clauses to expressly agree to litigate all disputes arising from the contract in a specific
jurisdiction and venue.

Choice of Law Clause

Parties may also negotiate which laws will govern their contract. Specifically, choice of
law clauses specify the legal jurisdiction under which the agreement shall be governed
and construed. While there are clear advantages to the parties for inserting such clauses
into their contract, there must also be a rational reason for the specifie choice of law.
Such clauses require careful research and negotiation, because the laws of different
jurisdictions may affect the parties differently.

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X. ALTERNATIVE DISPUTE RESOLUTION CLAUSE

At present most of the agreements contain alternative dispute resolution (ADR) clauses
that obligate the parties to submit their disputes to arbitration or mediation rather than
litigation. Alternative dispute resolution procedures are often cost-effective and enable
disputing parties to pursue their claims more quickly than traditional litigation.

Through the use of alternative dispute resolution clauses, the parties can agree to such
specific matters as: whether the arbitration will be binding or non-binding; how the
arbitration provision is to be triggered; where the arbitration would take place; which rules
will govern the arbitration proceedings; and the selection of the arbitrators.

Thus, properly drafted dispute resolution clauses can provide assurance to the parties
that their disputes will be resolved through the less expensive and speedier processes of
arbitration or mediation rather than by litigation. Moreover, alternative dispute resolution
clauses are of particular value in international agreements, in light of the availability of
established arbitration institutes to serve as a forum for disputes involving contracting
parties from different countries.

TYPICAL ARBITRATION CLAUSE:

Any claim, dispute or difference relating to or arising out of this Agreement shall be
referred to the arbitration, of a sole arbitrator. The arbitration shall be subject to the
Arbitration and Conciliation Act, 1996 as may be amended from time to time. The XYZ
Arbitration Centre, will appoint the Sole Arbitrator and will conduct the Arbitration in
accordance with its rules for conduct of Arbitration proceedings then in force and
applicable to the proceeding. The seat and venue of arbitration shall be New Delhi. The
proceedings shall be undertaken in English. The arbitration award shall be final and
binding on the parties.”

Suggested terms: In case of unforeseen circumstances caused by Govt actions due to

epidemic or Nation wide lockdown, arbitration process shall be conducted online under
the rules of the XYZ Arbitration Centre.

XI. REMEDIES FOR THE BREACH OF CONTRACTS

A breach of contract terms occurs when a party fails to perform either fully or adequately
the obligations provided in the contract. In the event of breach, the non-breaching and
performing party may be provided relief for the breaching party’s failure to perform its
obligations.

Damages

Damages are generally designed to compensate the non-breaching party for the benefit
of its bargain. Damages may be compensatory, consequential, punitive or nominal. The
non-breaching party generally has an obligation to mitigate its damages.

Types of damages include:

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 Direct damages: Losses incurred by the victim of a breach in acquiring the
equivalent of the performance promised under the contract, so as to substitute for
the performance that should have been rendered by the breaching party.
Consequential damages: Losses suffered by the victim of a breach going beyond
the mere loss in value of the promised performance (direct damages), and resulting
from the impact of the breach on other transactions or endeavors dependent on the
contract.

Penalty:

Damages awarded, not to compensate the victim for established loss, but to punish the
breaching party and make an example of him.

Liquidated Damages

At the time of contracting, the parties may wish to avoid disputes and uncertainty over
damages if a breach should occur in the future. They may include a term in the contract
itself that seeks to fix in advance the amount of damages to be paid if a breach occurs.
Such “agreed damages”provisions are referred to as liquidated damages clauses.

Liquidated damages clauses can be enforceable if the clause was fairly bargained, was
agenuine attempt to forecast probable loss, and is not disproportionate to the actual loss
ultimately suffered. If the clause fails to meet these standards, it is generally treated as a
penalty and is unenforceable.

Specific Performance

The non-breaching party may seek a court order to force the breaching party to perform
in accordance with contract terms. This remedy is generally granted in situations where
money damages are inadequate as a remedy.

Rescission and Restitution

Another remedy involves cancelling the contract and making restitution to the parties.
Rescission is the cancellation of a contract. In its most common use,rescission is the
victim’s termination of the contractual relationship following a material and total breach by
the other party. Rescission ends the victim’s performance obligations under the contract.

Restitution is a judicial remedy under which the court grants judgment for the restoration
of property or its value to the damaged party.

Reformation

Reformation is an equitable remedy that allows the parties to rewrite or reform the
contract as originally created in order to reflect what they intended.

Limitations and Waivers

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The non-breaching party may waive its right to enforce a remedy. Generally,contracts
provide that waiver of one event of default does not mean waiver of any future defaults. If
permitted by law, the contracting parties can limit the type and amount of remedies
provided to the non-breaching party.

Voidable Contracts

A contract that is void is not legally enforceable and the parties thereto are not legally
obligated to each other. Generally, contracts are void because the subject matter is not
legal or one of the contracting parties does not have the competency to contract. For
example, a contract to commit a crime is void and cannot be enforced.

XII. ANCILLARY DOCUMENTS.

a) FORM OF ADVANCE PAYMENT GUARANTEE

b) FORM OF BANK GUARANTEE (PERFORMANCE BANK GUARANTEE)

c) FORM OF DISCHARGE CERTIFICATE

d) FORM OF CHANGE REQUEST

e) LETTER OF ACCEPTANCE

f) INSURANCES

i. Contractors All Risks Insurance

ii. Third Party Liability Insurance

iii. Workmen Compensation Insurance

iv. Employers Liability Insurance

v. Professional Indemnity Insurance

vi. Plant, Tools and Equipment Insurance

vii. Public Liability Insurance

Contractors’ all risks insurance

Contractors’ all risks (CAR) insurance is a non-standard insurance policy that provides
coverage for property damage and third-party injury or damage claims, the two primary
types of risks on construction projects. Damage to property can include improper
construction of structures, the damage that happens during a renovation, and damage to
temporary work erected on-site.

Third parties including subcontractors may also become injured while working at the
construction site. CAR insurance not only covers those associated risks but also bridges
these two types of risks into a common policy designed to cover the gap between

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exclusions that would otherwise exist if using separate policies.

CAR insurance coverage is common for such construction projects as buildings, water
tanks, sewage treatment plans, flyovers, and airports.

Workmen’s Compensation Insurance:

Employers are legally obligated to take reasonable care to assure that their workplaces
are safe. Nevertheless, accidents happen. When they do, workers compensation
insurance provides coverage.

Workers compensation insurance serves two purposes: It assures that injured workers
get medical care and compensation for a portion of the income they lose while they are
unable to return to work and it usually protects employers from lawsuits by workers
injured while working.

Workers receive benefits regardless of who was at fault in the accident. If a worker is
killed while working, workers comp (as it is often abbreviated) provides death benefits for
the worker’s dependents.

Employers liability (EL) insurance

An EL policy covers the legal liability of the employer for any illness, injury or death
suffered by their employees. EL insurance is always on an annual basis so it is divorced
from specific projects. However, most EL policies are issued on a ’causation’ basis. It is in
general annexed to the Workmen’s compensation Insurance policy.

Professional indemnity (PI) insurance

Cover is provided under PI policies for awards of damages, costs or settlements(including

defence costs) for which the Consultancy practice is legally liable resulting from a claim
made against them during the policy period for any act, error or omission arising out of
the conduct of the business. Cover is for matters notified to the insurers in the policy
period. The event giving rise to the claimmay have occurred during the same period of
insurance but is more likely to have occurred before (perhaps many years before).

Plant and Tools Insurance:

Plant & Equipment Insurance provides cover for a range of construction equipment such
as portable tools, bobcats and forklifts. It is vital to ensure you have this type of cover to
protect yourself against potential issues such as theft, damage and breakdown to name a
few. We are able to provide insurance solutions for both fixed and mobile equipment as
well as indoor or outdoor plant.

Public liability (PL) insurance

The standard cover will provide indemnity in respect of liability at law for damages or
compensation arising from accidental injury to third parties (not employees) or accidental
damage to their property arising in connection with the project.

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It is recommended that this element of cover be considered very early on in the
procurement process, as decisions made about who is to purchase what cover and in
whose names should be reflected in the contract conditions. The policy may be annually
renewable or project specific.

XIII. SPECIAL CONTRACTS:

E-CONTRACTS

E-Contract is meant for negotiating successful contracts for consumer and business e-
commerce and related services. It contains model contracts for the sale of products and
supply of digital products and services to both consumers and businesses.

An e-contract is a contract modelled, executed and enacted by a software system.

Computer programs are used to automate business processes that govern e-contracts.
E-contracts can be mapped to inter-related programs, which have to be specified
carefully to satisfy the contract requirements. These programs do not have the
capabilities to handle complex relationships between parties to an e-contract

An electronic or digital contract is an agreement “drafted” and “signed” in an electronic

form. An electronic agreement can be drafted in the similar manner in which a normal
hard copy agreement is drafted. For example, an agreement is drafted on our computer
and was sent to a business associate via e-mail. The business associate, in turn, e-mails
it back to us with an electronic signature indicating acceptance. An e-contract can also be
in the form of a “Click to Agree” contract, commonly used with downloaded software:

The user clicks an “I Agree” button on a page containing the terms of the software license
before the transaction can be completed. Since a traditional ink signature isn’t possible on
an electronic contract, people use several different ways to indicate their electronic
signatures, like typing the signer’s name into the signature area, pasting in a scanned
version of the signer’s signature or clicking an “I Accept” button and many more.

E-Contracts can be categorized into two types i.e.

i. web-wrap agreements and

ii. shrink-wrap agreements.

Web-wrap agreements are basically web based agreements which requires assent of the
party by way of clicking the “I agree” or “I accept” button e.g. E-bay user agreement,
Citibank terms and conditions, etc.

Whereas Shrink-wrap agreements are those which are accepted by a user when a
software is installed from a CD-ROM e.g. Nokia PC-suite software

Law governing e-contract :-

Section (11) of information technology Act, 2000

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Section(12) of information technology Act, 2000

Section (13) of the information technology act, 2000 and

Section 10 of the Indian Contract Act, 1872

FIDIC FORM OF CONTRACTS FOR THE CONSTRUCTION INDUSTRY:

FIDIC Stands for Fédération Internationale Des Ingénieurs-Conseils (International

Federation of Consulting Engineers) which has about 102 countries as members. The
FIDIC forms of contract have conditions suitable for use in all types of construction,
electrical, mechanical and domestic contracts.

FIDIC published four new editions of forms of contracts:

1. Conditions of contract for construction

2. Conditions of contract for plant and design-build

3. Conditions of contract for EPC and Turnkey projects

4. Short form of Contract

This Second Edition of the Conditions of Contract for Construction has been published by
the Fédération Internationale des Ingénieurs-Conseils (FIDIC) as an update of the FIDIC
1999 Conditions of Contract for Construction (Red Book), First Edition.

Along with the FIDIC 1999 Yellow Book (the Conditions of Contract for Plant and Design-
Build) and the FIDIC 1999 Silver Book (the Conditions of Contract for EPC/ Turnkey
Projects), the FIDIC 1999 Red Book has been in widespread use for nearly two decades.

In particular, it has been recognised for, among other things, its principles of balanced risk
sharing between the Employer and the Contractor in projects where the Contractor
constructs the works in accordance with a design provided by the Employer. However, the
works may include some elements of Contractor-designed civil, mechanical, electrical
and/or construction works.

This Second Edition of the FIDIC Red Book continues FIDIC’s fundamental principles of
balanced risk sharing while seeking to build on the substantial experience gained from its
use over the past 18 years. For example, this edition provides:

1) greater detail and clarity on the requirements for notices and other communications;

2) provisions to address Employers’ and Contractors’ claims treated equally and

separated from disputes;

3) mechanisms for dispute avoidance and

4) detailed provisions for quality management, and verification of Contractor’s contractual

compliance.

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These Conditions of Contract for Construction include conditions, which are likely to apply
to the majority of such contracts. Essential items of information which are particular to
each individual contract are to be included in the Particular Conditions Part A – Contract
Data.

In addition, it is recognised that many Employers, especially governmental agencies, may

require special conditions of contract, or particular procedures, which differ from those
included in the General Conditions. These should be included in Part B – Special
Provisions.

It should be noted, that the General Conditions and the Particular Conditions (Part A –
Contract Data and Part B – Special Provisions) are all part of the Conditions of Contract.

To assist Employers in preparing tender documents and in drafting Particular Conditions

of Contract for specific contracts, this publication includes Notes on the Preparation of
Tender Documents and Notes on the Preparation of Special Provisions, which provide
important advice to drafters of contract documents, in particular the Specifications and
Special Provisions. In drafting Special Provisions, if clauses in the General Conditions are
to be replaced or supplemented and before incorporating any example wording,
Employers are urged to seek legal and engineering advice in an effort to avoid ambiguity
and to ensure completeness and consistency with the other provisions of the contract.

This publication begins with a series of comprehensive flow charts which typically show,
in visual form, the sequences of activities which characterise the FIDIC Construction form
of contract. The charts are illustrative, however, and must not be taken into consideration
in the interpretation of the Conditions of Contract.

This publication also includes a number of sample forms to help both Parties to develop a
common understanding of what is required by third parties such as providers of securities
and guarantees.

Drafters of contract documents are reminded that the General Conditions of all FIDIC
contracts are protected by copyright and trademark and may not be changed without
specific written consent, usually in the form of a licence to amend, from FIDIC. If drafters
wish to amend the provisions found in the General Conditions, the place for doing this is
in the Particular Conditions Part B – Special Provisions, as mentioned above, and not by
making changes in the General Conditions as published.

XIV. SUMMARY:

While Contract drafting demands due diligence, there are a number of strongly held
ideological values underlying contract law and its rules are motivated by conscious and
deliberate public policy. Understanding these policy themes can help a practitioner
appreciate the goals and assumptions underlying the legal rules involved in drafting
Contracts.

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One of the most important parts of drafting a contract is ensuring the language is clear
and unambiguous. We should shun flowery words and legal jargon. A contract should be
clearly understood by the stake holders who are not legal professionals.

For an effective Contract drafting/compilation, the Administrator should be involved from

the bidding stage itself ; this will enable him to track all the negotiating communications
and meeting minutes integrated in to the respective sections and to construct a flawless,
comprehensive Contract agreeable by the stakeholders.

Further, an efficient Contract Administrator should adopt the time-tested ethics while
formulating the terms and conditions. The terms shall be pleasing, beneficial, and not
agitating the stake holders as stipulated in the song of the God – Bhagavad Gita

Austerity of words consists in enumerating words that are truthful, pleasing, beneficial and
not agitating to others.

In a nutshell, the Contractshall foster synergetic relationship among the stakeholders,

sustainably by imbibing the values that are inherent to our culture and this great Nation!

ANNEXURES

CONTRACT TERMINOLOGY

A. CONTRACT TERMINOLOGY

ADR – this is short for alternative dispute resolution, or ways to resolve disputes outside
of the courtroom. The term typically encompasses negotiation,mediation and arbitration.

Assignment – the transfer of rights or duties by the assignor to the assignee.This may
occur only by agreement or by operation of law, for example, when someone dies or
when a company is bankrupt.

Choice of Law – often, the parties to a contract will specify which rules of law should be
used to resolve any dispute between them. Particularly in international transactions, the
choice of law can be a significant point of negotiation among lawyers. Choice of law (what
legal principles will be used to resolve the dispute)should be distinguished from choice of
forum (where the dispute should be resolved)and choice of dispute resolution method
(litigation or some form of ADR).

Common Law – this term, when contrasted with Civil Law, refers to legal systems which
have their origin in the British legal system. The legal system of India is from the
common law tradition.

Condition Precedent – an event that must happen before a contract or a contractual

obligation goes into effect.

Condition Subsequent – a happening which terminates the duty of a party to perform or

do his/her part.

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Consideration – a common law concept which requires (in essence) that a promise be
part of an exchange to be enforceable as a contract.

Contracts of Adhesion – standardized contracts, usually presented on a take it-or-

leave-it basis, to parties of unequal bargaining strength.

Covenant – this term used in a contract means a promise which, if not carried out, will
carry legal consequences. Often, covenants are divided into Affirmative Covenants (the
things the promis or agrees to do) and Negative Covenants (the things the promis or
agrees not to do).

Defects Liability Period – often, when a Default occurs under a contract, the obligor may
have a certain period of time to cure the Default before the affected party is allowed to
exercise Remedies.

Default – the circumstances where an obligor under a contract is considered to be in

breach of the contract. In formal written contracts, Defaults often include failure of a
Representation or Warranty to be true when made, failure to perform any Affirmative or
Negative Covenant, insolvency or bankruptcy, as well as other enumerated situations
tailored to the specific circumstances.

Equity – this term, which is often used to mean fairness, also has a more technical legal
meaning. It used to be that the Common Law system was rather rigid,and in order to
obtain relief, a litigant had to fit into a limited class of situations.

Estoppel – an equitable concept that prevents a party from raising an argument when the
party has acted unfairly, fraudulently, or other wise in appropriately. (EU equivalent:
“legitimate expectations”).

Force Majeure – an “act of God” which prevents one party from performing the
obligations owing under a contract. Commonly such things as war, riots,earthquakes,
floods, strikes and the like are included. The common law generally takes a stricter
approach to force majeure than civil law legal systems.

Impracticability – A legal doctrine closely related to Force Majeure. If some

unanticipated event makes performance of the contract unusually burdensome, some
legal systems will allow a party to be excused from the contract under the doctrine of
impracticability. Different legal systems have varied requirements for invoking this
doctrine.

Indemnity – an agreement in which one party agrees to reimburse another party if it is

held liable. An indemnity is in the nature of a guaranty, but typically is used when the
party offering indemnity has some interest in, involvement with, or control over the events
leading to liability. Indemnity clauses are often found in commercial contracts, and may be
coupled with “hold harmless” provisions. In a“hold harmless” provision, the first party says
that they will not hold the second party responsible for certain actions, even if the first
party might otherwise have the right to do so under applicable law.

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Lien – a creditor has a Lien on a piece of property owned by a debtor when the creditor
has a contingent claim to that property. Sometimes, the debtor voluntarily gives the
creditor a Lien as a form of security for payment; other times the creditor receives the
Lien by operation of law. Usually non-payment of the debt,or an Event of Default under
any contract creating the debt, allows the creditor to Foreclose on the Lien.

Liquidated Damages – when parties to a contract settle in advance the amount of

damages which will be available should one party fail to perform.

Remedies – the actions that can be taken upon an Event of Default.Sometimes an

aggrieved party can take action on its own. This is often referred to as“self-help.” Other
times, the term “remedies” is used to describe the court procedures and decisions that
are available to help an aggrieved party.

Severability – the characteristic of a contract that allows for removal of duties or portions
that are incorrectly or illegally drawn up. The parties may agree that incorrect, impractical,
or illegal portions be severed from the agreement and replaced by language that best
reflects the intent of the parties and comes closest to the business objective of those
severed portions. Severance allows the remainder of the contract to be valid and
enforceable.

Specific Performance – a court orders specific performance when it requiresa party to

carry out its obligation, rather than merely paying damages. Specific performance is an
extraordinary remedy.

Void – is absolutely null, empty, having no legal force, and incapable of being ratified. In
contracts it refers to an attempt at formation of contract which is equivalent to no contract
at all.

Voidable is capable of being voided, or later annulled. If a contract is formed but

voidable, it may either be ratified or confirmed by conduct or else it may be voided by
one of the parties. Once ratified, the promise is enforceable. If itis voided, it is
unenforceable.

[1]UNCITRAL is the core legal body of the United Nations system in the field of
international trade law, with a mandate to further the progressive harmonization and
unification of the law of international trade.

Author : Ramasubramanian is an ADR and Claims professional having over 20 years of

international expertise in the dispute resolution arena. He is a Member of the prestigious
Chartered Institute of Arbitrators- UK and empanelled as an Arbitrator with the Indian
Council of Arbitration. email: [email protected]

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 Location: COIMBATORE, Tamil Nadu, IN

Member Since: 26 May 2020 | Total Posts: 2

Ramasubramanian is an ADR and Claims professional having over 20 years of
international expertise in the dispute resolution arena. He is a Member of the prestigious
Chartered Institute of Arbitrators- UK and empanelled as an Arbitrator with the Indian
Council of Arbitration. email: [email protected] View Full Profile

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