rticles

Commercial Contracts – Some Key Areas for Close

Attention
T Ramappa, Advocate, Chennai.

The purpose of this article is to highlight the importance of some of the key areas in
a commercial contract that are to be carefully expressed, more importantly by one
e-mail : with experience in drafting commercial contracts, whether it is for the purchase of
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heavy equipment, obtaining know-how or international agency agreements or any
other such agreement of substantial monetary value.

Proper law of the contract
‘Proper law of the contract’ means the legal system which will
govern the contract or a particular aspect of it. Put simply, the
question is: what is the law which will govern the rights and
obligations under the contract of the parties, Indian law, English
law or any other, depending upon the nationality of one or
other of the parties? It is open to the parties to agree upon the
domestic law of which country would apply to the transaction
which is the subject of their contract, unless it is with an intention
to defeat the provisions of some law. The determination of the
applicable substantive law is necessary for the purpose of
deciding the rights and obligations of the parties under the
contract, and the remedies for them. The question does not
arise where the parties to the contract are Indian companies or
other entities which are of Indian nationality. It will arise only
when one or more of the parties contracting with Indian entities
are nationals of other countries. In the choice of applicable
substantive law of the contract, the parties to the contract should
recognize that there should be a reasonable connection between
the place of performance of the contract and the law of the
country whose law is proposed to be made applicable.
The law is that where the intention of the parties is expressly
stated, it will prevail. Where the parties have not expressed
their intention as to what country’s substantive law will apply
to the contract and if it is not so expressed and it is possible to
infer it from the terms, the nature of the contract, general
circumstances of the case, the court will determine which law
would apply. When the intention is neither expressly stated
nor can be inferred, the contract will be governed by the system
of law with which the transaction has its closest and most real
connection. 1
It is not uncommon to find in drafts of contracts supplied by
overseas companies relating to performance in India of Indian
companies, clauses such as “the contract will be governed by
the laws of Florida”. If the contract requires an Indian company
to perform its obligations under the contract, e.g. designing
and supply from India of equipment to be delivered either to
the company in the US or its subsidiary in India, there is no
logic in imposing American law on the Indian party. The Indian
party does not know the obligations of the seller and the rights
of a buyer under that American law. More importantly, that
law has no connection with a contract to be performed in
India by the Indian party. Where the place of arbitration is in
India, even in an international commercial arbitration, it is
permissible under section 28 [1][b][i] of the Arbitration and
Conciliation Act, 1996, to provide that Indian law would apply
to the contract, if the nexus of the contract to its performance
is clear. If, on the facts, Indian law would be the appropriate
law governing the contract, this term will have to be taken up
with the American buyer. It should not be left unspecified,
casting the burden on the court to gather the intention of the
parties on this issue.
It is not only the law relating to the main contract, but also the
law governing arbitration should be considered as rendered
necessary by the nature of the contract, the place where
arbitration is intended by the parties to be held. If the arbitration
clause or the agreement provides that arbitration shall be
1. ‘Conflict of laws’ Dicey & Morris, 10th edition.

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governed by the law of the country of the foreign party and
an award is made in that country, the award would be a foreign
award. Enforcement of foreign awards is provided for in Part
II of the Arbitration and Conciliation Act, 1996.
It is permissible to provide, if the facts viz. the places of
business of the parties, the place of performance, the place of
payment, the currency in which payment is to be made, justify
it that they would be subject to different laws. For example,
where a letter of credit is opened, in a contract between an
Indian supplier and a French buyer, and the paying banker is
in Germany, that bank may require that payment would be
governed by the laws of Germany. In the same way, if parties
agree, the substantive law applicable to the main contract may
be Indian law and the law of the foreign country would apply
to arbitration where the arbitration would be held.
THE NTPC CASE
National Thermal Power Corporation v. Singer Company and
ors.2 was a case where the issue before the court was the law
applicable to arbitration between the parties. It was common
ground that Indian law applied to the contract. The Arbitration
Act, 1940 was then in force. The National Thermal Power
Corporation [“NTPC”] entered into a contract with Singer
Company [“Singer”], a foreign company for supply of
equipment, erection and commissioning of certain works in
India. The contract provided that the law applicable to the
contract would be the laws in force in India and that the Courts
of Delhi would have the exclusive jurisdiction. But there was
a specific provision that any dispute arising out of the contract
should be decided as per the relevant clauses of the General
Terms of the contract, dealing with the special responsibilities
of the parties. The General Terms, besides stating that the
laws of India applied to the contract, set out the different
positions regarding arbitration in respect of NTPC and Singer,
describing them as the Indian contractor and the foreign
contractor respectively. It provided that in the case of NTPC
the arbitration shall be conducted at New Delhi, in accordance
with the provisions of the Arbitration Act, 1940, and in the
case of Singer, the arbitration should be conducted by three
arbitrators, one each to be nominated by the parties and the
third to be named by the President of the International Chamber
of Commerce, Paris, and the place of arbitration was left to
be determined by the arbitrators. The arbitration was conducted
in London and the arbitrators made an interim award.
NTPC applied to the Delhi High Court seeking to set aside the
award. The High Court dismissed the application on the ground
that the seat of arbitration was in London and that the award
2. 1993 AIR 998 Supreme Court of India.
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Commercial Contracts – Some Key Areas for Close Attention
was a foreign award3 and was not governed by the Arbitration
Act, 1940 and that the arbitration agreement on which the
award was made was not governed by the law of India. The
High Court concluded that English Courts alone had jurisdiction
to set aside the award. NTPC appealed to the Supreme Court
of India.
It was argued on behalf of Singer before the Supreme Court
that even though the main contract provided that Indian law
would apply to the contract, arbitration being a collateral
contract, the law applicable to arbitration would have to be
determined by other factors as the contract in this case did not
state which law would apply to the arbitration. The place of
arbitration was urged as one factor. On that reasoning,
according to Singer, arbitration was governed only by English
law as the arbitration was held in London.
The Supreme Court rejected this argument and allowed the
appeal. The Court held that the High Court had erred in
treating the award in question as a foreign award and that the
Foreign Awards [Recognition and Enforcement] Act, 1961
[repealed later] had no application to the award by reason of
the specific exclusion of that Act to any award made on an
arbitration agreement governed by the law of India. It held
that the award was governed by the laws in force in India,
including the Arbitration Act, 1940.
The Supreme Court ruled that the parties had expressly agreed
that the laws in force in India would govern their contract and
that the courts in Delhi shall have exclusive jurisdiction in all
matters arising under the contract and in as much as they had
not expressly or by implication provided for a law other than
Indian law to govern the arbitration under the contract, the
proper law governing the arbitration agreement was the law
in force in India, which applied to the contract, and that the
competent courts in India had jurisdiction over all matters
concerning arbitration. The Supreme Court added that London
was chosen, not by the parties, but by the ICC Court and that
the place had no significant connection either with the parties
or the contract.
TIME AS ESSENCE OF THE CONTRACT
The clause relating to time for performance, stating that time
is of the essence of the contract is also often included in almost
all contracts in a mechanical manner. In the first place, it
cannot be so in every case, and it depends on the nature of the
obligation. Excepting in unusual circumstances, performance
of an essential obligation beyond the agreed time may not
cause damage to the aggrieved party that cannot be
3. The Arbitration Act, 1940 was silent on foreign awards. Part II of the
Arbitration and Conciliation Act, 1996 provides for the enforcement of
foreign awards.
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Commercial Contracts – Some Key Areas for Close Attention
compensated in money terms. In fact, courts have held that a
provision for levy of liquidated damages would negate a claim
that time was the essence of the contract.
Section 55 of the Indian Contract Act, 1872 deals with time
for performance and the effect of failure to perform when
time is not essential and related positions.
The substance of the section is: when the intention of parties
was that time should be the essence of the contract and the
promisor fails to perform at or before specified times, the
contract becomes voidable at the option of the promisee. If it
was not the intention of the parties that time was the essence
of the contract, such failure would entitle the promise to
compensation for any loss sustained by such failure, but the
contract does not become voidable. If a promise accepts
performance of a contract that would be voidable under this
section at any time other than the agreed time, the promisee
cannot claim compensation, unless, at the time of such
acceptance he gives notice to the promisor of his intention to
claim compensation.
Therefore it is a question of fact in each case whether time was
the essence of the contract and it is for the party affirming that
it was the intention to show that the terms of the contract, the
nature of the obligation and other circumstances establish it.
HIND CONSTRUCTIONS’ CASE
The decision in Hind Construction Contractors v. The State
of Maharashtra 4 is apposite. The State of Maharashtra
awarded a contract to Hind Construction Contractors [“Hind
Construction”] for building an aqueduct across the Alandi River
and the period for completion of work was fixed as twelve
months from the date stipulated for commencement of the
work, which was July 5, 1955. Therefore Hind Construction
was to complete the work on or before July 4, 1956. By a
letter dated August 27, 1956, the Executive Engineer of the
State of Maharashtra, rescinded the contract on the ground
that the work was not completed within the stipulated time
and forfeited the security deposit furnished by Hind
Construction. Hind Construction sued for compensation for
wrongful termination of the contract. One of the grounds was
that unusual rains prevented his continuing with his work and
that he was orally informed that the period of inactivity on
that ground would be deducted from the period fixed for
completion of his work. He also averred that time was not of
the essence of the contract and that several factors beyond his
control in completing the work within the stipulated time were
not considered by the Government and that the contract
permitted extension of time and that therefore the rescission
4. 1979 AIR 720.
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of the contract was wrongful. The State of Maharashtra
repudiated the claims contending that time was the essence of
the contract.
Ultimately, the dispute was taken to the Supreme Court, both
parties challenging the decisions against them. On the main issue
as to whether time was the essence of the contract, the Supreme
Court held that in considering the question whether time is the
essence of the contract the term would have to be read along with
other provisions of the contract and such other provisions may,
on a construction of the contract, exclude the claim that time was
of the essence of the contract. The Court added that clauses
providing for extension of time in certain contingencies or for
payment of fine or penalty for work remaining unfinished on
the expiry of the time provided for completion of the work
would be construed as rendering ineffective the express provision
relating to the time being of the essence of contract. The contract
contained clauses provided for compensation for delayed work
and also for extension of time. On this ground, the Supreme
Court ruled that it was not the intention of the parties that time
was of the essence of the contract.
BANK GUARANTEES
Bank guarantees are a potential source of disputes and unless
the contractor goes through the clauses of the bank guarantee
[before signing the contract and giving instructions to the bank]
to ensure that they are reasonable, proportionate to the need
for the bank to protect its interests, and not conferring powers
to the bank to exercise its rights under the guarantee arbitrarily,
he should be prepared for burdensome litigation either in
courts or in arbitration or at both venues. This unfortunate
position is the result of the unjust exploitation, mostly by public
sector undertakings, as beneficiaries of bank guarantees, of
the legal position that courts have consistently refused to grant
an injunction restraining a bank from paying under the
guarantee, whatever the dispute between the parties to the
contract, except where it can be proved that the beneficiary of
the bank guarantee obtained the guarantee from the bank
through fraud and the bank had notice of the fraud or that
some special equities require that payment under the bank
guarantee is restrained. This is on the view that the commercial
trading and banking systems should not be interfered with by
mutual complaints by parties to the main contract, who should
go either to courts or arbitration to settle their disputes.
U.P. CO-OPERATIVE FEDERATION CASE
U.P. Co-operative Federation Ltd. v. Singh Consultants &
Engineers (P) Ltd.5 is a very early case decided by the Supreme
5. 1988 AIR 2239.
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Court of India dealing with the question of restraining a bank
from paying under a demand guarantee at the request of one
who provided the bank guarantee. The U.P. Co-operative
Federation [“the Federation”], a State Government enterprise,
placed an order on Singh Consultants & Engineers [“SCE”] a
limited company for the supply and installation of a Vanaspati
manufacturing plant at Harducharu, in the State of Uttar
Pradesh. The contract contained the terms for guaranteed
performance of work at various stages in accordance with the
time schedule prescribed therein and provided for completion
and commissioning of the plant after due trial run by the 15th
May, 1984. According to the Federation, time was essentially
and indisputably the essence of the contract. SCE executed a
bank guarantee for performance as agreed and also another
bank guarantee towards advance payments received from the
Federation. The two guarantees as well as the contract bond
entitled the appellant to invoke them and call for their
realisation and encashment on the SCE’s failing to perform
the obligations for which the Federation was the sole judge.
On the failure of SCE in completing the work at various stages
and in not completing the work on the agreed date, the
Federation invoked the two bank guarantees. The Federation
completed the work and inaugurated it.
SCE filed an application before the civil judge having
jurisdiction praying for an order restraining the Federation
from realising and encashing the bank guarantees. That
application was dismissed. On appeal to the Allahabad High
Court, a single judge reversed that order holding that the
invocation of the guarantees was illegal. On appeal to the
Supreme Court it held that the bank could not be restrained
from paying under the bank guarantees. It stated: “An
irrevocable commitment either in the form of confirmed bank
guarantee or irrevocable letter of credit cannot be interfered
with except in case of fraud or in case of question of
apprehension of irretrievable injustice has been made out.”
Neither of these exceptions was to be found in this case.
Some general steps to prevent unjust encashment of a bank
guarantee that can be considered are: the requirement that the
default by the contractor is specifically to be stated to him,
with a certificate by a neutral engineer; in the case of a
performance guarantee, that the performance complained of
is not according to agreed standards; not leaving the bank
guarantee open-ended, which means that there can be no
automatic extension of the bank guarantee; the beneficiary, if
he is a foreign national, to comply with the domestic laws of
the supplier; a term that the bank should know exactly on the
happening of which event, it should pay; a term providing for
applicable law relating to the bank guarantee, if any foreign
party is the beneficiary, and dispute resolution. This is not a
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Commercial Contracts – Some Key Areas for Close Attention
complete list, but shows what considerations are to be taken
into account.
EMAIL CONTRACT
Trimex International FZE Ltd. v. Vedanta Aluminium Ltd.,6
was a case, where the Supreme Court of India upheld a contract
concluded by both parties through email. Trimex International
FZE Ltd [“Trimex”] based in Dubai made a commercial offer,
through email, to Vedanta Aluminium Ltd [“Vedanta”], an
Indian company, for the supply of bauxite. Vedanta accepted
it by email. Trimex processed the order and the parties met
and a record of the minutes of the meeting was made and
signed by the parties and the acceptance of Trimex’s offer
was acknowledged in the minutes. Thereafter a formal contract
between the parties, containing an arbitration clause, was sent
to Vedanta, which accepted it with some changes.
After Trimex had made the arrangements for shipping the
material, Vedanta wanted postponement of delivery and since
it was not possible, Trimex terminated the contract. Trimex
had to pay to the shipowners a heavy sum for cancellation of
the arrangement with them. Trimex claimed compensation
from Vedanta and Vedanta repudiated liability and stated
that there was no concluded contract between them and
refused to nominate its arbitrator. Trimex initiated action
under section 11(6) of the Arbitration & Conciliation Act,
1996, before the Supreme Court of India, for appointment
of an arbitrator as per the arbitration agreement contained in
clause 6 of the Commercial Offer (purchase order) dated
15.10.2007 and clause 29 of the agreement exchanged
between the parties on 08.11.2007. Vedanta’s contention in
those proceedings was that though there were emails between
the parties, there was no concluded contract out of which
obligations would arise.
On a perusal of the correspondence through email between
the parties, the Supreme Court concluded: “Once the contract
is concluded orally or in writing, the mere fact that a formal
contract has to be prepared and initialed by the parties would
not affect either the acceptance of the contract so entered
into or implementation thereof, even if the formal contract
has never been initialed.” The Supreme Court ruled that the
offer through email containing all essential terms to constitute
a contract for the supply was accepted by email by Vedanta
and this satisfied the requirements of sections 4 and 7 of the
Indian Contract Act, 1872, regarding communication of an
offer and acceptance of the offer respectively and appointed
an arbitrator.
(Contd. on p. 164)
6. (2010) SCCL.COM 53.
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considered as Systemically Important Core Investment
Companies (CICs-ND-SI). These companies will continue to
require Certificate of Registration from RBI under Section
45-IA of the RBI Act.
While that is only a continuity, these companies have also
been subjected to additional requirements, which, on
implementation, may be quite difficult to achieve. There are
2 major requirements – leverage restraint and a capital
adequacy ratio.
It is notable that investment companies do not raise their
investible capital solely by means of equity or capital. They
raise it by way of loans. Loans are not necessarily loans from
banks – there are loans from group companies again. This is
simply a practical requirement since capital is not available
for buyback; loans are flexible.
So, the rule imposing a capital requirement of 30% of risk-
weighted assets is a huge capital to be kept. Notably, as most
of the investments would anyway have to be in equity shares,
the risk weight is unlikely to be less than 100%. So, if 30% of
the risk-weighted assets have to be in form of “net owned
funds”, it is only the balance 70% that may be in form of
debt, subject to the overall leverage limit of 2.5 times.
Conclusion
It is doubtful if many companies would be able to avail of the
exemption from the registration requirements. The restraints
and costs of availing the exemption, and retaining it, outweigh
the costs of maintaining an NBFC registration. After all, what
does it cost in terms of compliance for a non-depository,
systemically unimportant company to comply with the NBFC
registration requirements? Hence, if the objective of the new
regime was to clean up the messy NBFC scenario with 13000
names, the objective is hardly going to be achieved. 

Commercial
Commer Key
cial Contracts – Some K Areas
ey Areas for Close Attention
(Contd. from p. 160)
ARBITRATION costs on account of their remuneration, difficulty in arriving
at a consensus etc. The parties should agree in writing with
Blessed is the contractor who will collect his money without
the arbitrator that the award would be made within a specified
recourse to arbitration. In fact, his actual travails commence
time after all documents have been filed. A schedule setting
only after a dispute has arisen and he has to prepare himself to
out the time frame for filing documents, examination of
spend long months, even years, in participating in the arbitral
witness, if any and if necessary, arguments and other major
process, which is supposed to be an alternative to the time-
activities should be agreed upon before the commencement of
consuming and expensive machinery for settlement of disputes
the hearings and made part of the records of the proceedings
through courts. We may state what the basics are for the
before the arbitrator. Arbitration is preferred because that is
contractor to consider. The time for planning starts with the
the only business before the arbitrator, unlike in courts.
drafting of the arbitration clause. Attention should be paid to
However, this may be defeated by frequent, unnecessary
the qualifications of an arbitrator, the number of arbitrators,
adjournments, more often than not because the stronger party
the time within which they should make the award, the
can bear the delay and the consequent costs.
procedure for hearings, whether only documents or documents
and written arguments and such matters. The effectiveness of this mechanism as an alternative is now
being doubted because of the delay in arbitration proceedings,
Excepting where a question of law is involved materially
protracted procedural disputes and other factors which cause
affecting the rights of parties, it is not necessary to stipulate
delays in courts. In courts, one of the reasons for the delay is
that a judge should be an arbitrator. Where the dispute that
that the management of the case is in the hands of the litigants
may arise relates to conformity to technical specifications set
and that should not be the position in arbitral proceedings also.
out in the contract, the practical step would be to appoint the
If the position is the same in both venues, the only benefit to
president for the time being of the industry, e.g. president of
the parties is the savings in court fees but that comes to nothing
the association of manufacturers of electronic equipment, as
when the other total expenses of arbitration spread over years is
the sole arbitrator. He is far more likely to understand the
considered. Then, what is the value of the money that, if ever
nature of the dispute and evaluate the merits of claims by the
realized, after a long time, considering that the money was due
opponents and come to a conclusion within a short time. There
anterior to the commencement of the arbitration. It is for the
is no merit in mechanically prescribing that three arbitrators
parties to continuously work a cost-effective arbitration. 
would constitute the arbitral tribunal. This would entail more

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