INTRODUCTION TO SALE OF

GOODS ACT & CONTRACT

ACT

By
J.MICHAEL SAMMANASU
JIM

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Preparing an Effective Contract

 Two Relevant Laws in India Governing

Commercial Transactions
• Sale of Goods Act, 1930
• Indian Contract Act, 1872

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Sale of Goods Act

 What does this Act cover?

• Contracts for the sale of goods from/in India,
whereby the seller transfers the property in
goods to the buyer for a price.
• Provisions not similar to the Uniform
Commercial Code.

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Sale of Goods Act

 The Sales of Goods Act will not apply if you

include in your contract (or the terms and
conditions) that the United Nations
Convention on Contracts for the International
Sale of Goods (CISG) applies.
 India is not a signatory to the CISG. So,
CISG rules would not apply automatically to
transactions between U.S. sellers and India
buyers or vice-versa.
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Sale of Goods Act

 Essentials for a contract for sale of goods:

• Must meet requirements of contract.
• The subject matter is over “goods” (this means
every kind of moveable property other than
actionable claims and money).
• There must be a transfer of property.
• Contract is between a buyer and seller.
• Sale should be for a price.

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Contract Act

 What does this cover?

• In India, all contracts are covered/governed
by the Indian Contract Act, 1872, unless
stipulated otherwise by parties.

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Contract Act

 To have a valid contract, these statutory elements must be

present:
• Competency to contract
• Age of maturity
• Sound mind
• Someone not disqualified under Indian laws
• Free consent of the contracting parties
• Lawful consideration, which -
• Must be at the desire of the promisor
• May be from the promisee
• Can be past, present or future
• Must be something of value
• The object/subject matter of the contract must be lawful
• The contract should not be voidable or void
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Contract Act

 Void and Voidable Issues

• Coercion, undue influence, misrepresentation, or
fraud in obtaining a contract makes it voidable by
the aggrieved party
• When a party to a contract with reciprocal promises
is prevented from performing his obligation, the
party prevented can void the contract
• In a contract where time is of the essence and a
party fails to adhere to the timing schedule, the
other party can void the contract.
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Contracts – What Key Terms are
Important?
 Must have adequate “Payment Terms”
• This section of the contract obligates the buyer to pay the contract
price at certain times and under certain conditions.
• Typical types of payments accepted in India that could be
included in the “Payment Terms” section
• Advance payments
• Payments made before any goods or services have been
provided
• Stage payments
• Payments made upon receipt or shipment of goods or
services

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“Payment Terms”

 Section of “Payment Terms” include

• The amount of each payment
• Timing of payments
• When time limits are set for advance payment, stage
payments, or opening lines of credit, then remedies for
delay should also be built into the clause.
• Where payments are linked to the furnishing of bank
guarantees, time limits for obtaining the guarantees by
the payor (debtor) should also be set within the clause.
• If you desire to keep a strict adherence to timelines
and time guidelines for payments, then the phrase
“time is of the essence” should be used.
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“Payment Terms”

 Mode of payments can be made through:

• Direct remittance (wire transfer through
normal banking channels);
• Letters of credit; or
• Both for various payments involved in a
contract.

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“Price Variation” Terms

 Consider: “Price Variation” issues within the contract

• Usually arises with contracts of long duration and where the
economic conditions and price levels are in flux, making the
input costs and a fixed price hard to determine.
• Usually parties will agree on a price related to economic
conditions and price levels prevailing in a month and a year
(known as the ‘Base Level’), and agree to incorporate a
price variation clause (that is, an upward or downward
variation in price levels) with reference to the base level.
• Overheads and profits should also be considered within the
“Price Variation” clause.

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How can you secure your
payments within the contract?
 Bank Guarantees
• Bank guarantees must be negotiated/written in the
original contract. The actual guarantee, however, is
a separate document issued from the bank to the
Payee (creditor).
• Bank guarantees should be negotiated as
unconditional guarantees given by the Payor
(Debtor) bank to the Payee (Creditor) undertaking to
pay the sum specified in the guarantee on demand
and without demur, if the Payor fails to make the
payment or breaches the terms of the Contract.
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How can you secure your
payments within the contract?
• These are given to the Payee (Creditor) by the
Payor (Debtor’s) bank on behalf of the Payee to
secure:
• An earnest money deposit.
• As a security against performance of the contract or
initial and stage payments made by the buyer.
• Towards liquidated damages or meeting warranty
claims in respect to equipment/goods/services.
• Towards guaranteeing specified operational
parameters of equipment sold pursuant to a contract.

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Bank Guarantees

 An example of how to word the clause:

• "We, ...Bank, hereby agree and undertake that, if in your opinion, any
default is made by (constituent) in performing any of the terms and or
conditions of the order or if in your opinion, they have committed any
breach of the contract or there is any demand by you against...
(constituent), then, on notice by you, we shall, on demand by and
without demur and without reference to ...(constituent) immediately
pay you in any manner in which you may direct a sum of Rs... or such
portion thereof as may be demanded by you not exceeding the said
sum and as you may from time to time require. Our liability to pay is
not dependent or conditional on your proceedings against... and we
shall be liable to pay the aforesaid amount as and when demanded
by you merely on a claim being raised by you and even before any
legal proceedings are taken against the constituent. Unless extended,
this guarantee shall expire on... Notwithstanding anything contained
herein above our liability shall be limited to Rs..."
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Well Established Rule of Law

 “The bank must pay according to the terms of the

guarantee, on demand, or stipulated, without proof or
condition” (Edward Owen Engineering Ltd. v. Barclays
Bank International Ltd., 2001, Mumbai High Court).

 “The Court observed that in a performance guarantee

without conditions of proof, the guarantee is virtually a
promissory note payable on demand” (Texaco Ltd. v.
State Bank of India & Ors., 1985, Madras High Court).

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Expiring of Bank Guarantees
and Law of Limitation
 The Bank will give a guarantee for a specific time period
and not an open-ended guarantee.

 A limitation is imposed on liability and beyond the expiry

date of the bank guarantee, (usually six months) – no
claims survive against the bank guarantee after that.

 So it is important to negotiate the right terms and

understand the limitations on liability.

 Remember to negotiate in advance any extensions of

guarantees that may be required.
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How can you secure payments
within the contract?
 Letters of Credit ("LC”)
• LC is a document issued by a bank, which is basically another
form of an irrevocable guarantee of payment to a beneficiary
(creditor). Know the conditions of the LC.
• Example: In transactions related to goods, the Seller must send
the necessary shipping documents confirming the delivery of
goods within a certain time period to receive payment from the
bank.
• Documents that are usually presented to banks for payment:
• Documents evidencing that goods were shipped and the
delivery date.
• The invoice of the Seller.
• Certificate of quality or acceptance.
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Letters of Credit (“LC”)

• LCs are beneficial for international trade to eliminate

risks such as unfamiliarity with the foreign country,
customs, or political instability.
• Modus operandi:
• Two banks involved in an LC. The Buyer will
open a bank account in his country. That bank
will
guarantee the contract payment and establish a
line of credit with a bank in Seller’s country in
favor of Seller.
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Letters of Credit (“LC”)

 Letters of credit can be "confirmed" or "unconfirmed"

• Confirmed - intended to protect the interests of the Seller
because the confirming bank cannot have recourse to the
Seller if the Buyer's bank fails to pay the contract price.
• Unconfirmed - the bank paying on the LC can get its money
back from the Seller if the Buyer's bank does not come
through.
• However, "open-ended" LCs not allowed under India's
exchange control regulations.
• In international trade, it is common practice for Seller to
demand a confirmed LC as opposed to an unconfirmed LC.

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How can you provide for
payments within contracts?
 Liquidated Damages (“LD”)
• These are predetermined awards/amounts of damages
written into the contract in case of breach or default of
one of the parties.
• These clauses mitigate the risk associated with long
cumbersome civil litigation and issues relating to
estimating actual loss suffered, by providing for a fixed
amount of compensation in case of a breach of the
contract.
• Courts/Arbitrators do not normally interfere with LD
clause so long as not unduly harsh, and the damages
specified are considered reasonable.
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How can you provide for
payments within contracts?
 Penalties
• Section 74 of the Indian Contract Act says that if the
contract contains any stipulation by way of penalty, the
party complaining of breach is entitled whether or not actual
damage or loss is proved to have been caused to receive
from the party who has breached the contract reasonable
compensation not exceeding the amount so named or as
the case may be, the penalty stipulated for.
• Examples of penalties that can be written in the contract:
Forfeiture of earnest money deposit; security deposit;
installment of hire; stipulation for increased interest from
date of default; or forfeiture of a right to money or other
property already delivered.
• Note: Be careful - Penalty Clauses in other countries might
not be enforceable.
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Beware of Drafting Errors

 Instruments (i.e., Bank Guarantees

and LC)
• If the amount of payment is stated differently
in words and the numbers, then the amount in
words will be considered the official amount.
• If the promissory note, bank guarantee or a
bill of exchange has not specified a time for
payment, then they are considered payable
on demand.
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Beware of Drafting Errors

 Be careful of contract wording:

• If drafted “Compensation for loss or damage is
payable,” then punitive damages cannot be
awarded because the only word used was
“compensation;” so only LD.
• Remember there will never be any damages or
compensation awarded for remote or indirect
losses.
• Tax clauses must state that they survive the
termination or expiration of contract.
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Beware of Drafting Errors
 Additional Options- Contract must include clauses on:
• Obligations to pay taxes and duties and identify the parties who will
pay;
• Address aspects of taxes relating to Double Taxation Relief
Agreements;
• Scheduled delivery dates and shipment (consider application of LD
here);
• Export-Import license compliance;
• Inspection, Acceptance and Shipment;
• Passage of Title and Risk;
• Warranty (consider application of Bank Guarantee here);
• Ownership of Intellectual Property (i.e., trademark/patents/copyrights);
• Confidentiality;
• Indemnities; and
• Force majeure.
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Contracts: Governing Law and
Dispute Resolution
 Make sure that the contract has a section regarding
which laws shall govern the contract (i.e., U.S. or India).
 Remember, certain issues may be subject to a law
different from one agreed upon by parties. For
example: IP transfer, registration, protection in vendor
territory, real estate, labor laws, bankruptcy,
enforcement of foreign judgment/award.
 If the parties want to quickly end disputes arising from
the contract, an arbitration clause is necessary to avoid
lengthy civil procedures.

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Dispute Resolution

Enforcement of a foreign judgment

in India to recover money
 A foreign decree/judgment can be enforced in India as a
decree passed by an Indian court if the decree/judgment
is passed by any court of a reciprocating territory.
 Reciprocating territory: Any country or territory outside
India which the Central Government may, by notification
in the Official Gazette declare as reciprocating territory.
 USA is not a reciprocating territory.

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Enforcement of a foreign
judgment in India to recover
money
 Judgment from a "non-reciprocal territory" (such as the U.S.A.) can be
enforced only by filing a law suit in an Indian Court for a judgment based on
the Foreign Judgment.
• The foreign judgment Is considered only as evidence
• Such a law suit is to be brought within 3 years of the foreign judgment
• A foreign judgment can be considered conclusive by an Indian court if
such judgment
• Has been pronounced by a court of competent jurisdiction.
• Has been given on the merits of the case.
• Is founded on correct view of international law.
• Is contained in proceedings that followed principles of natural justice
• Has not been obtained by fraud.
• The claim or judgment is not contrary to any law in force in India.
 Likely a long and slow procedure, as the Indian courts are overburdened.

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Arbitration- Enforcement of a
foreign arbitral award in India
 India and U.S. are parties to the New York Convention, 1958.
 U.S. arbitral awards on commercial disputes are directly
enforceable in India through foreign award being made a
decree of the court.
 Indian courts may grant preliminary injunctions and other
protective orders pending international commercial arbitration.
 Grounds for refusing enforcement of foreign arbitral awards.
• Disputed subject matter not capable of settlement by
arbitration under Indian law; or
• Enforcement of award would be contrary to the public policy
of India/fundamental principle of Indian law, interest of
India, justice or morality.

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Arbitration clauses in contracts

 An arbitration clause in the contract can

avoid the time consuming and
sometimes ineffective process of seeking
damages through the civil courts in India.

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Tips For Contract Management

 Analyze your long-term and short-term objectives.

Consider drawing up a business term sheet First.
 Have precise contractual clauses leaving no scope
for doubts requiring interpretation (in most situations).
 After execution, consider drawing up a Master
Schedule of all events in their chronological
sequence that have to take place during the course
of implementation of the contract so that monitoring is
facilitated.
 Strict enforcement of the terms and conditions, and
prompt issues of notices, where necessary.
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Conclusion

 Quote:
• “A good personal rapport and building a
trustful relationship is absolutely necessary
and critical for successful business
relationships, but it is critical to back that up
with good formal legal documentation that
supports a claim in Court.”

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Thank You

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