assignment of rights and obligations under a contract india

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Sub-contracting and Assignment : Resolving the Legal Conundrum

assignment of rights and obligations under a contract india

The performance of a contract may require third party involvement towards the fulfilment of obligations under a contract. In certain specific circumstances, the contracting parties may decide to “sub-contract” or “assign” their rights and obligations to a third party depending upon the nature of the contract.

In common parlance, sub-contracting and assignment are used interchangeably, however, a significant difference lies between the two when one examines the terms from a legal stand point. This post aims to discuss the concept of Sub-Contracting and Assignment and explains the key difference between the two concepts.

Sub-contracting

Sub-contracting refers to the delegation of certain duties and obligations by contracting parties to a third party, i.e. a sub-contractor who aids in the performance of the contract. According to the Black’s Law Dictionary, a sub-contract is “where a person has contracted for the performance of certain work and he, in turn, engages a third party to perform the whole or part of that which is included in the original contract, his agreement with such third person is called a subcontract and such person is called a subcontractor .” [1] A subcontractor could be a company, self-employed professionals or an agency undertaking to fulfil obligations under a contract.

Sub-contracting is generally undertaken in complex projects where the contract has a prolonged life cycle or multiple components for completion of a project, for instance, infrastructure contracts, construction contracts, renewable energy contracts or certain information technology-related contracts. However, the rights and duties of the sub-contractor under the sub-contracting agreement are relatively similar to that of the principal contractor in the main agreement.

Furthermore, while drafting a contract, one must ensure to incorporate a clause on sub-contracting which clearly spells out that parties to the contract shall sub-contract the rights and obligations only after seeking prior written consent from the other party. The sub-contracting arrangement maybe two-fold, depending upon the nature of the main contract:

Primarily, the basic idea behind delegation of the obligations to a sub-contractor is to ensure greater flexibility in the performance of the contract. However, it is imperative to enter into a sub-contractor’s agreement that specifies all the details of the work to be performed by the subcontractor, including optimum time required to accomplish the task, payment of charges to the subcontractor, termination of the agreement, etc.

While subcontracting is time-saving and cost efficient, it may result into legal issues between the contracting parties. For instance, issues may arise with respect to the payment conditions where the payment to sub-contractor is contingent upon or linked to the principal contractor receiving its payment from the employer. Further, the courts in India have always upheld the principle of privity of contract between employer and the principal contractor on the one hand and between the principal contractor and sub-contractor(s) on the other. The Supreme Court of India in the case of Zonal General Manager, Ircon International Ltd. v. Vinay Heavy Equipments [2] upheld that in the absence of a back-to-back covenant in the main contract, “ the distinct and sole liability of the middle-contractor is presumed and that the rules in relation to privity of contract will mean that the jural relationship between the employer and the main contractor on the one hand and between the sub-contractor and the main contractor on the other will be quite distinct and separate” . Therefore, in order to avoid ambiguities and future legal squabbles, careful consideration must be given while drafting specific terms and obligation that will pass down the contractual chain.

Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party’s concurrence. Section 37 of the India Contract Act, 1872 (“ Contract Act ”) enables the contracting parties to dispense with the performance of a contract by way of an assignment. While the principle of assignment is well recognized under Indian law, it derives its origin from the English law.

Assignment of rights is a “complete transfer of rights to receive benefits” accruing to one party under a contract. Performance of a contract may be assigned as long as the contracting parties provide their consent towards the assignment. However, the act of assignment needs to be looked at from the perspective of the contracting parties. Essentially, there are three parties involved, namely, the assignor, assignee and obligor.

An important principle affecting assignments is that the burden or liability under a contract cannot be assigned. Essentially, the moot question that often arises is with respect to assignment of “rights” vis à vis assignment of “obligations”. The Supreme Court in the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Limited [3] categorically distinguished between assignment of “rights” and “obligations”. The court upheld that, “ an assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised distinction between these two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a novation resulting in substitution of liabilities. On the other hand rights under a contract are assignable unless the contract is personal in its nature (or) the rights are incapable of assignment either under the law or under an agreement between the parties” . Primarily, the court clarified that obtaining prior consent to assign “obligations” under a contract would be considered as novation as it will result into substitution of liabilities and obligations to the assignee. Moreover, introduction of a new party into an existing contract will result into novation of a contract i.e. creation of a new contract between original party and new party. As the courts have interpreted that transfer of obligations can be undertaken through novation, the assignment clause in a contract must clearly deal with novation, if the intention is to transfer obligations.

Furthermore, the Supreme Court, in the case of Gopalbhai Manusudhan [4] , reaffirmed that whenever there is a case of assignment or even the transfer of the obligations, it must be acclaimed that there is the presence of the consent of the parties. Without the consent of the parties, the assignment will be not considered valid. In addition to upholding the legal point, this ruling also indicates that before establishing a commercial contract, the parties must consider the different complications of contracts, such as the objective of the contract and the presence of an assignability clause in the agreement.

Therefore, the judicial trend in India has time and again reiterated and laid down that rights under contract can be assigned unless (a) the contract is personal in nature i.e. requires personal engagement of a specific person or (b) the rights are incapable of assignment either under law or under an agreement between the parties. In the case of Robinson v. Davison [5] , the defendant’s wife pledged to perform piano at a concert on a specific date. Due to “her illness”, she was unable to fulfil her obligation, which was to play the piano at an event. The contract in this instance was ruled to be solely dependent on the defendant’s wife’s good health and personal talent, and the defendant’s wife’s illness led the contract to be void. Further, the court ruled that the defendant could not be held liable for damages as a result of the contract’s non-performance. The wife could not assign her right/obligation to a third party because the contract was founded on the “promisor’s expertise” in the aforesaid case.

While assignment is a boiler plate clause, it requires careful consideration on a case-to-case basis. For instance, in real estate transactions, a buyer would insist on retaining the right to assign the “agreement to sell” in favour of a nominee (a company, affiliate or any other third party), in order to facilitate final conveyance in favour of the intended buyer. Similarly, in lending transactions, a borrower will be prohibited from assigning rights under the contract, however, the lender will retain absolute and free right to assign/sell loan portfolios to other lenders or securitisation company.

The apex court has time and again reiterated that the best policy is to unequivocally state the intent with respect to assignment in the agreement to avoid litigation in the future. The contracting parties must expressly specify the rights and obligations stemming from assignment under a contract. Any agreed limitation on such an assignment must be expressly laid down in the contract to avoid adverse consequences.

For a person drafting a contract, it is important to understand these subtle differences, between sub-contracting and assignment. While “sub-contracting” is delegating or outsourcing the liabilities and obligations, “assignment” is literally transferring the obligations. It will be not fallacious to say that an “assignment” transfers the entire legal obligation to perform to the party assigned the obligation whereas, subcontracting leaves the primary responsibility to perform the obligation with the contracting party.

Archana Balasubramanian (Partner), Vaishnavi Vyas (Associate)

[1] Black’s Law Dictionary 4th ed. (St. Paul: West, 1951).

[2] 2006 SCC OnLine Mad 1107

[3] MANU/SC/0428/1962

[4] Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan 2019 (10) SCJ 269

[5] (1871) LR 6 Ex 269

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Assignment of Contract

An agreement enforceable by law becomes a contract. A contract involves both rights and obligations because a contract is an agreement enforceable by law. An agreement involves promises from both sides, and thus, there is the creation of both rights and obligations. For instance, X promises to sell his car to Y, and Y promises to pay Rs. 5,00,000 for his car. This constitutes a valid contract between X and Y. Here, the right on the part of X is to get Rs. 5,00,000 as consideration for selling his car, and the obligation for X is to deliver the car to Y as consideration for Rs. 5,00,000 paid to X by Y for selling his car.

Similarly, the right on the part of Y is to get the car delivered as consideration for Rs. 5,00,000 paid, and the obligation for Y is to pay Rs. 5,00,000 as consideration for the vehicle. If either X or Y fails to discharge their responsibility, there will be a breach of contract. In this way, a contract leads to the creation of both rights and obligations for both parties.

Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. For instance, X owes Y Rs. 1,000, and Y owes Z the same amount. In this case, Y is under obligation to pay Rs. One thousand to Z and has the right to receive Rs. 1,000 from Z. In this case if Y asks Z to directly pay Rs. 1,000 to X, and if X accepts the same, there will be an assignment of Y’s right to Z. But, if in a similar situation, instead of transferring his ownership, Y would have transferred any of his obligations, then it would amount to novation. Section 37 of the Indian Contract Act, 1872, enables the parties to dispense the performance by way of the contract’s Assignment. Apart from conforming with the Indian Contract Act, 1872, there are exceptional circumstances where the contract assignment must be duly stamped in conformity with the provisions of the Indian Stamp Act, 1899.

The common law system did give effect to three kinds of transactions, viz., acknowledgment, novation, and power of attorney, which to some extent did work of an assignment. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. There are three parties involved in contracts of Assignment, namely, the assignor, assignee, and obligor. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment.

But if a contract between two parties relies entirely on the’ promisor’s skill or expertise, then such a contract cannot be assigned under any circumstances. This is because the ‘promisee’ has entered into the contract based on the’ promisor’s skill or expertise. The case of Robinson v Davison is important case law in this regard . In this case, the defendant’s wife promised to play piano on a particular at a concert. She was unable to discharge her liability, that is, to play piano at the concert because of her illness. In this case, it was held that the contract was directly dependent on the good health and the personal skill of the defendant’s wife, and the illness of his wife discharged the contract. It was also stated that the defendant could not be made liable to pay compensation for the non-performance of the contract. As the contract was based on the ‘promisor’s skill in the above case law, the wife could not assign her right/obligation to any third party.

Case Study: Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan Case

Kapilaben & Ors. v Ashok Kumar Jayantilal Seth through POA Gopalbhai Manusudhan is a recent judgment delivered by the Supreme Court of India on November 25, 2019, concerning the Assignment of rights and Interests in a contract. In this judgment, the Supreme Court reaffirmed that a party to a contract could not assign its liabilities or obligations without the consent of the other party.

The facts of the case are: The appeals to the Supreme Court resulted from the Gujrat High Court’s decision that had allowed the appeals of the respondent against the trial court’s decision. The dispute, in this case, is related to a property owned by the appellants (Vendor). The appellant has had formulated an agreement to sell in favor of some of the respondents in 1986 regarding the above-mentioned property. The respondents, who were the original vendees, had paid a part of the consideration part. The Original Vendees, in 1987, assigned the former’s rights in favor of Respondent 1 and executed an agreement in favor of Respondent 1. This led to several disputes, and subsequently, Respondent 1 filed suits against the Original Vendees and the vendor demanding specific performance of the agreement executed in 1987. The Respondent’s suits were dismissed by the trial courts stating that the Original Vendees could not have assigned their outstanding obligation of paying Vendor the remaining money to Respondent 1 without the consent of the Vendor. On the other hand, Gujrat High Court reversed the decision of the trial court and declared the Assignment of rights in favor of Respondent 1 as valid.

The Supreme Court in its judgment reaffirmed the view of the trial courts and stated that: “ It is further relevant to note that under the 1987 agreements, payment of the outstanding consideration amount is to be made to the original vendees, not the Appellants, and possession/ownership of the suit property is to be handed over by the original vendees. The 1987 agreements nowhere provide for the discharge of the original vendees’ pending obligations towards the Appellants by Respondent Nos. 1. Hence, we are inclined to accept the Appellants’ argument that the 1987 agreements were not a case of Assignment but appear to be independent/sovereign agreements for sale which were contingent and dependent on the execution and implementation of the 1986 agreement. Therefore, the only way Respondent Nos. 1 can seek specific performance of the 1986 agreement against the Appellants is by proving the Appellants’ knowledge of and consent to transfer the original vendees’ rights and liabilities Respondent Nos. 1.”

From the above discussion, it is clear that the Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party’s concurrence. Section 37 of the Indian Contract Act, 1872, thatenables the parties to dispense is the performance by way of Assignment of the contract. Under the Indian Contract Law, any form of contract can be assigned as long as consent is involved in the Assignment. The consent of the ‘promisee’ is necessary for assigning any obligation under the contract. The working and application of the contract assignment depend on a multiplicity of factors such as the contract’s language, applicability, availability of the assignment clause in the agreement, etc. There are contracts that contain a clause prohibiting Assignment, while other contracts require the consent of the other party to the Assignment. The Assignment of obligations/liabilities is not possible in the case of contracts solely relying on the personal skill or expertise of the ‘promisor’.

The recent judgment of the Supreme Court in Kapilaben & Ors. v Ashok Kumar Jayantilal Seth, through POA Gopalbhai Manusudhan Case, also reaffirms that in case of transfer/assigning of outstanding obligations under the contract, the consent of the other party is a necessary condition to make the Assignment valid. Even though this judgment reaffirms the point upheld by law, it still suggests the parties to a contract consider the various complexities of contracts, the intent contract, the availability of the assignability clause in the written agreement, etc., before drafting a commercial contract.

References:

The Indian Contract Act, 1872, No. 2(h) (Indian).
Dr. R.K. Bangia, The Indian Contract Act, 2 (12 th Edition, 2005), Allahabad Law Agency, Haryana.
Krishnendu Kanungo & Pritisha Chakraborty , Assignment Of Rights And Its Practical Relevance In Financial Transactions: A Lender’s Perspective Manupatra, http://docs.manupatra.in/newsline/articles/Upload/E915DA6B-361C-493B-91D1-96D8EB703128.pdf (last accessed Mar. 12, 2021).
The Indian Contract Act, 1872, No. 37 (Indian)
Sir Oshley Roy Marshall, The Assignment of Choses in Action (Pitman Publishing 1950).
Krishnendu, supra note 3, at 1.
Khared & Co. Ltd. v Ramon & Co. Ltd., AIR 1962 SC 1810.
Krishnendu, supra note 3, at 2.
Robinson v Davison, (1871) L.R. Ex. 269.
BANGIA, supra note 1, at 255.
Ramesh Vaidyanathan & Aishini Mandal, Assignment Of Contractual Obligations – Is Consent Necessary Advayalegal (Dec. 6, 2019) https://www.advayalegal.com/blog/contractual-rights/ (last accessed Mar. 13, 2021).

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Commercial Contracts in India

Use the Lexology Getting the Deal Through tool to compare the answers in this article with those from other jurisdictions.

Contract formation

Good faith in negotiating

Is there an obligation to use good faith when negotiating a contract?

There is no statutory obligation under Indian laws to use good faith while negotiating a contract. As is the case under common law, Indian laws also do not impose a general obligation to use good faith when negotiating a contract.

‘Battle of the forms’ disputes

How are ‘battle of the forms’ disputes resolved in your jurisdiction?

The courts in India generally follow a variation of the common law based ‘mirror rule’ in resolving disputes relating to ‘battle of forms’ whereby the contract form that constitutes a complete and concluded contract prevails. While the key ingredients of a concluded contract are offer and acceptance of such offer, the principle of ‘mirror rule’ that requires an absolute and unqualified acceptance is not strictly applied by Indian courts. Contracts have been held to be enforceable and binding on the parties where the acceptance is qualified with minor or immaterial variance and where the offer is not materially affected.

Language requirements

Is there a legal requirement to draft the contract in the local language?

No. In India, contracts are generally drafted in English for practical convenience of the parties.

Online contracts

Is it possible to agree a B2B contract online?

Indian contract law does not specify a particular form of contract (except for contracts relating to immovable property, which have to be compulsorily recorded in writing and executed in a certain manner). The parties to the contract are free to decide on any form they deem fit. It is possible to agree to and execute a B2B contract online through a click-to-accept process or through other electronic means. However, all such online contracts have to meet the essentials of a valid contract set out under Indian contract law. This means that a B2B contract executed online will be valid and enforceable in a court of law so long as it is a lawful agreement between two or more parties who are competent to contract with a valid offer and an acceptance of such offer communicated electronically between such parties.

A practical challenge regarding the enforceability of online contracts is with respect to their stamping. In India, stamp duty is required to be paid on all agreements irrespective of the form of execution to make them admissible in evidence before Indian courts. If an online agreement is not stamped at the time of its execution, it is technically possible to complete the stamping formalities at a later date on payment of a statutory penalty on top of the applicable stamp duty.

Statutory controls and implied terms

Controls on freedom to agree terms

Are there any statutory or other controls on parties’ freedom to agree terms in contracts between commercial parties in your jurisdiction?

Yes, Indian contract law lays down specific criteria to be satisfied for a contract to be legally binding and enforceable in India. Subject to fulfilment of these criteria, parties have complete freedom to agree to such terms as they deem fit in their contracts. The essential elements of a valid contract are as follows:

Competent parties: Parties to the contract have to be competent, (ie, they should have attained the age of 18 years, should be of sound mind, and not be disqualified from contracting by applicable law).
Offer and acceptance: An offer must be made to create a legal contractual relationship and it signifies one’s willingness to do or to abstain from doing something. When the offer is unequivocally accepted by the other party, this acceptance creates a contract. Further, the intention of the parties must be to create a legally binding relationship.
Lawful object and consideration: The consideration and object of a contract must be lawful. For example, parties cannot contractually agree to do something that is forbidden by law or is intended to defeat the provisions of any law or is opposed to the public policy of India.
Free consent: Parties to the contract must have willingly executed the contract and the consent of either party should not be out of coercion, undue influence, fraud or misrepresentation.

Indian contract law also identifies the circumstances under which an agreement will be treated as a ‘void agreement’. A void agreement includes an agreement that restrains the parties to the agreement from initiating legal proceedings against each other or restricts either party from pursuing a lawful profession, business or trade.

Standard form contracts

Are standard form contracts treated differently?

There is no specific legislation regulating standard form contracts in India as they are also governed by the principles of Indian contract law.

The general view taken by the Indian courts is that standard form contracts cannot be avoided, unless the aggrieved party can establish that the contract vitiates the essential ingredients of a valid contract. In some cases, Indian courts have refused to enforce standard form contracts on the ground that such contracts are ‘unfair’ and ‘unreasonable’. This assumes significance in cases where the bargaining power of the contracting parties is not at the same level or if such a contract was found to be of unconscionable nature.

Implied terms

What terms are implied by law into the contract? Is it possible to exclude these in a commercial relationship?

Indian contract law does not explicitly specify the terms that would be implied in contracts. However, there are some implied terms that generally apply in all contracts, such as the duty not to prevent performance, the duty to co-operate, the duty to achieve specific results and the duty to put in best efforts. As regards supply of services, the service provider has an implied warranty to perform the services in a workmanlike manner and to exercise reasonable skill.

Some sector-specific laws governing transactions of a certain nature or relating to certain subject matter such as insurance, sale of goods, etc set out terms that are statutorily implied in a contract. For instance, the law governing sale of goods in India implies the following warranties in a contract of sale with regard to the quality of goods supplied under such contract:

where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required, a condition that the goods shall be reasonably fit for such purpose is implied in the contract;
where goods with a specific description are bought from a seller dealing in such goods (whether such seller is the manufacturer, producer or not), there is an implied condition that the goods shall be of merchantable quality. However, if the buyer has examined the goods prior to purchase, there shall be no implied condition as regards defects which such examination ought to have revealed; and
an implied warranty or condition as to quality or fitness for a particular purpose may be annexed as part of commercially accepted trade practice.

These warranties provided under statute cannot be contractually circumvented by parties in India. Indian courts generally follow the principle of ‘business efficacy’ before implying a general term into a contract, that too under exceptional circumstances where the contract will not be capable of performance without such an implied term.

Vienna Convention

Is your jurisdiction a signatory to the United Nations Convention on Contracts for the International Sale of Goods (the Vienna Convention)?

Good faith in entering and peforming

Is there an obligation to use good faith when entering and performing a contract?

In line with the common law practice, Indian laws do not impose an obligation on the parties to enter and perform a contract in good faith. The only exception to this principle is the case of an insurance contract that has been held to be a contract of utmost good faith and binds the parties to the contract to disclose all material information at the time of entering into such contract. In the event of either party to the contract failing to comply with the same, the contract of insurance can even be terminated.

Limiting liability

Prohibition on exclusions and limitations

What liabilities cannot be excluded or limited by a supplier in a contract?

A supplier in a contract cannot limit its liability towards defaults in the goods delivered where the buyer has already paid consideration towards delivery of such goods. Further, courts in India have struck down contractual exclusion and limitation of liability for death or personal injury resulting from a party’s negligence in specific instances depending on the facts of the case.

Financial caps

Are there any statutory controls on using financial caps to limit liability for breach of contract?

No. However, as mentioned in our response to question 10, financial caps to limit liability for death or personal injury resulting from a party’s negligence will not be permitted in specific instances.

Indemnities

Are there any statutory controls on indemnities used to cover liability risks in contracts?

The extent of liability under an indemnity clause depends on the nature and terms of the contract. While there are statutory protections and limitations present in the claim for unliquidated and liquidated damages, there is no such restriction on the quantum of loss that can be claimed under indemnity. Additionally, a party entitled to indemnity under a contract can claim the same from the indemnifying party even before the occurrence of actual damage or loss.

In the absence of statutory controls on indemnities, indemnity clauses in commercial contracts are extensively negotiated in India. While the indemnifying party tries to limit the scope to the maximum possible extent, the other party looks at broadening the scope for indemnity. Indemnity clauses may be drafted in such a manner to cover for liability for past as well as for future transactions by containing expressions such as ‘shall at all times indemnify and keep harmless from all and every loss and injury which has been incurred or shall or may at any time or times hereafter be incurred’.

Liquidated damages

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

Yes, liquidated damages clauses are commonly used and enforceable in India. Liquidated damages are recognised by Indian contract law and refer to a genuine pre-estimate of the loss or damage likely to be suffered on breach of contract by a party to the contract. Indian contract law, however, stipulates that in case of liquidated damages for claims of breach, the affected party is entitled to receive only reasonable compensation for its loss, which cannot be more than the amount so fixed in the contract.

Courts in India have often emphasised that liquidated damages in a contract should be a fair and bona fide estimate of the damages arising from the breach, and not a mere penalty for breach. In some cases, the actual liquidated damages awarded by the court may be less than the fixed amount agreed by the parties under the contract. Also, leading evidence for proving damages is not always required in such claims except where the courts conclude that no loss is likely to occur because of such breach or the happening of such an event.

Liquidated damages are generally set out in commercial contracts in India by way of a specific amount or mentioning the amount to be calculated based on a fixed rate or a specific method of calculation as may be mutually agreed between the parties to the contract. It may also be a lump-sum amount or an amount fixed with reference to a time period or different amounts for breach of different terms of a contract.

Payment terms

Statutory time limits on payments

Are there statutory time limits for paying invoices? Is it possible to agree a different payment period?

No, there is no statutory time limit for payment of invoices or the manner of payment and the same is as mutually agreed by the parties and set out in the contract.

Late payment interest

Is statutory interest charged on late payments? Is it possible to agree a different rate of interest?

Parties to a contract have the discretion to decide on the interest rate as there is no statutory interest rate specified under Indian contract law. However, there is a statutory limitation on the rate of interest payable in a civil litigation for non-payment of dues relating to commercial transactions. This is capped at the rate of interest agreed in a contract, and in the absence of the same the rate at which moneys are lent or advanced by scheduled commercial banks in India for commercial transactions. Further, the courts are also statutorily empowered to relieve a party to a contract from paying exorbitant interest where the courts are of the view that the rate of interest is excessive or the transaction is proven to be substantially unfair.

Civil penalties

What are the civil penalties for failing to comply with statutory interest rate or late payment of invoices?

As mentioned in our response to question 15, there is no statutory rate of interest for late payment of invoices under Indian contract law and therefore no civil penalties ensue.

Termination

Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?

Indian law regulating the sale of moveable property in India would be applicable to supply contracts. This law specifies that the breach of a condition fundamental to the object of the contract will entitle the aggrieved party to invalidate the contract. If a breach of warranty is considered to be collateral to the main purpose of the contract, such breach will only give rise to a claim for damages and not entitle the aggrieved party to terminate the contract on such grounds. This depends on the facts of each case.

There are no other special rules applicable to termination of a supply contract. The statutory rules of termination applicable to all contracts will also apply to supply contracts and these rules cannot be excluded or limited by the parties to the contract.

Notice period

If a contract does not include a notice period to terminate a contract, how is it calculated?

Indian contract law does not provide a mandatory notice period except in the case of agency or tenancy contracts. These contracts have to include a reasonable notice period to be served on the concerned party prior to termination of such contracts. Failure to serve such a reasonable notice period will entitle the aggrieved party to claim compensation.

There is no method of calculation of notice period stipulated under contract law in India for any contract. In such an event, either party will not be obligated to serve any notice period prior to terminating a contract.

Automatic termination on insolvency

Will a commercial contract terminate automatically on insolvency of the other party?

No, insolvency of the other party will not terminate a commercial contract automatically. While Indian contract law is silent on this aspect, the insolvency legislation prohibits termination of a contract during the pendency of insolvency proceedings in case of a corporate entity. Thereafter, upon final adjudication of a debtor as an insolvent, an insolvency official takes over the assets of the insolvent debtor, including all contracts entered into by it, and has the discretion to either terminate or continue the contract subject to the value of the assets of the insolvent debtor and the liquidation process.

Termination for financial distress

Are there restrictions on terminating a contract if the other party is in financial distress?

No, there is no restriction on terminating a contract if the other party is in financial distress, if such ground of termination has been expressly set out in the contract. Typically, commercial contracts in India provide for termination of contract not just for liquidation, but also potential liquidation or analogous arrangements which are invariably linked to financial distress.

Force majeure

Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?

Yes, a force majeure event is recognised in India. A force majeure event may result in:

suspension of obligations;
discharge of obligations;
extension of term; and
termination on extended force majeure.

In order to enforce a force majeure clause, the party who claims discharge under such clause must show that such circumstances have arisen that make it impossible for such party to perform the contract.

Subcontracting, assignment and third-party rights

Subcontracting without consent

May a supplier subcontract its obligations under the contract without seeking consent from the other party?

A supplier can subcontract its obligations under the contract without seeking consent from the other party only if such subcontracting is expressly permitted under the contract.

In cases where the contract is silent on the subcontracting aspect, intention of the parties as regards assignment of obligations must be ascertained by analysing the nature of the contract and the facts and circumstances surrounding the same. If the contract is personal in nature (ie, where a party has agreed to contract with another party based on its personal credentials such as brand name, reputation, qualification, skill, experience and so on) there can be no intention to permit subcontracting of obligations.

Statutory rules

Are there any statutory rules that apply to subcontracting in your jurisdiction?

Assignment of rights and obligations

May a party assign its rights and obligations under the contract without seeking the other party’s consent?

A party may assign its rights and obligations under the contract without seeking the other party’s consent if such assignment is expressly permitted under the contract. If a contract is silent about assignment of rights and obligations, then the intention of the parties will be considered in respect of contracts that are of a non-personal nature.

What statutory controls apply to the assignment of rights or obligations under a supply contract?

If assignment of rights under a supply contract relates to rights over unsecured debts such as receivables of the supplier not secured by any collateral, such assignment is statutorily required to be made through a written instrument executed by the assignee.

Enforcement by third party

How may a third party enforce a term of the contract?

In general the ‘doctrine of privity’ is followed in India and only parties to the contract have the right to enforce a term of the contract. The only exception to the ‘doctrine of privity’ is a third party for whose benefit a contract has been executed such as beneficiary of a trust, family arrangements and marriage settlements, torts, collateral contracts, etc. While the term ‘beneficiary’ is not explicitly defined under the relevant statute, Indian courts have held that any person drawing a benefit out of the contract or who is affected by a breach by any party to the contract or for whose benefit the parties have entered into such a contract may be considered to be a ‘beneficiary’. Such permitted third party can enforce a term of the contract by instituting a suit for enforcement either in the name of the contracting party through whom the third party derives its benefit under the contract or where such contracting party refuses to partake in the proceeding, by joining such party to the suit as a co-defendant.

Limitation periods

What are the limitation periods for breach of contract claims? Is it possible to agree a shorter limitation period?

The limitation period for breach of contract claims in India is three years. The commencement of such limitation period depends on the nature of the contract, number of the breaches and so on. Accordingly, the limitation period for breach of contract will start from the time of occurrence of a single breach. In case of successive breaches, the limitation period will start from the time of occurrence of the relevant breach and where the breach is continuing, the limitation period will start from the time of cessation of such breach.

Given this statutory period of limitation, a shorter limitation period mutually agreed by the parties to a contract will not be enforceable.

Choice-of-law clauses

Do your courts recognise and respect choice-of-law clauses stipulating a foreign law?

Yes, courts in India recognise and respect international commercial contracts governed by foreign law, subject to such choice of law meeting the following criteria identified by Indian courts:

the choice of foreign law must be bona fide and legal;
the law chosen must have some connection with the transaction, other than the mere fact that it is selected as the governing law; and
the law chosen must not be offensive to the public policy of India or the jurisdiction where it is sought to be enforced.

There is lack of clarity on whether Indian parties in a domestic contract can opt for foreign governing law, with different courts in the country taking differing views based on the facts and circumstances of the matter. However, the Delhi High Court confirmed in a judgment last year that two Indian parties can choose a foreign seat (and thereby a foreign governing law) for arbitration. Given the conflicting judicial precedents on this issue, one hopes that the Supreme Court of India will have the opportunity to rule on this issue in the near future.

Do your courts recognise and respect choice-of-jurisdiction clauses stipulating a foreign jurisdiction?

Yes, Indian courts recognise and respect international contracts stipulating a foreign jurisdiction. Courts in India also recognise ‘splitting of the contract’ where the parties to a contract choose to apply law of a particular jurisdiction as the governing law for the transaction and a different governing law and jurisdiction for dispute resolution. However, in case of domestic contracts involving only Indian parties, there is ambiguity on validity of choice-of-jurisdiction clauses stipulating a foreign jurisdiction, as judicial trends so far are not conclusive and in some cases even contradictory.

It is pertinent to note that while Indian courts recognise and respect foreign jurisdiction in an international contract, recognition and enforcement of judgments passed by superior courts of ‘reciprocating territories’ of India is only permitted under Indian laws. Thus, a judgment pronounced by a court in any jurisdiction that is not a reciprocating territory will not be recognised and enforced by the Indian courts.

The concept of ‘reciprocating territories’ is not applicable to international arbitration. As India is a signatory to the New York Convention, arbitral awards of most jurisdictions are therefore enforceable in India, as if they were passed by an Indian court. This is subject to the foreign award meeting the guidelines set out by the law governing arbitration in India, such as the foreign award not offending the public policy of India or suffering from jurisdictional defects.

Efficiency of local legal system

How efficient and cost-effective is the local legal system in dealing with commercial disputes?

The Indian judicial system struggles with corruption issues, a huge backlog of pending cases, improper infrastructure and an inadequate number of judges. Therefore, resolving commercial disputes through the local legal system is not only time consuming, but also an expensive affair.

New York Convention

Is your jurisdiction a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Which arbitration rules are commonly used in your jurisdiction?

Yes, India is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

In case of domestic contracts, resolution of any dispute between parties is generally sought to be achieved through ad hoc arbitration conducted in accordance with the provisions of the Indian arbitration law. However, in case of international commercial transactions, parties generally prefer institutional arbitration under the rules formed by internationally recognised fora such as the ICC, LCIA and SIAC.

Available remedies

What remedies may a court or other adjudicator grant? Are punitive damages awarded for a breach of contract claim in your jurisdiction?

Some of the common remedies that may be granted by a court or an adjudicator in India are:

specific reliefs for enforcing individual civil rights or for recovery of immovable or movable property;
specific performance at the discretion of the courts in cases where there is no standard for ascertaining the actual damage caused by non-performance of the contract or when monetary compensation would not be an adequate relief for non-performance;
award of damages for any loss or damage that arises in the usual course of things. Where the contract specifies the amount of liquidated damages, such amount will be deemed to be the damages payable in case of a breach of contract, unless it is proved otherwise. It is important to note that no damages are awarded for any remote or indirect loss;
grant of injunction (temporary or permanent); and
cancellation, rescission or rectification of contract.

Award of punitive damages for a breach of contract claim is not very common in India. The general rule followed in India for grant of damages is that it is primarily meant to be compensatory and not retributive. The function of damages for breach of contract under Indian contract law is to put the party whose right has been violated in the same position as such party would have been in if such right had not been breached. However, there has been a gradual shift in recent years by Indian courts to award punitive damages, especially in intellectual property matters.

Update and trends

Are there any other current developments or emerging trends that should be noted?

In March 2018, the lower house of the Indian parliament (Lok Sabha) passed the Specific Relief (Amendment) Bill 2017 (the Bill) to amend the Specific Relief Act 1963. The Bill seeks to make specific performance available as a general rule, and also introduces the concept of substituted performance where the party suffering a breach is entitled to get the contract performed by a third party and recover the expenses, including compensation from the breaching party. The Bill also proposes measures to prevent unnecessary delays in disputes involving infrastructure projects. The Bill awaits the approval of the upper house of parliament (Rajya Sabha) following which it will require the President’s assent.

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Contract Law
Contracts and Agreements

Novation, Rescission, Alteration under the Indian Contract Act

This article is written by Sachi Ashok Bhiwgade from Hidayatullah National Law University, Raipur. This article covers the basic differences and the essentials of novation, rescission and alteration of a contract under the Indian Contract Act, 1872.

Table of Contents

Introduction

A contract to be legally enforceable should be valid. Section 10 of the Indian Contract Act, 1872 provides the essential conditions that are to be complied with for a valid contract. They are:

Free consent;
Competency of the parties;
Lawful consideration and lawful object;
Not declared to be void under the law.

In case, a contract is entered into by the parties under coercion, threat, fraud, undue influence, etc such a contract will be invalid. Also, the object of contract should not be inconsistent with any other law.

The word ‘novation’ literally means to replace with a new contract and the same obligations are performed by different parties. Under novation, the liabilities under the existing contract are extinguished. The doctrine of novations is recognized under Section 62 of the Indian Contract Act, 1872. Every contract can be novated and novation can be effective only when there is a new contract and not a new agreement. Hence, mere agreement to substitute the existing contract will not be binding unless it has been accepted and executed mutually by all the parties. A new contractual obligation arises when parties novate a contract.

What is novation of Contract?

Novation of contract means creating a new contract while the old one is terminated and need not be performed. It is an act substituting a new obligation or party in a contract for the old one. Further, the newly substituted agreement should be valid, enforceable, have consideration and should be by the mutual consent of the parties. Basically, it should fulfil the requirements of a valid contract.

When a contract is novated, the original contract ceases to exist and the parties have to follow the new contract. Section 62 of the Indian Contract Act states that “if the parties to the contract agree to substitute a new contract for it or to rescind it or alter it, the original contract need not to be performed.”

Essentials of Section 62 of the Indian Contract Act

Consensus ad idem between the parties to a contract.
There should be a previous contract entered into between the parties.
Substitution, recession or alteration of a contract giving rise to a valid new contract.
Termination of the original contract.

The basic requirement of Section 62 was discussed by the Supreme Court in the case of Lata Construction & Ors v. Dr. Rameshchandra Ramniklal Shah , novation requires a complete substitution of a new contract in place of the old one and only in that condition the original contract does not have to be performed. The new substituted contract should rescind or completely alter the terms of the original contract. In Ramdayal v. Maji Devdiji , the court observed that novation takes place by introducing new terms in the contract or by introducing new parties. A contract of novation requires a party to agree to extinguish or discharge his obligation or debt. Unless this has been accomplished there can be no novation . Therefore the test is to know whether the parties intended to enter into a new contract between them or not.

For novation to take effect, modification to the contract must go to the root of the original contract and change its essential character as held by the Calcutta High Court in the case of Juggilal Kamlapat v. NV Internationale .

In a partnership firm, the liabilities of an old firm are taken over by the new firm.
A lease agreement, where the tenant gives the lease to another party and makes him responsible for the obligations and responsibility arising from the lease agreement.
John owes 2 lakh rupees to Ram under a contract, Ram owes David 2 lakh rupees. Ram asked John to pay 2 lakh rupees to David in his place, but David does not agree and neither gives her consent to the agreement. Therefore, Ram still owes David 2 lakh hence, there is no new contract to enter.

Kinds of Novation of Contract

Novation is of two kinds:

Where the obligation under a contract is replaced with a new one, and
Where a party is replaced by another party.

Change in terms of the contract

The parties to a contract have the freedom to enter into a contract and alter its terms by mutual consent. When both the parties mutually agree to change the term of the contract which they have previously entered into, then the new agreement becomes binding on them. However, in case there is a clause in the contract stating that the terms of the contract can be altered by one party (unilaterally) such changes in the terms will be considered as valid. Hence, a party cannot by unilateral term impose conditions which were not a part of the original contract.

In the case of RS Amarnath Mehra v. Union of India, the court observed that calling of fresh rates at a lower price will not amount to a new contract. If a contract consists of a number of terms and conditions then it does not mean that each term or condition is a separate contract.

Similarly, in the case of Ramji Dayawala & Sons (P) Ltd v. Invest Import , the Apex Court held that a contract having a number of parts should have been assented by the contracting parties in the same manner and in the same sense, that is, it should have consensus ad idem.

Change in the parties to the contract

Under a novation agreement, it is possible that the terms of the contract provide for the replacement of one party to the contract by another party. This creates an obligation for one party in place of another party. Under this kind of contract, the new party assumes all the obligations under that contract and the party who has assigned his obligations to another party under such a contract will not be held liable for any future damages.

For instance: if A and B are parties to a contract, and A agrees to replace C in B’s place, then the existing contract between A & B will cease to exist.

In the case of Godan Namboothiripad v. Kerala Financial Corporation , the respondent (Kerala Financial Corporation) sanctioned loan to one Gopinath for purchasing a transport vehicle which was to be paid in instalments. He defaulted in making the payments and as a result of that, the respondent seized the vehicle. After that, the appellants executed an equitable mortgage confirmed to repay the balance amount. The court held that it was a novation of contract because the appellants took the liability to pay the dues and the original debtor (Gopinath Menon) ceased to be the debtor.

Difference between novation and assignment

The difference between novation and assignment is minimal but important and is discussed in the table below:


1	Under novation, the rights and obligations arising under the new contract.	Under assignment, only some rights are transferred to the third party.
2	The original contract is discharged. The new contract becomes binding on the parties.	The original agreement is not extinguished and the parties will remain bound by the obligations under that contract.

Novation of contract in an illegal agreement

The Court in Ratanlal son of Pannalalji v. Firm Mangilal Mathuralal observed that “ if there is a direct connection between a fresh contract after novation and the earlier illegal contract or the earlier collateral contract, the novated contract would still continue to be illegal or immoral and the Court would refuse to enforce the same”.

When is it ‘No Novation’?

When the requisite conditions of novation are not satisfied then it will be considered as no novation. The Kerala High Court held in the case of Godan Namboothiripad v. Kerala Financial , that the essential features of a novation are the replacement or relinquishment of a right under the original contract by a new one and when these essential features are missing then, there will be no novation.

A unilateral act of one party

As discussed already, a party cannot on its own change the terms of the contract unilaterally. The Supreme Court in the case of Citi Bank N A v. Standard Chartered Bank held that novation, recission, and alteration under Section 62 requires that both the parties should agree to substitute, rescind or alter the existing contract with a new one. Such substitution, rescission or alteration has to be done bilaterally. In the case of Polymat India P. Ltd. & Anr vs National Insurance Co. Ltd. & Ors , it was held that the terms of a contract cannot be varied without the mutual agreement of the parties.

Intention of parties

All the parties to the contract have to agree to the new terms of the substituted contract. A novation contract will be ineffective when there is an absence of intention between the parties to alter, rescind or substitute a contract. In T.S. Duraiswami Aiyar And Ors. vs Krishnier , the court observed that substitution of one contract with another clearly depends upon the intention of the parties. Similar observation was made in the case of Calcutta Insurance, Madras vs Thirumalai Animal And Ors. and National Insurance Co. Ltd. v. Thirumalai Ammal And Ors .

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Rescission of Contract

To rescind means to cancel or revoke. Rescission under contract law means a party to the contract can cancel or terminate the contract. In this, the parties legally terminate a contract by mutual consent. Under Section 62, a party is allowed to rescind a contract but such rescission should only be in bilateral terms.

In the case of Union of India v. Kishorilal Gupta and Bros , the Calcutta High Court held that a contract under Section 62 of the Indian Contract Act can be rescinded only after there has been a breach.

Difference between Rescission and Novation


1	Rescission happens when the parties agree to cancel or terminate the contract.	Novation occurs when the parties substitute the old contract with a new one.

Alteration in terms of a Contract

Alteration in terms of contract happens when the parties enter into a contract and one of the parties wants to modify or change certain terms of the contract with the assent of the parties. Hence, once the parties sign the contract they cannot alter its term except in the case where all parties by the mutual consent agree to the alteration. For instance, change in the date or place of delivery in a contract of sale of goods between parties.

The Apex Court in the case of United India Insurance Co Ltd v. MKJ Cooperation held that material alterations in a contract can only be done by mutual consent of the parties.

In V Kameshwararao & Ors v. M Hemalathammarao , the court observed that a material alteration is one that varies the rights and liabilities of the parties ascertained by the deed or varies the legal effect of the instrument originally expressed.

Difference between Novation and Alteration

The basic difference between novation and alteration can be studied under the following table:


1	Parties to the contract may change.	Parties do not change. They remain the same.
2	The existing contract is substituted with a new one.	There is no substitution of a new contract, only certain terms, and conditions of the contract changes.

Contents of novation agreement

A novation agreement may contain the following:

Definitions;
Name of the parties;
Representations;
Rights of the third party;
Obligations of all the parties;
Effects of novation agreement;
Fees, costs, expenses;
Jurisdiction and the law governing the parties;
Counterparts.

As already seen in this article novation happens when there is a change in the terms of the contract or when parties to the contract change. It is also necessary that all the parties have consented to the changes and have not acted upon the contract unilaterally. The new agreement should contain the requisites of a valid contract.

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Jul 5, 2023

Breach of Contract in India: Types, Cases, and Remedies

Updated: Feb 4

Contracts are the foundation of business and legal transactions, providing a framework for the rights and obligations of the parties involved. A breach of contract occurs when one party fails to fulfill its contractual obligations, leading to legal consequences.

In this article, we'll explore the concept of breach of contract under the Indian Contract Act, 1872. We'll delve into the different types of breaches, penalties, and remedies available, and analyze prominent Indian court cases to understand how the Indian legal system addresses breach of contract issues.

I. Defining Breach of Contract II. Types of breach of contract III. Factors determining the breach of contract IV. Breach of contract : penalty V. Remedies for breach of contract

I. Defining Breach of Contract in India

Breach of contract, under the Indian Contract Act, 1872, refers to a situation where one or more parties to a legally binding agreement fail to fulfill their contractual obligations.

This failure can take various forms, such as non-performance, partial performance, or defective performance of the terms agreed upon. A breach of contract may lead to legal consequences, including penalties and remedies, which can involve the payment of damages, specific performance, or injunctions.

II. Types of breach of contract

A. actual breach of contract.

An actual breach of contract occurs when a party fails to perform their obligations as specified in the contract at the time performance is due.

Examples of actual breach include non-payment, incomplete performance, or delivering substandard goods or services.

In the case of R. Venkataraman vs. Hindustan Petroleum Corporation Ltd. (1998) , the court found that there was an actual breach when the defendant failed to provide a petroleum dealership to the plaintiff.

B. Anticipatory breach of contract in India

An anticipatory breach of contract, also known as a constructive breach, occurs when a party indicates their intention not to perform their obligations before the performance is due. T

his can happen through clear communication or actions that make it impossible for them to fulfill the contract.

In India, anticipatory breach is recognized under Section 39 of the Indian Contract Act, 1872. The case of Hari Shankar vs. Anant Ram (1999) is an example where the court found an anticipatory breach of contract when the defendant refused to complete a sale of property.

C. Material breach of contract

A material breach of contract occurs when a party's failure to perform their obligations is so significant that it defeats the entire purpose of the contract.

This type of breach usually justifies the non-breaching party's termination of the contract and the pursuit of legal remedies.

In the case of State Bank of India vs. Mula Sahakari Sakhar Karkhana Ltd. (2006) , the court determined that the defendant's failure to repay a loan was a material breach, entitling the bank to enforce its security interest.

D. Repudiatory breach of contract

A repudiatory breach is a serious breach of contract that allows the aggrieved party to either accept the breach and terminate the contract or affirm the contract and continue with its performance.

This type of breach typically occurs when one party refuses or is unable to perform their contractual obligations.

In the Indian case of I ndian Oil Corporation Ltd. vs. Amritsar Gas Service (1991) , the court ruled that the defendant's refusal to pay outstanding dues constituted a repudiatory breach, allowing the plaintiff to terminate the contract.

III. Factors determining the breach of contract

A. the terms of the contract.

The terms of the contract play a significant role in determining whether a breach has occurred.

The explicit and implicit obligations of the parties, as well as the conditions and warranties stipulated in the contract, are essential in assessing a breach.

In the case of M/S. Alopi Parshad & Sons Ltd. vs. Union of India (1960) , the court emphasized the importance of considering the parties' intentions when interpreting contract terms. The court stated that the interpretation of a contract should be based on the parties' intentions and the circumstances under which the contract was formed.

B. The extent of the breach

The extent of the breach is another crucial factor in determining the appropriate classification and remedies for a breach of contract.

The severity of the breach is typically assessed in terms of the non-breaching party's expectations and the degree to which the breaching party has deviated from their contractual obligations.

In the case of State Bank of India vs. Mula Sahakari Sakhar Karkhana Ltd. (2006) , the court determined that the defendant's failure to repay a loan constituted a material breach, entitling the bank to enforce its security interest.

C. The impact of the breach on the parties involved

The impact of a breach on the parties involved is also a significant factor in determining the breach's classification and the remedies available.

Courts consider the non-breaching party's loss and the breaching party's actions to assess the appropriate remedy.

In the case of Food Corporation of India vs. M/S. Kamdhenu Cattle Feed Industries (1993) , the court highlighted the significance of timely performance in contracts. The defendant's delay in supplying cattle feed caused the plaintiff substantial loss, and the court awarded damages accordingly.

IV. Breach of contract : penalty

A breach of contract penalty refers to the consequences imposed on the breaching party for failing to fulfill their contractual obligations. Penalties can take various forms and are typically aimed at compensating the non-breaching party for their losses or preventing further breaches.

A. Purpose of penalties in contract law

In contract law, penalties are typically designed to protect the interests of the non-breaching party and deter future breaches.

They are often stipulated in the contract itself in the form of liquidated damages clauses or other provisions outlining the consequences of a breach.

Courts may also impose penalties based on the principles of equity and justice, considering factors such as the extent of the breach, the impact on the parties involved, and the nature of the contract.

B. Common types of penalties

1. liquidated damages:.

Liquidated damages are a predetermined amount of compensation that parties agree upon in the contract to be paid in the event of a breach. These damages are meant to reflect a genuine pre-estimate of the non-breaching party's loss due to the breach. In the case of Fateh Chand vs. Balkishan Das (1963) , the Supreme Court of India held that liquidated damages must be reasonable and not penal in nature. In the case of ONGC vs. Saw Pipes Ltd. (2003) , the court upheld the enforcement of liquidated damages for the defendant's failure to deliver goods on time.

2. Specific performance:

Specific performance is a court order that compels the breaching party to fulfill their contractual obligations as originally agreed upon. Specific performance is generally granted when damages are inadequate to compensate the non-breaching party, or the subject matter of the contract is unique or irreplaceable. In the case of R.L. Kalathia & Co. vs. State of Gujarat (2011) , the Supreme Court of India ruled that specific performance could be granted when the contract involved immovable property or when monetary compensation would not provide adequate relief. In case of Shree Hanuman Cotton Mills vs. Tata Air Services (1970) , the court granted specific performance to the plaintiff as the defendant had failed to supply a unique type of machinery, which could not be easily procured from another source.

3. Injunctions:

An injunction is a court order that prohibits a party from committing a breach or compels a party to take certain actions to rectify a breach. Injunctions may be granted to maintain the status quo, prevent irreparable harm, or protect the non-breaching party's rights. In the case of Gujarat Bottling Co. Ltd. vs. Coca-Cola Co. (1995) , the court issued an injunction to prevent the defendant from entering into a competing agreement, which would have breached its existing contract with the plaintiff.

V. Remedies for breach of contract

The choice of remedy in breach of contract cases depends on several factors, including the type and extent of the breach, the impact on the parties involved, and the specific terms of the contract. Indian courts carefully consider these factors when determining the appropriate remedy for each case. Usually party want damage or repudiate the contract itself

A. Damages in contract law

1. Compensatory damages

Compensatory damages are monetary awards intended to compensate the non-breaching party for the loss suffered due to the breach.

In the case of Hadley vs. Baxendale (1854 ), which is a landmark English case that has been adopted in Indian law, the court established the principle that damages should be limited to losses that were foreseeable at the time the contract was formed.

2. Consequential damages

Consequential damages, also known as special damages, are awarded for losses that result indirectly from the breach, provided that these losses were reasonably foreseeable.

In the case of Hotel Leela Venture Ltd. vs. Airports Authority of India (2014) , the court awarded consequential damages to the plaintiff for the loss of business due to the defendant's breach.

3. Nominal damages

Nominal damages are small monetary awards granted to the non-breaching party when a breach has occurred, but no actual loss has been suffered.

In the case of R.K. Upadhyay vs. State of Bihar (1995) , the court awarded nominal damages to the plaintiff, as it found a breach of contract but no evidence of substantial loss.

4. Punitive damages

Punitive damages, also known as exemplary damages, are awarded in rare cases to punish the breaching party for particularly egregious conduct. Indian courts are generally reluctant to award punitive damages in breach of contract cases.

B. Repudiation of contract

Repudiation of contract occurs when one party communicates to the other party that it intends to terminate the contract or refuses to perform its obligations. The non-breaching party can either accept the repudiation and terminate the contract or continue with its performance. Under the Indian Contract Act, 1872, repudiation of contract is considered a breach of contract, and the non-breaching party is entitled to pursue legal remedies. Section 39 of the Act specifically addresses anticipatory breach, which is a form of repudiation. It states that if one of the parties to a contract refuses to perform their obligations or makes it impossible to perform, the other party may consider the contract as void and claim damages for any loss suffered.

In the case of Muralidhar Chatterjee vs. International Film Co. Ltd. (1943) , the court recognized the right of the plaintiff to repudiate the contract due to the defendant's failure to pay royalties.

In the case of S.B.P. & Co. vs. Patel Engineering Ltd. (2005) , the Supreme Court of India held that repudiation must be in clear and unambiguous terms, indicating an intention to not fulfill the contract. The court also held that repudiation may be inferred from the breaching party's conduct if it demonstrates a clear intention to not fulfill their obligations.

The remedies available to the non-breaching party in case of repudiation of contract include claiming damages, treating the contract as void, and seeking specific performance. In the case of S.P. Chengalvaraya Naidu vs. Jagannath (1994 ), the Supreme Court of India held that the non-breaching party has the option to treat the contract as still subsisting and sue for specific performance if they can demonstrate that they are ready and willing to perform their part of the contract.

References:

Indian Contract Act, 1872

Pollock & Mulla, The Indian Contract and Specific Relief Acts (15th ed., 2018)

Avtar Singh, Law of Contract (12th ed., 2016)

R.K. Bangia, Contract I: Cases and Materials (5th ed., 2015)

Supreme Court of India, Judgments: https://main.sci.gov.in/judgments

Indian Kanoon: https://indiankanoon.org

Contract Laws

Law of Contracts

defines Contract as an agreement enforceable by law which offers personal rights, and imposes personal obligations, which the law protects and enforces against the parties to the agreement. The general law of contract is based on the conception, which the parties have, by an agreement, created legal rights and obligations, which are purely personal in their nature and are only enforceable by action against the party in default.

Section 2(h) of the Indian Contract Act, 1872[2] defines a contract as "An agreement enforceable by law". The word 'agreement' has been defined in Section 2(e) of the Act as ‘every promise and every set of promises, forming consideration for each other’

:
Lord Denning was perhaps the greatest law-making judge of the century and the most controversial. His achievement was to shape the common law according to his own highly individual vision of society. Lord Denning was one of the most celebrated judges of his time. He is popular as a dissenting judge.

Lord Alfred Thompson Denning (1899-1999) was a Populist English judge whose career spanned 37 years. He was known as a fighter for the underdog and a protector of the little man's rights against big business. He served for 20 years as the head of the Court of Appeals, one of the most influential positions in the English legal system. Denning was a controversial judge who was often the dissenting voice on the bench. His decisions were based more on his religious and moral beliefs than the letter of the law and he was often criticized for his subjectivity. Denning retired from the bench in 1982 under a cloud of controversy regarding some racially insensitive views that he published. Denning continued to publish books during his retirement and died at the age of 100

:
According to legal scholar Sir John William Salmond, a contract is " " For the formation of a contract the process of proposal or offer by one party and the acceptance thereof by the other is necessary. This generally involves the process of negotiation where the parties apply their minds make offer and acceptance and create a contract.

:
The law of contract has in recent time to face a problem, which is assuming new dimensions. The problem has arisen out of the modern large scale and widespread practice of concluding contracts in standardized form. People upon whom such exemption clauses or standard form contracts are imposed hardly have any choice or alternative but to adhere. This gives a unique opportunity to the giant company to exploit the weakness of the individual by imposing upon him terms, which may go to the extent of exempting the company from all liability under contract. It is necessary and proper that their interests should be protected. The courts have therefore devised some rules to protect the interest of such persons

:
Indian courts have consistently refused to enforce post-termination non-compete clauses in employment contracts, viewing them as “restraint of trade” impermissible under Section 27 of the Indian Contract Act, 1872 (the Act), and as void and against public policy because of their potential to deprive an individual of his or her fundamental right to earn a livelihood

:
Contracts of Bailment are a special class of contract. These are dealt within Chap. IX from S.148 to 181 of the Indian Contract Act, 1872. Bailment implies a sort of one person temporarily goes into the possession of another. The circumstance in which this happens are numerous. Delivering a cycle, watch or any other article for repair, delivering gold to a goldsmith for making ornaments, delivering garments to a drycleaner, delivering goods for carriage, etc. are all familiar situations which create the relationship of ‘Bailment’.

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Contract labourers also suffer from inferior labour status, casual nature of employment, lack of job security and poor economic conditions. It was also observed that in some cases the contract labourers did the same work as the workers directly employed by the industrialist but were no paid the same wages and the same working conditions. This practice of contract labour has also lead to the exploitation of these labourers as they are not employed directly under the employer. This practice of exploitation was and still is very much prevalent in India, therefore to encounter such problem and also to regulate the conditions of these labourers the Govt. passed an Act called the Contract Labour (Regulation and Abolition) Act, 1970

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Basic instinct. Hearing the concept of labour, what strikes the minds of the layman is the name sakingly clad men and women who work at construction sites, factories and alongside the roads, working in the scorching sun and pitiful conditions. Does it ever come to the minds of the general public that these labourers have a huge set of laws governing and safeguarding their rights ? yes. Probably some of us do know about labour laws. Ever given a second thought about the implementation of these laws and regulations which are painstakingly formulated? Not that they are not followed at all but come on! We’re aware of the scene here in our country

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It’s an undisputed fact that E-Commerce has become a part of our daily life. One such justification for the popularization of E-Commerce would be immoderate technological advancement. E-Commerce, as the name suggests, is the practice of buying and selling goods and services through online consumer services on the internet. The ‘e’ used before the word ‘commerce’ is a shortened form of ‘electronic’. The effectiveness of E-Commerce is based on electronically made contracts known as E-Contracts. Although E-Contracts are legalized by Information Technology Act but still majority feels insecure while dealing online. The reason being lack of transparency in the terms & conditions attached to the contract and the jurisdiction in case of a dispute that may arise during the pendency of a transaction with an offshore site

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Specific performance is equitable relief, given by the court to enforce against a defendant, the duty of doing what he agreed by contract to do. Thus, the remedy of specific performance is in contrast with the remedy by way of damages for breach of contract, which gives pecuniary compensation for failure to carry out the terms of the contract. Damages and specific performance are both, remedies available upon breach of obligations by a party to the contract; the former is a ‘substitutional’ remedy, and the latter a ‘specific’ remedy. The remedy of specific performance is granted by way of exception.

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The Object of the Contract Labour Regulation and Abolition) Act, 1970 is to prevent exploitation of contract labour and also to introduce better conditions of work. A workman is deemed to be employed as Contract Labour when he is hired in connection with the work of an establishment by or through a Contractor. Contract workmen are indirect employees. Contract Labour differs from Direct Labour in terms of employment relationship with the establishment and method of wage payment.

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Contract Labour is one of the acute form of unorganized labour. Under the system of contract labour workers may be employed through contractor on the contract basis. Workmen shall be deemed to be employed as contract labour or in connection with the work of an establishment when he is hired in or in connection with such work by or through a contractor, with or without the knowledge of the principal employer. In this class of labour the contractors hire men (contract labour) who do the work on the premises of the employer, known as the principal employer but are not deemed to be the employees of the principal employer. The range of tasks performed by such contract workers varies from security to sweeping and catering and is steadily increasing. It has been felt, and rightly too, that the execution of a work on contract through a contractor who deployed the contract labour was to deprive the labour of its due wages and privileges of labour class.

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The requirements of Force-Majeure are:
(a) It must proceed from a cause not brought about by the defaulting party’s default.
(b) The cause must be inevitable and unforeseeable.
(c) The cause must make execution of the contract wholly impossible.

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The engineering & construction industry, especially that in India, is dynamic and highly volatile, making it susceptible to tremendous amounts of litigation and other forms of alternative dispute resolution. The rapid and substantial growth in the magnitude of this industry has resulted in the increased need for information about the rights and obligations of the various players involved in the execution of a particular work of construction. It has become essential that proper attention is given to assert one’s rights and discharge one’s obligations as laid down by the law and also by a correct understanding of the meaning and interpretation of the terms of the contract governing such relationships, as otherwise the basis of estimates and calculations made will become infructuous

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The Indian Contract Act, 1872, provides a basic structure of the law of contract in India, its enforcement, various provisions regarding non-performance and the breach of contract. This report is aimed to highlight provisions regarding liquidated damages in case of the breach of the contract and to bring about a comparative study between India and England regarding it. Thus, before knowing what exactly liquidated damages are, it is important to understand the consequences of breach of contract and the damages awarded in case of breach. A party who is injured by the breach of a contract may bring an action for damages and Damages means compensation in terms of money for the loss suffered by the injured party. Thus, in contract when these damages are awarded it is known as liquidated damages

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The doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. There are two times where third party beneficiaries are allowed to fall under the contract. The duty owed test looks to see if the third party was agreeing to pay a debt for the original party. The intent to benefit test looks to see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. Any defense allowed to parties of the original contract extend to third party beneficiaries[1]. A recent example is in England, where the Contract (Rights of Third Parties) Act 1999 was introduced

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Ratification is in law equivalent to previous authority it may be expressed or it may be affected impliedly by conduct.[1] Section 196 and 197 of the act show that an act done by person who is not authorized to do it, but who purports to act as an agent for another person, can retrospectively ratified by such other person. From this it follows logically, that such an act on the part of the person purporting to act as agent is not void but voidable. If it is not ratified it becomes void but if it is ratified it will be validated.

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There are certain situations wherein certain persons are required to perform an obligation despite the fact that he hasn’t broken any contract nor committed any tort. For instance, a person is obligated to restore the goods left at his home, by mistake, and keep it in good condition. Such obligations are called quasi-contracts

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In this era of globalization where a contract contains one or more foreign elements, the difficult and complicated question in proceeding that arises is that of ascertaining its applicable law. Such difficulty stems from the multiplicity and diversity of connecting factors and each of them may arise in a different jurisdiction for instance the place where the contract was made; the place of performance; the place of business of the parties; the place of payment; the currency of payment; domicile or nationality o the parties and so on. So to avoid this situation parties are granted with the freedom to select the law to govern their contract under the provisions of Rome convention. The inclusion of a choice of law clause is such an everyday matter in international contracts that its absence would be to ignore commercial realities

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With the advancements in computer technology, telecommunication and information technology the use of computer networks has gained considerable popularity in the recent past, computer networks serve as channels between for electronic trading across the globe. By electronic trading we don’t just mean the use of computer networks to enter into transaction between two human trading partners by facilitating a communication but electronic trading or electronic commerce also means those contracts which are entered between two legal persons along with the aid of a computer program which acts as an agent even when it has no conscious of its own but also by initiating it

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The Law of Standard Form Contracts rests on intuitions of the common mass. This research paper explores these intuitions and examines intended consumer behavior on common contracting contexts. Firstly, the research paper focuses on the need of Standard Form Contracts and its justification. After the clear explanation of the term and its use in the practical world, the focus shifts to the legal issue, as to what are the problems with the issuance of Standard Form Contracts on a large scale, and how it can prove to be of exploitative nature. Further, the paper discusses the basic tendency of the consumers towards the acceptance of the Standard Form Contracts, the reasons for such acceptance and how the party issuing the Standard Form Contract can take advantage of the consumer’s ignorant behaviour

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The effects of frustration with special reference to the restitution of advantages or benefits received by a party, not entitled to such advantage or benefit. On account of an agreement being deemed void, subsequent to certain obligations being fulfilled by either party, there would continue to subsist, rights to make good the loss caused. Section 65 of the Indian Contract Act, 1872, states

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It’s an undisputed fact that E-Commerce has become a part of our daily life. One such justification for the popularization of E-Commerce would be immoderate technological advancement. E-Commerce, as the name suggests, is the practice of buying and selling goods and services through online consumer services on the internet. The ‘e’ used before the word ‘commerce’ is a shortened form of ‘electronic’. The effectiveness of E-Commerce is based on electronically made contracts known as E-Contracts. Although E-Contracts are legalized by Information Technology Act but still majority feels insecure while dealing online. The reason being lack of transparency in the terms & conditions attached to the contract and the jurisdiction in case of a dispute that may arise during the pendency of a transaction with an offshore site

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Section 32 and 33 provide for when are such contracts enforceable. Section 32 says when a contingent contract to do or not to do anything depends on the happening of an uncertain future event cannot be enforced by law unless and until that event has happened and in case the event becomes impossible, then the contract becomes void. Section 33 provides that if a contingent contract to do or not to do anything depends on an uncertain future event not happening, it can be enforced only when the happening of that event becomes impossible and not before

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E-contract is a contract modeled, specified, executed and deployed by a software system. E-contracts are conceptually very similar to traditional (paper based) commercial contracts. Vendors present their products, prices and terms to prospective buyers. Buyers consider their options, negotiate prices and terms (where possible), place orders and make payments. Then, the vendors deliver the purchased products. Nevertheless, because of the ways in which it differs from traditional commerce, electronic commerce raises some new and interesting technical and legal challenges. For recognition of e-contracts following questions are needed to be considered

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In the traditional notion of contract formation, negotiating parties must come to a "meeting of the minds" on the terms of an agreement. In the course of negotiation, there may be invitations to make offers (e.g., price lists are generally not offers, but invitations) and counter-offers, but the general rule is that formation requires an offer and acceptance to be communicated between the parties

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Under Panama Civil Law the general rule is that all contracts are consensual, which is to mean that they are perfected by the mere consent of the parties. Consequently, and except if expressly established by law that a contract is formal or real, it must be understood to be consensual, without prejudice to the liberty granted by law to the parties to give a consensual contract the character of formal

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Submission Guidelines

Assignment in Arbitration: Scope and Issues in India

[ Krishan Singhania is Managing Partner and Alok Vajpeyi an Associate at Singhania & Co]

Arbitration is a binding voluntary alternative dispute resolution process by a private forum chosen by the parties. It can broadly be divided into three stages, first being the pre-arbitration stage (prior to the time when the dispute arises), second is during the course of arbitration proceeding and last is following the passing of arbitral award.

The term ‘assignment’ is defined as the transfer by a party of all its rights to some kind of property, usually intangible property such as rights in a lease, mortgage, agreement of sale or partnership. The arbitration clause/agreement provides the right to arbitrate to the concerned parties of that agreement. Therefore, the question arises as to whether such right can be transferred through assignment to some other party. The authors in this post have discussed the scope of assignment in arbitration and the issues that arise in making such assignment.

Assignment in Arbitration: An Overview

Arbitration is a separate contract by the separability principle as envisaged under section 16(1)(b) of the Arbitration and Conciliation Act, 1996. An assignment of a contract might result from a transfer either of the rights or of the obligations thereunder. As a result, obligations under a contract cannot be assigned except with the consent of the promisee and then it is a novation resulting in substitution of liabilities. On the other hand, rights under a contract are assignable unless a contract is personal in nature or the rights are incapable of being assigned. This view has been upheld in DLF Power Limited v. Mangalore Refinery & Petrochemicals Limited & Ors. , 2016 SCC Online Bom 5069. The Bombay High Court in its judgment stated that the arbitration clause does not take away the right of assignment of a party to a contract if it is otherwise assignable. The Court noted that there is a clear distinction between assignment of rights under a contract by a party who has performed its obligations thereunder and the assignment of a claim. The latter is a mere claim which cannot be assigned in law. It was further held in this case that once the other party has accepted the assignment and had insisted for compliance of rights, duties and obligations, the assignee steps into the shoes of the assignor and will be entitled to all rights, obligations and benefits including the arbitration agreement forming part of the said agreement.

Alternatively, parties may expressly prohibit assignment. The benefits of the contract are not then assignable. In such a case, a purported assignment by one party of the contract is invalid as against the other party, but it is valid and enforceable between the assignor and the assignee. The terms of a contract could be expressed, or may be implied as it is legitimate to take the surrounding circumstances into account.

Taking into consideration the general principles relating to the concept of assignment in arbitration, it is to be considered whether the situation for assignment remains same throughout different stages of arbitration (pre-arbitration, during the course of the arbitral proceedings and following the passing of arbitral award).

Pre-Arbitration

The Calcutta High Court in Hindustan Steel Works Construction Ltd. v. Bharat Spun Pipe Co. , AIR 1975 Cal 8, while deciding the application for setting aside an arbitral award, discussed the scope of assignment and held that the correct position in law seems to be that whether the contract is assignable or not depends upon the nature of the contract. A contract in the nature of a personal covenant cannot be assigned. Secondly, the rights under a contract can be assigned, but the obligations under a contract lawfully cannot be assigned. Thirdly, the intention about assignability would depend upon the terms and the language used in a contract. Lastly, existence of an arbitration clause per se does make neither the contract non-assignable or assignable.

The Delhi High Court in Kotak Mahindra Bank v. S. Nagabhushan & Ors. , 2018 SCC OnLine Del 6832, while deciding the application under section 34 was faced with the question whether there was valid assignment of arbitration agreement or not. The arbitrator decided that since the claimant is not signatory to the arbitration agreement the matter cannot be decided through arbitration. However, the Court held that the loan agreement by its very nature was assignable. The Court viewed that once the rights under the loan agreement are assigned in favour of the petitioner, the rights under the arbitration agreement, being only in the nature of a remedy for enforcement of such rights, are equally assignable and have been duly assigned in favour of the petitioner in the present case by way of the assignment agreement. The Court followed Bestech India Private Ltd. v. MGF Developments Ltd. (2009) 161 DLT 282 and held that if a contract is assignable, an arbitration clause will follow the assignment of the contract.

During the Course of the Arbitral Proceedings

The Bombay High Court in Agri Marketing Co. SARL v. Imperial Exports Ltd. , (2002) 2 Bom CR 646, while deciding the enforcement application of an arbitral award, stated that the right under an arbitration clause is assignable even after arbitration proceedings have commenced and that the assignee may simply take over the assignor’s proceedings without the need to start afresh. However, the right was subject to two important qualifications:

(i) the notice to the arbitrator must be given within a reasonable time;

(ii) absolute assignment of clause:

(a) in writing.

(b) with notice to the other party (and the arbitrators).

Following the Passing of Arbitral Award

By virtue of section 36 of the Arbitration and Conciliation Act, 1996, on expiry of the period for an application of setting aside, an arbitral award shall be enforceable in accordance with the provisions of Civil Procedure Code, 1908 in the same manner as a decree of a court. Therefore, the award is assignable according to the provisions of the Civil Procedure Code, 1908 dealing with assignment of decree.

Champerty & Assignment

A claim for damages for breach of contract, after breach, is not an ‘actionable claim’, within the meaning of section 3 of the Transfer of Property Act, 1882, but a mere right to sue within the meaning of section 6(e) of that Act, and it cannot therefore be assigned. Rights of action arising out of or incidental to rights of property can be assigned with the property transferred. An assignment of a bare right of action may also be upheld if the assignee has a genuine commercial or financial interest in taking the assignment; but a step towards the sale of bare cause of action to a third party who had no genuine commercial interest in the claims will be void as champertous since it involves trafficking in litigation.

The Privy Council has generally held that champertous agreements are void in England as it violates the statute of champerty. However, it also recognized that this principle is inapplicable in India. The courts have looked the champertous agreements with caution as they may violate the public policy of the country. But the Indian courts have not faced any situation where the issue involved the funding arrangement with any party to the arbitration proceedings.

The concept of assignment in arbitration is based on the principles of transfer of contractual rights. Assignment can be undertaken during any of the stages and this is beneficial to the parties involved in arbitration. Assignment may be beneficial in various ways. Prior to the dispute if there is some acquisition which occurs or the party does not want to further invest in the project then it can assign the contractual rights (including right to arbitrate to the other parties). During the proceedings, the stressed companies with no real assets but pending arbitration claims can assign their claim to the party whom the debt is own. However, all of this will depend on the agreement of the concerned parties.

It is to be noted that Indian courts have held that assignment of claim is not allowed. However, assignment has been allowed during the arbitral proceedings. This is contradictory, since the pending arbitration proceeding will be considered as a claim only. The courts or the legislature should address this issue.

Therefore, Indian courts may have taken the view that assignment in arbitration is permissible. However, its scope is not clarified and therefore it should be included in the Arbitration and Conciliation Act, 1996 as well, so that the unaddressed issues can be settled and assignment becomes a right in the hand of a party having a legitimate claim. Such a statutory recognition will introduce certainty in the arbitral regime of the country and will help India in its stride to become a hub for international arbitration.

– Krishan Singhania & Alok Vajpeyi

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Can An Arbitration Agreement Be Assigned?

Contributor.

Section 16 of the Indian Arbitration & Conciliation Act, 1996 ('the Act') provides for the principle of separability, as per which an arbitration clause enshrined in a contract is considered a separate agreement in itself. India is gearing up to showcase its arbitration-friendly character which is evident from amendments brought in the arbitration act as well as from the catena of judgments propounded by the national courts. This article would be focusing on a very important and practical issue which lurches in the mind of every party to arbitration and thus requires clarity i.e. the fate of an arbitration clause enshrined in an agreement that has been assigned via a Deed of Assignment.

Practice of assignment of contract is very common. It is when there is a transfer of rights & obligations (with the consent of counterparty to the contract) from a party to a contract to another entity which is not a party to that contract. 1 Businesses usually assign their rights under a contract to another party vide a registered Deed of Assignment. Rights under a contract can be assigned unless the said contract is personal in nature or the said rights are unassignable under law or under an agreement between the parties. A benefit under a contract can always be assigned. 2 It is always open for the parties to enter into an agreement prohibiting assignment.

However, issue arises when such a contract has an arbitration clause. What is the fate of such an arbitration clause when the underlying contract itself is assigned to a third party? This leads to a usual jurisdictional objection if an arbitration is invoked, as the third party was originally not a party to the arbitration agreement. The party challenging the jurisdiction of the Tribunal can argue that as arbitration agreement is in itself a separate agreement, separable from the main agreement that has been assigned, the third party was not the one with which the arbitration agreement was entered into i.e. there was no agreement to resolve any disputes with the third party through arbitration.

The Bombay High Court in DLF Power Limited v. Mangalore Refinery & Petrochemicals Limited & Ors. 3 , gave a finding that in case of assignment of a contract, the arbitration agreement enshrined within the agreement is also assigned. The relevant excerpt of the judgment is reproduced herein below -

"77. In my view, there is no substance in the submission of the learned senior counsel for the respondent that even if the two contracts were assigned in favour of the petitioner, the arbitration agreement forming part of such contracts was not assigned. The judgments relied upon by the learned senior counsel for the respondent interpreting section 16 of the Arbitration & Conciliation Act, 1996 are not relevant to decide whether arbitration agreement can be assigned or not. Under section 16 of the Arbitration & Conciliation Act, 1996, it is provided that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. It is provided that the arbitral tribunal has power to rule on its own jurisdiction including ruling on any objections with respect to the existence or validity of the arbitration agreement and for that purpose, the arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. Merely because a party has appointed an arbitrator or has participated in the appointment of an arbitrator, he is not precluded from raising a plea of jurisdiction in the arbitral proceedings. The scheme of section 16 permitting a party to raise such an objection of jurisdiction though he had participated in the appointment of an arbitrator in an arbitration, without intervention of the Court is totally different and is limited only for that purpose. In my view, the judgments interpreting section 16 of the Arbitration Act would not apply in case of an assignment of a contract including arbitration agreement.

80. In view of the assignment of the said two contracts in favour of the petitioner, the arbitration agreement contained therein also stood assigned in favour of the petitioner. The petitioner had thus locus standi and had rightly invoked the said arbitration agreement. The impugned order holding that arbitration agreement was not assigned in favour of the petitioner shows patent illegality."

Calcutta High Court discussed in great detail the issue of assignment of arbitration agreement in Hindustan Steel Works Construction Ltd. v. Bharat Spun Pipe Co. 4 , has held, while relying on Russel on Arbitration, that the arbitration clause was not personal in nature thus there was nothing to prevent the assignment of such a contract as the restriction only applies if the contract is in the nature of a personal covenant. The relevant excerpt is reproduced herein below-

"5. Therefore, from the observations of the courts both of England and in this country, it appears to me, that the correct position in law seems to be that whether the contract is assignable or not depends upon the nature of the contract. A contract in the nature of a personal covenant cannot be assigned. Secondly, the rights under a contract can be assigned, but the obligations under a contract lawfully cannot be assigned. Thirdly, the intention about assignability would depend upon the terms and the language used in a contract. Fourthly, and this is important for our purpose, existence of an arbitration clause per se does make neither the contract non-assignable or assignable. But in a particular case the arbitration clause may be so worded as to afford an indication about the contract being personal or not. But apart from that the existence of arbitration clause does not, in my opinion, affect either the rights or the assignability of the contract if it is otherwise assignable. This is the position as a result of the principles of the different judicial authorities before the Appeal Court in England and the Supreme Court in India. This again, in my opinion is corroborated by Section 34 of the Arbitration Act, 1940 which is in pari materia with Section 4 of the Arbitration Act, 1950 of England so far as relevant from this aspect of the matter and which re-enacts part of Section 4 of the Act of 1889 upon which Master of the Rolls Lord Creene M.R. relied in the case of (1946) 2 All ER 54 (supra).

6. On this aspect it may be appropriate to refer to the statement of law as stated by the learned editor of Russel on Arbitration, 18th Edition at page 143.

"3. Person claiming through or under a party.

Assignee of contract.

An arbitration clause will bind a valid assignee of a contract containing it; and the presence of an arbitration clause will not normally cause a court to hold that a contract is not assignable."

7. Looking at the contract containing arbitration clause in this case it appears to me that the contract was not personal. It was for performance and for supply of some materials. It was an agreement between the buyer and seller. There is nothing in the facts of the case or on the terms of the contract or in the arbitration clause, which make it necessary to hold that it was upon personal qualification or quality of Shrigopal Modi that the Hindustan Steel Works Construction Ltd. was induced to enter into this transaction. Furthermore, the arbitration clause in its nature also does not in my opinion contain any special clause which indicated any personal nature of the covenant. In the aforesaid view of the matter this is not a contract which by the nature of the contract or by the terms of the contract could not be said to be one which is not assignable and the existence of the arbitration clause itself or its term also do not indicate any contrary intention. There was, therefore, nothing in law which prevented effectual assignment of this contract."

At this juncture, the discussion in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. 5 , as to whether even non signatories to the Arbitration Agreement can be referred to Arbitration is of prime importance. The Court while analyzing the circumstances wherein a third party (non-signatory) to an arbitration agreement can referred to arbitration cite assignment of underlying contract containing the arbitration agreement as one of such circumstance. The relevant portion is reproduced herein for better understanding -

"70. Normally, arbitration takes place between the persons who have, from the outset, been parties to both the arbitration agreement as well as the substantive contract underlining (sic underlying) that agreement. But, it does occasionally happen that the claim is made against or by someone who is not originally named as a party. These may create some difficult situations, but certainly, they are not absolute obstructions to law/the arbitration agreement. Arbitration, thus, could be possible between a signatory to an arbitration agreement and a third party. Of course, heavy onus lies on that party to show that, in fact and in law, it is claiming "through" or "under" the signatory party as contemplated under Section 45 of the 1996 Act. Just to deal with such situations illustratively, reference can be made to the following examples in Law and Practice of Commercial Arbitration in England (2nd Edn.) by Sir Michael J. Mustill:

"1. The claimant was in reality always a party to the contract, although not named in it.

2. The claimant has succeeded by operation of law to the rights of the named party.

3. The claimant has become a party to the contract in substitution for the named party by virtue of a statutory or consensual novation.

4. The original party has assigned to the claimant either the underlying contract, together with the agreement to arbitrate which it incorporates, or the benefit of a claim which has already come into existence."

Delhi High Court followed the finding given in its earlier judgment of Bestech India Private Ltd. v. MGF Developments Ltd. [6] , wherein it held that if the contract is assignable then the arbitration agreement enshrined in the contract will follow the assignment, in its recent judgment in Kotak Mahindra Bank v. S. Nagabhushan & Ors. 7 while deciding an application under Section 34 of the Act. The Court was faced with the issue of arbitration agreement enshrined in a loan agreement that was assigned to a third party and held that post the assignment of the loan agreement the rights under the arbitration agreement being in the nature of remedy for enforcement of rights under the agreement are assignable as well.

In cases of the contract being assigned after invocation of arbitration, the assignee can substitute itself in the pending proceedings in the place of the assignor based on a valid Deed of Assignment. The Bombay High Court while deciding on an enforcement proceeding in Agri Marketing Co. SARL v. Imperial Exports Ltd. 8/sup> held that in such a case, the assignee can take over the assignor's proceedings without there being a need to start afresh.

Thus, in light of the above cited court findings, it is clear that an arbitration agreement can be assigned and a non-signatory to an arbitration agreement can be referred to arbitration if the agreement which contained the arbitration agreement was assigned.

1 Refer Kapilaben and Ors. v. Ashok Kumar Jayantilal Sheth through POA Gopalbhai Madhusudan Patel and Ors. 2019 SCC OnLine SC 1512, wherein the Court has categorically held that a party to a contract cannot assign its obligations/liabilities without the consent of the other party.

2 Khardah Company Ltd v. Raymon & Co (India) Private Ltd., AIR 1962 SC 1810

3 2016 SCC Online Bom 5069

4 1974 SCC OnLine Cal 59

5 (2013) 1 SCC 641

6 (2009) 161 DLT 282

7 2018 SCC OnLine Del 6832

8 2001 SCC OnLine Bom 841

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Litigation, Mediation & Arbitration

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Practical Law

Assessing Assignability: Transferring Contractual Rights or Obligations

Practical law legal update 5-546-6326 (approx. 7 pages).

An intended transfer is of the type that is prohibited by law or public policy (see Practice Note, Assignability of Commercial Contracts: Statutory and Public Policy Exceptions ).
The parties expressly agree to restrict transferability (see Practice Note, Assignability of Commercial Contracts: Contractual Anti-assignment and Anti-delegation Clauses ).
Breaching the contract.
Making an ineffective and invalid transfer.

Distinguishing Between Assignment and Delegation

The assignment of rights to receive performance.
The delegation of duties to perform.

Characteristics of Assignments

The right to receive performance from the assignor.
Its remedies against the assignor for any failure to perform.

Characteristics of Delegation

The general rule governing assignment and delegation.

Most assignments of contractual rights.
Many delegations of contractual performance.
Assignments and delegations that violate public policy or law.
Assignments of rights or delegations of performance that are personal in nature.
Contracts with anti-assignment or anti-delegation clauses.

Contracts That Present the Greatest Challenges

Personal services contracts (see Personal Services Contracts ).
Non-exclusive intellectual property licenses (see Intellectual Property Licenses ).
Contracts with anti-assignment and anti-delegation clauses (see Contracts With Anti-assignment and Anti-delegation Contract Clauses ).

Personal Services Contracts

Intellectual property licenses, contracts with anti-assignment and anti-delegation clauses, is a change of control an assignment.

Contains an anti-assignment and anti-delegation clause expressly restricting a change of control.
States that a change in management or equity ownership of the contracting party is deemed to be an assignment.

When Does an Involuntary Transfer Trigger a Restricted Transfer?

A contractual anti-assignment and anti delegation clause applies to a specific type or transfer.
The transfer is permissible, with or without a contractual anti-assignment and anti-delegation provision.

Drafting and Negotiating Anti-assignment and Anti-delegation Clauses

Directly addressing assignment of rights and delegation of performance.
Clarifying the universe of restricted transfers.
Designating the non-transferring party's consent rights.
Specifying any exceptions to non-transferability.
Requiring notification of a permitted transfer.
Including a declaration that impermissible transfers are void.
Adding a novation to the anti-assignment and anti-delegation provision.
General Contract and Boilerplate
General Commercial

Assignment of Rights and Obligations Under a Contract: Everything You Need to Know

An assignment of rights and obligations under a contract occurs when a party assigns their contractual rights to a third party. 3 min read updated on October 29, 2020

An assignment of rights and obligations under a contract occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee.

What Is an Assignment of Contract?

In an assignment contract, the assignor prefers that the assignee reverses roles and assumes the contractual rights and obligations as stated in the contract. Before this can occur, all parties to the original contract must be notified.

Contracts create duties and rights. An obligor is the party who is legally or contractually obliged to provide a benefit or payment to another, while an obligation is owed to the obligee. The obligee transfers a right to obtain a benefit owed by the obligor to a third party. At this point, the obligee becomes an assignor. An assignor is the party that actually creates an assignment.

The party that creates an assignment is both the obligee and a transferor. The assignee receives the right to acquire the obligations of the promisor/obligor. The assignor can assign any right to the obligor unless:

Doing so will materially alter the obligation
It's materially burdening
It decreases the value of the original contract
It increases their risk
Public policy or a statute makes it illegal
The contract prevents assignment

Assignments are important in business financing, especially in factoring . A factor is someone who purchases a right to receive a benefit from someone else.

How Assignments Work

The specific language used in the contract will determine how the assignment plays out. For example, one contract may prohibit assignment, while another contract may require that all parties involved agree to it before proceeding. Remember, an assignment of contract does not necessarily alleviate an assignor from all liability. Many contracts include an assurance clause guaranteeing performance. In other words, the initial parties to the contract guarantee the assignee will achieve the desired goal.

When Assignments Will Not Be Enforced

The following situations indicate when an assignment of a contract is not enforced:

The contract specifically prohibits assignment
The assignment drastically changes the expected outcome
The assignment is against public policy or illegal
The contract contains a no-assignment clause
The assignment is for a future right that only would be attainable in a contract in the future
The contract hasn't been finalized or written yet

Delegation vs. Assignment

Occasionally, one party in a contract will desire to pass on or delegate their responsibility to a third party without creating an assignment contract. Some duties are so specific in nature they cannot be delegated. Adding a clause in the contract to prevent a party from delegating their responsibilities and duties is highly recommended.

Characteristics of Assignments

An assignment involves the transfer by an assignor of some or all of its rights to receive performance under the contract to an assignee. The assignee then receives all the benefits of the assigned rights. The assignment doesn't eliminate or reduce the assignor's performance commitments to the nonassigning party.

Three Steps to Follow if You Want to Assign a Contract

There are three main steps to take if you're looking to assign a contract:

Make sure the current contract does not contain an anti-assignment clause
Officially execute the assignment by transferring the parties' obligations and rights
Notify the obligor of the changes made

Once the obligor is notified, the assignor will effectively be relieved of liability.

Anti-Assignment Clauses

If you'd prefer not to allow the party you're doing business with to assign a contract, you may be able to prevent this from occurring by clearly stating anti-assignment clauses in the original contract. The three most common anti-assignment clauses are:

Consent required for assignment
Consent not needed for new owners or affiliates
Consent not unreasonably withheld

Based on these three clauses, no party in the contract is allowed to delegate or assign any obligations or rights without prior written consent from the other parties. Any delegation or assignment in violation of this passage shall be deemed void. It is not possible to write an anti-assignment clause that goes against an assignment that is issued or ordered by a court.

If you need help with an assignment of rights and obligations under a contract, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee. The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
only one of the parties may assign;
only certain rights may be assigned – for example, warranties and indemnities may be excluded;
a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

an oral assignment;
an assignment by way of charge;
an assignment of only part of the chosen in action;
an assignment of which notice has not been given to the debtor;
an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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COMMENTS

Assignment of contract
Section 2 (h) of the Indian Contract Act, 1872 defines a contract as "an agreement enforceable by law". It is characterised by an offer and an acceptance along with consideration and is backed by the power of law. An agreement is a promise by one party to another. A proposal once accepted becomes a promise.
PDF Assignment of Rights and Its Practical Relevance in Financial
The judicial trend in India has reiterated this position time and again. It has lain down; rights under a contract are freely assignable unless: a) The contract is of a personal nature; b) The rights are incapable of assignment either under law or under an agreement between the parties. Hence, if the
Sub-Contracting And Assignment : Resolving The Legal Conundrum
The Supreme Court in the case of Khardah Company Ltd. v. Raymon & Co. (India) Private Limited 3 categorically distinguished between assignment of "rights" and "obligations". The court upheld that, "an assignment of a contract might result by transfer either of the rights or of the obligations thereunder. But there is a well-recognised ...
Sub-contracting and Assignment : Resolving the Legal Conundrum
Assignment. Assignment of contract refers to an act of transferring contractual rights and liabilities under the contract to a third party with other party's concurrence. Section 37 of the India Contract Act, 1872 ("Contract Act") enables the contracting parties to dispense with the performance of a contract by way of an assignment.
Does the Assignment of a Contract Assign the Arbitration Agreement: The
The Supreme Court of India in Khardah Company Ltd vs ... if the rights and obligations under the principal contract are assigned to a third party and this third party also performs obligations under the contract, such as making payments, seeking extension of time or approval, joint survey, etc., this third party is entitled to invoke ...
Assignment of Contract
Assignment of contract refers to transferring contractual rights and liabilities under the contract to the third party with or without the other party's concurrence. For instance, X owes Y Rs. 1,000, and Y owes Z the same amount. In this case, Y is under obligation to pay Rs. One thousand to Z and has the right to receive Rs. 1,000 from Z.
Commercial Contracts in India
If a contract is silent about assignment of rights and obligations, then the intention of the parties will be considered in respect of contracts that are of a non-personal nature.
Novation, Rescission, Alteration under the Indian Contract Act
Under novation, the rights and obligations arising under the new contract. Under assignment, only some rights are transferred to the third party. 2. The original contract is discharged. The new contract becomes binding on the parties. The original agreement is not extinguished and the parties will remain bound by the obligations under that ...
assignment-of-contract
The legal documents provided outline the following key principles regarding the assignment of contracts under Indian law: 1. **Assignment of Rights vs. Obligations**: - Assignment of a contract can involve the transfer of either the rights or the obligations under the contract [Indira Devi VS Veena Gupta - Supreme Court, P. Seshareddy (D) Rep ...
PDF Kluwer Arbitration Blog
time of assignment of a contract. Therefore, as held by the Bombay High Court in DLF Power Ltd. v. Mangalore Refinery & Petrochemicals Ltd. ("DLF"), a third party, to whom the principal contract is assigned, can enforce the arbitration agreement. Specifically, if the rights and obligations under the principal contract are assigned to a ...
PDF The Indian Contract Act, 1872
As regards rights of the parties, in the case of a void contract there is no legal remedy for the parties as the contract cannot be performed in any way. In the case of voidable contract the aggrieved party has a right to rescind it within a reasonable time. If it is so rescinded, it becomes void. If it is not rescinded, it is a valid contract. 3.
Assignment In Arbitration: Scope And Issues In India
Assignment in Arbitration: An Overview. Arbitration is a separate contract by the separability principle as envisaged under section 16(1)(b) of the Arbitration and Conciliation Act, 1996. An assignment of a contract might result from a transfer either of the rights or of the obligations thereunder.
PDF Law of Assignment of Receivables
A contract is a bunch of mutual rights and obligations. Assignment of a contract would mean assignee steps in the shoes of the assignor and assumes all the rights and obligations of the assignor. For example: X enters into a contract of sale with Y where X is the seller. The contract would obviously provides for rights and obligations of either ...
Breach of Contract in India: Types, Cases, and Remedies
Contracts are the foundation of business and legal transactions, providing a framework for the rights and obligations of the parties involved. A breach of contract occurs when one party fails to fulfill its contractual obligations, leading to legal consequences. In this article, we'll explore the concept of breach of contract under the Indian Contract Act, 1872. We'll delve into the different ...
Assignment vs Novation: Everything You Need to Know
Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. The party transferring their rights and duties is the assignor; the party receiving them is the assignee. Novation is a mechanism where one party transfers all its obligations and rights under a ...
Contract laws in India
The general law of contract is based on the conception, which the parties have, by an agreement, created legal rights and obligations, which are purely personal in their nature and are only enforceable by action against the party in default. Section 2 (h) of the Indian Contract Act, 1872 [2] defines a contract as "An agreement enforceable by law".
assignment+of+a+contract
An assignment of a contract might result by transfer either of the rights or by tr...is a well recognized distinction between the two classes of assignments. As a rule, obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent i... Vishveshwar Vighneshwar Shastri v.
assignment+of+liabilities+of+contract
Assignment by act of parties may cause assignment of rights or of liabilities under a contract. As a rule a party to a contract cannot transfer h...other party for assignment under Section 15(b) of the Specific Relief Act is only applicable in cases where the obligation is of a personal nature or where there is an express bar in the contract...
Assignment in Arbitration: Scope and Issues in India
Assignment in Arbitration: An Overview. Arbitration is a separate contract by the separability principle as envisaged under section 16(1)(b) of the Arbitration and Conciliation Act, 1996. An assignment of a contract might result from a transfer either of the rights or of the obligations thereunder.
Can An Arbitration Agreement Be Assigned?
It is when there is a transfer of rights & obligations (with the consent of counterparty to the contract) from a party to a contract to another entity which is not a party to that contract. 1 Businesses usually assign their rights under a contract to another party vide a registered Deed of Assignment. Rights under a contract can be assigned ...
Assessing Assignability: Transferring Contractual Rights or Obligations
An assignment involves the transfer by an obligee (assignor) of some or all of its rights to receive performance under the contract to a non-party (assignee). The assignor no longer receives any benefits of the assigned rights, which are all transferred to the assignee. However, even though the assignor divests its contract rights, the ...
Assignment of Rights and Obligations Under a Contract
An assignment of rights and obligations under a contract occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the ...
Assignment and novation
Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well. In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the ...


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Difference between novation and assignment

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When is it ‘No Novation’?

A unilateral act of one party

Intention of parties

Rescission of Contract

Difference between Rescission and Novation

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Contents of novation agreement

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