Advance Praise

[This is] an outstanding book written authoritatively on the

topic of contract and arbitration. It fills a huge void on the
topic and would be useful and of great interest to every busi-
ness manager at all levels. Professor Agarwal’s academic
distinction and professional brilliance in engineering and
law with a vast experience on these subjects make him ide-
ally suited to write the book: A unique book of its kind.
— Bishwajit Bhattacharyya
Senior Advocate (Supreme Court) and
Former Additional Solicitor General of India

Professor Agarwal has straddled business, law and aca-

demia providing his book with the rigour of a researcher, the
world view of management and the practical issues noticed
by lawyers in their professional life. His multiple viewpoints
strengthened by his interaction with industry participants at
the IIM Ahmedabad (IIMA) campus give him a strong foun-
dation on the subject which is never divorced from reality.
This is a must-read for managers, students and law profes-
sionals who are interested in the subject.
— Sandeep Parekh
Founder, Finsec Law Advisors, Mumbai

I am happy to know that Professor Anurag K. Agarwal, an

engineer turned lawyer, turned Professor of business law at
IIMA has come out with another unconventional book titled
Contracts and Arbitration for Managers, bringing holistic
perspective of the concept of contract and arbitration with
a practical approach. In the post-liberalisation era, it is fairly
common for commercial contracts, whether with private
corporations or with the government, to usually contain
an arbitration clause, which requires sound legal strategy
right from the language of terms of contract including
arbitration clause, till the execution/enforcement stage. I
am sure stakeholders will find this book to be a complete
encyclopaedia on the subject.
— Justice N.N. Mathur
Former Vice Chancellor,
National Law University, Jodhpur

It is one of the most lucid read. Only Professor Agarwal could

pull up such a work, where the intricate concept of laws are
explained in the most understandable terms. I believe it is
a must-read for corporate managers. Especially in modern
times when every manager is facing issues with contract
management and alternative dispute resolution, this book
comes as an interesting read. I have had the occasion of
attending Professor Agarwal’s classes during my MBA days
from IIMA. Let me say there are very few teachers who can
teach the complex legal principles in such simple language.
Most of my understanding of contract laws and international
commercial arbitration is courtesy the teachings of Profes-
sor Agarwal. I can say he is one of the best teachers that
IIMA has.
— Mukul Shastry
Chief Manager—Legal,
KEC International Limited, Mumbai

Ten years back, during my brief stint as an intern under

Professor Agarwal, one of the projects I loved working on
was in relation to mental health laws in India and abroad. As
it was my first internship, I tried hard to include all relevant
sections of the legislations. When I took my work over to
him, he asked me if I had watched the movies Seema and
Sadma. We saw portions of both movies in his chamber and
debated over unsoundness of mind and consent. He always
managed to bring any subject alive. That is exactly what he
has done with this book.
Peppering each chapter with instances that draw up par-
allels in real life, the book goes on to explore the origin
of the contract and arbitration law, analyses them from
an international as well as Indian perspective, clearly enu-
merates the various facets involved and contains some
very direct takeaways, answering the practical doubts that
every manager faces when dealing with contracts filled
with legalese and arbitration clauses. Simply put, this book
effectively demystifies the law and would be an effective
guide for all professionals.
— Karishma Baria
Senior Associate, Wadia Ghandy & Co., Mumbai

In today’s topsy-turvy but engulfing and dynamic business,

Indian markets are equally pulsating with international
market and its parties. The parties which have global foot-
prints are entering into contracting relationship with Indian
counterparts and their managers. These managers, who are
mostly from engineering background, have proven their met-
tle in the global business world from number crunching to
applying business strategies.
In today’s scenario, the onus of interpretation between
the contracting entities on risks and rewards, and consider-
ations and obligations is required to be understood with bare
threaded details by our responsible Indian managers who are
administrating the contracts. But Indian managers feel suf-
focated when they are on collision path in certain business
entangles and unable to understand contracts, arbitration
and litigation aspects of contracting. They do not feel that
their legal armour is foolproof to understand the take on
such business entangles.
However, now they have a chance to peep into the world
of contracting and arbitration through this book by Professor
Anurag K. Agarwal who is an engineer-turned-lawyer-turned-
professor at IIMA. His sheer magic of changing complex legal
concepts to chewable and simpler form for today’s Indian
managers to understand legal concepts would act as effec-
tive enabler to take on such legal entangles with confidence
by bringing them on the path of awareness of laws of con-
tracts. I wish Professor Agarwal continues to connect the
legal world and the ambit of fast-growing business, seam-
lessly helping today’s engineers-turned-managers.
— Vikas Sobti
Manager—Purchase and Supply Chain Management,
Cairn India Limited

A major hiccup for companies willing to do business in India

is their concern over how to make way through the labyrin-
thine legal structure. Enforcement of contracts and a swift
hassle-free dispute resolution mechanism is at the heart of
rule of law. Suitable guiding literature in this regard has
been missing and this book can equip professionals, managers,
entrepreneurs and the like to understand the intricacies of
this vital domain. This book comes handy both for the work-
ing professional as well as for the curious academic.
Professor Agarwal emerges at his best in this book and
comes out as the master of his art. His grasp of the subject
matter at hand is profound and the coherence in his ideas
impeccable. The book reflects years of his experience in
legal, managerial and academic arenas. We hope to see more
such marvels from Professor Agarwal in future.
— Rohan Anand
Class of 2011, IIMA
Indian Police Service, 2013 Batch,
Gujarat Cadre

Contracts and arbitration are things everyone need to under-

stand. Professor Agarwal’s classes proved absolutely invalu-
able to me when I started working. It is great that he will
now be sharing the benefit of his knowledge and experience
with a much wider audience through this book.
— Aditi Krishnakumar
Class of 2007, IIMA
Risk and Compliance Officer,
Ocean Dial Asset Management, Singapore
CONTRAC
TS
and
Arbitration
FOR
MANAGERS
CONTRAC
TS
and
Arbitration
FOR
MANAGERS

Anurag K. Agarwal
Copyright © Anurag K. Agarwal, 2016

All rights reserved. No part of this book may be reproduced or utilised

in any form or by any means, electronic or mechanical, including
photocopying, recording or by any information storage or retrieval system,
without permission in writing from the publisher.

First published in 2016

SAGE Publications India Pvt Ltd

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Published by Vivek Mehra for SAGE Publications India Pvt Ltd, typeset
in 11/14 pt ITC Century by Diligent Typesetter, Delhi and printed at
Sai Print-o-Pack, New Delhi.

Library of Congress Cataloging-in-Publication Data

Names: Agarwal, Anurag K., author.

Title: Contracts and arbitration for managers / Anurag K. Agarwal.
Description: Thousand Oaks : SAGE Publications, 2015. | Includes
  bibliographical references.
Identifiers: LCCN 2015039144| ISBN 9789351506379 (pbk. : alk. paper) |
ISBN
  9789351506386 (ebook) | ISBN 9789351506362 (epub)
Subjects: LCSH: Contracts—India. | Arbitration and award—India. | Dispute
  resolution (Law)—India. | Contracts. | Arbitration and award. | Dispute
  resolution (Law)
Classification: LCC KNS810 .A43 2015 | DDC 346.5402/2024658—dc23 LC
record available at http://lccn.loc.gov/2015039144

ISBN: 978-93-515-0637-9 (PB)

The SAGE Team: Sachin Sharma, Sandhya Gola and Ritu Chopra
 To my father,
Late Shri Ram Lakhan Agarwal, Advocate
 Thank you for choosing a SAGE product!
If you have any comment, observation or feedback,
I would like to personally hear from you.
Please write to me at contactceo@sagepub.in
Vivek Mehra, Managing Director and CEO,
SAGE Publications India Pvt Ltd, New Delhi

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Contents

List of Abbreviations ix
Preface xi

  1. Introduction  1
 2. Contracts 12
  3. Arbitration  45
  4. Institutional and Ad Hoc Arbitration  68
  5. Liquidated Damages  83
  6. Force Majeure  100
  7. Arbitration Clause  114
  8. Mandate of an Arbitrator  134
  9. Challenging an Award  149
10. Public Policy  168
11. Interest  189

Epilogue  209
Appendix: Important Definitions 212
Notes 220
Glossary  227
About the Author  231
List of Abbreviations

AB Associate Build­ers
ADR alternative dispute resolution
BIT bilateral investment treaty
BRCC Bimal and Raman Construction Company
(fictitious)
CAG Comptroller and Auditor General of India
CIF cost, insurance, freight
CJI Chief Justice of India
DDA Delhi Development Authority
EMD earnest money deposit
FERA Foreign Exchange Regulation Act
FCI Food Corporation of India
FIDIC Fédération Internationale Des
Ingénieurs-Conseils
GE General Electric
FOB free on board
HPCL Hindustan Petroleum Corporation Limited
IPLA Intellectual Property License Agreement
ICC International Chamber of Commerce
ICSID International Centre for Settlement of
Investment Disputes
JMC J. M. Combines
IIMA IIM Ahmedabad
LBW leg before wicket
LD liquidated damages
L&T Larsen and Toubro
MPRDC M.P. Road Development Corporation
MHB Mohan Lal Harbans Lal Bhayana
x CONTRACTS AND ARBITRATION FOR MANAGERS

MSP MSP Infrastructure Limited

NITI Aayog National Institution for Transforming
India Aayog
NHAI National Highways Authority of India
NME Navodaya Mass Entertainment
ONGC Oil and Natural Gas Corporation Limited
PIL public interest litigation
PPP public–private partnership
SCOPE Standing Confer­ence of Public Enterprises
SHA Share Holding Agreement
SSHAs Supplementary Share Holding Agreements
STKHA Supplementary Technical Know-How Agreement
TKHA Technical Know-How Agreement
T&Ps tools & plants
TSR time, score and result
UNCITRAL United Nations Commission on International
Trade Law
WCC Wonkul Construction Com­pany (fictitious)
Preface

I wish this book could have been published when my father,

Shri Ram Lakhan Agarwal, Advocate, was alive. He passed
away in February 2014. A self-made man, he rose to the high-
est levels of professional success in his six decades of career
as a lawyer in Lucknow. He had mastery over civil law and
was the District Government Counsel (Civil) in Lucknow
in 1980s. He was the doyen of arbitration law and had the
uncanny ability to explain intricate aspects in a very lucid
manner. A generation of lawyers learnt the basics of law at
his feet, and I am fortunate to be one of them. I assisted him
in numerous arbitration matters. The courses I teach at IIM
Ahmedabad (IIMA)—particularly International Business
Dispute Resolution—do have his indelible impression.

He has been the true inspiration for writing this book.

The book deals with contracts and arbitration from a

business perspective and is not meant for experts in con-
tracts and the law of arbitration. It is also not a textbook on
the subject of contracts and arbitration. It is meant for those
professionals who are responsible for managing projects.
Many a time, most of these professionals in a large number
of companies, both private and government, are engineers,
who are expected to work as managers by the top manage-
ment. This entails thinking and delivering like managers.
This is a tall order as most of the projects, or rather all,
involve contracts and dispute resolution clauses, which even
to the best of the managers look like Greek and Latin. I have
xii CONTRACTS AND ARBITRATION FOR MANAGERS

been involved in teaching a large number of students—most

of them engineers—at IIMA and managers—again, many of
them engineers—in numerous executive programmes for the
government and private companies. I graduated as a mechani-
cal engineer and worked with Bharat Petroleum before
I decided to study law. Hence, I can very well understand
their feelings. This book, therefore, targets the managers—
chiefly engineers but performing the role of a manager—who
grapple with issues related to contracts and arbitration very
often. Therefore, this book is not supposed to be daunting,
extremely thick and full of references.
The book starts with an introductory chapter, which talks
about a hypothetical story, ‘Bimal and Raman Construction
Company’, and describes the relationship between business
and contracts, and how companies may use the contractual
clauses to avoid disputes. The story tells us about different
issues involved in typical contracts and dispute resolution.
It also touches upon dealing with the government. Most of
these shall be discussed in separate chapters with the help
of landmark and interesting cases largely from the Supreme
Court of India. These court judgements are in public domain
and can be used by anyone. In fact, the effort should be wider
dissemination of these judgements, as these are an integral
part of the ‘law of the land’. I have not always given the entire
judgement, but only the important parts have been culled. I
have made an effort to not use legal jargons so that they are
palatable to everyone. But, in some cases, I have deliberately
included ticklish legal terms and detailed discussions so as
to give business managers a taste of the real thing. In this
process, I have tried that the judgements retain their original
feel and flavour. Selection of the cases has been made in a
manner to have the latest cases, to highlight the concerned
topic and in relation to the name of a product or company
with which the reader would be familiar. To enhance read-
ability, I have selectively given citations and endnotes.
 Prefacexiii

The book covers the following topics in different chapters—

contracts, arbitration, institutional and ad hoc arbitration,
liquidated damages (LD), force majeure, arbitration clause,
mandate of an arbitrator, challenging an award, public policy
and interest. Each chapter is not a watertight compartment.
Issues flow from one chapter to another. Thus, the approach to
understand the subject is not modular. It has to be integrated
learning. While trying to understand a particular topic the
entire attention should be on that topic itself and thereafter the
manager must develop the ability to assimilate it and integrate
it with the overall understanding.
There are many other issues related to contracts and
arbitration which a manager may be concerned with. Most of
them are beyond the scope of this work, as it is not expected
to be daunting and unwieldy. I have selected the ones which
have been repeatedly highlighted in class discussions with
the students and executives over the last 10 years. The book,
hopefully, will connect well and touch upon—if not answer
all—a lot many issues, concerns and queries, which often
trouble a manager. I envisage this book to be a useful com-
panion to the managers.
I would like to sincerely thank all the students and execu-
tives with whom I had such wonderful and rich discussions
in class. Deliberating about the practical problems that the
executives face helped me sharpen the subject and explore
further. Thanks to SAGE and its entire team, particularly
Sachin Sharma, whose persistence made this possible. It
was he who suggested the title also.
Special thanks to my family—wife Manjari and sons Anant
and Akshat—for encouraging me to work on this subject in
my father’s memory. The work has seen the light of the day
because of their unstinted support, care and motivation.

Anurag K. Agarwal
Indian Institute of Management
Ahmedabad
1 Introduction

Business managers have to deal with contracts almost on

a daily basis, but, very often, despite the best efforts to
avoid, disputes occur. In such a scenario, it is imperative for
them to understand the implications of such disputes in the
context of contracts and the dispute resolution clauses. It
is a tightrope walk to get work done by contractors and at
the same time raise contractual issues with them. Many a
time, strict legality takes the back seat and practicality wins
hands down. After all, a business manager, and rightly so,
must be concerned more about the business, rather than the
technicality of legal issues. Still, it makes sense for business
managers to be conversant with the basics of contractual
aspects and also the dispute resolution clauses, so that they,
at least, get the confidence to tackle the situation. I am using
the term ‘business manager’ throughout the book in a liberal
sense with wider interpretation. It includes any person who
is responsible for making business decisions at all levels in
a business. Hence, the term ‘business manager’ may be used
interchangeably and synonymously with chief executives,
businesspersons, entrepreneurs, etc.
This book deals with various aspects of contracts and the
dispute resolution clauses, with arbitration in particular. It
does not focus much on theoretical aspects, though there
will surely be references to the legal theories and principles
applicable in different situations. It focuses on different case
studies; by cases, we mean court judgments, which have been
picked from different courts in India, with the majority of
them being from the Supreme Court of India and a few from
different High Courts in India and courts of other countries.
2 CONTRACTS AND ARBITRATION FOR MANAGERS

Business managers, despite their best intentions, cannot

have the luxury of ignorance of law. It applies not only to
the business manager, but everyone, as it is the most fun-
damental principle which makes legal systems work around
the world. The Latin maxim which governs it is ignorantia
facti excusat, ignorantia juris non-excusat which means
that ignorance of facts can be excused, but ignorance of law
can never be excused. Hence, ignorance of law can never be
taken as a plea in legal proceedings. Thus, it is important for
business managers to know the basic principles of law and
understand their application to the business.
With international trade becoming more common and
popular, business managers have to often deal with inter-
national contracts, which also create international business
disputes that may be governed either by international law
or national laws as determined by the parties. In most of the
cases, the parties agree to get the disputes resolved in the
courts of one of the countries, with enforcement of the final
decision, still remaining a difficult proposition. However,
business continues throughout the world despite the legal
issues and problems. In such a scenario, it is desirable for
business managers to be aware of the basic principles which
apply in such cases.
For resolution of these disputes—whether domestic or
international—all matters except the ones which are set-
tled by the parties amicably without going to a court of law
have to reach the same in one way or the other. In most of
the countries, there is a three-tier judicial mechanism, with
courts at the district level at the lowest hierarchy, moving on
to the High Courts at the appellate stage and the Supreme
Court at the apex level. India follows the same system.
For almost all the contractual matters and disputes in
India, the judicial process starts at the District Court level,
which itself may be following a two-level system with the
court of the Civil Judge at the initial level and moving on to
 Introduction3

the District Judge level, which also includes the Additional

District Judges.
In most of the districts in India, the role of the District
Judge—which pertains to civil jurisdiction—is clubbed with
that of the Sessions Judge—which pertains to criminal juris-
diction. Hence, the designation for such a position is ‘the
District and Sessions Judge’ in most of the districts in India.
The person holding this position is supposed to devote time
to both these roles, and very often, criminal matters take pre-
cedence, with long pending, complex civil matters detailed
in thick files being pushed to the back burner.
Once the matter is decided at the District Judge’s level,
the aggrieved party may take the matter to the High Court.
Moving to the appellate court is either a matter of right as
provided in the procedural law or may be discretionary and,
thus, filed in the High Court with a prayer to the Bench to
exercise discretion to admit the matter and decide appropri-
ately as per the facts and circumstances of the case.
The aggrieved party at the High Court level has another
option, and that is to move to the Supreme Court, again as a
matter of right in certain cases and praying to exercise dis-
cretion in the rest of the matters, whose number is much
larger as compared to the former cases.
At each and every level, litigation takes time and costs
money. There is usually a quantum jump in the costs involved
as one moves from one level to the other due to exponen-
tially rising lawyers’ fees and other costs associated with the
proceedings as one has to physically be present in the cities
in which the High Courts and the Supreme Court are situated.
It is very rare that all the courts are situated in the same city,
and that too can happen only for a certain number of fac-
tors in which the parties reside on usually conducted busi-
nesses in the city in which the Supreme Court is situated,
which happens almost invariably in the capital of the coun-
try. Thus, it is a sheer luxury for the parties situated in the
4 CONTRACTS AND ARBITRATION FOR MANAGERS

capital of the country to follow all the proceedings at the

same geographical location; otherwise, disputing parties
have essentially to think about the costs—both monetary
and non-monetary—involved in pursuing litigation to the
highest level.
The United States of America (US), the United Kingdom
(UK) and most of the other countries in the world follow the
three-tier system, with almost similar issues as have been
discussed about India.
Let us start with a story which tells us about the impor-
tance of contracts and arbitration, and different related
issues. It is a fictitious story and all the names mentioned
are imaginary.

Bimal and Raman Construction Company

Raman proudly and humbly received the prize for the ‘Best
Businessperson of the Year Award’ from the minister. It was a
well-deserved award, and Raman had really worked very hard
in his life. He was requested to say a few words. He was filled
with emotions as the award took him back to his childhood
days in the village Chakmansab. It has been a long journey for
him from the village Chakmansab to this prestigious award.

Childhood and Education

His father was a farmer in Chakmansab and used to work
extremely hard in the fields. He loved the greenery all around
his village. But even as a child he used to think about the poor
conditions of his village folks. At a young age, he was fortunate
to go to the village school and get scholarship to study higher
secondary, and thereafter in the prestigious engineering
college in Wonkul city. Despite being poor, his father taught
him the value of qualities such as honesty and hard work.
 Introduction5

During school and college days, Raman became an avid

reader and had read numerous books on varied subjects. He
had picked up some golden words from different books and
tried to follow them in his life. His favourites were: first,
‘a stitch in time saves nine’ and, second, ‘slow and steady wins
the race’. These two were the most important guiding prin-
ciples in his life.

Philosophy of Life
In his life, Raman had perfected the art of doing small things
at the right moment. He would not unnecessarily wait for
things to take a nasty turn and then try to fix them. He had
also mastered the art of being patient with constant practise.
He was never attracted to anything which would give fast
returns as he was always suspicious of such plans. His firm
belief was in being slow and steady and doing the right thing
with great patience. For this, according to his competitors,
he had paid a heavy price. He could have been a far more
successful businessperson had he been a little bit ‘practical’
and gone with the tide. But Raman did not have any of that.
He had always trodden the straight and narrow path. He was
very much content with what he had and was extremely
grateful to the business community for recognising his work
and bestowing the honour on him.

Days at Wonkul Construction Company

He remembered the days in the Wonkul Construction
Company (WCC) which he had joined after graduating as
an engineer. WCC was very well known, but Raman found
the culture of the company unethical and unacceptable. He
tried to point out such issues to his bosses but rather being
appreciated, he was categorically told to work as per the set
6 CONTRACTS AND ARBITRATION FOR MANAGERS

practices and traditions of the company. Everyone in WCC

believed in chalta hai (it’s OK) for corruption, violation of
legal norms, non-adherence to contracts, inflating claims,
cooking account books and so on. It was considered to be
heroic to be able to get business by hook or by crook, and
anyone who used to pay too much attention to niceties and
ethics was branded ‘chicken hearted’ and ‘sissy’.

Bimal in His Life

Raman used to share his views with Bimal, another engi-
neer in WCC. Bimal’s friend Kamla was a lawyer in the
company’s legal department and the three often used to get
into heated discussion regarding company’s working over
cups of coffee. She would usually share her lunch with him
and was of the similar opinion. While Kamla agreed with
Raman and Bimal generally, there was one main difference:
She used to say that whatever the company was doing was
by being on the right side of the law. Though the practices
followed by the company might have been unethical, yet
they were all legal. Raman was usually at a loss with such
an explanation.
Trying to understand the relationship and balance between
law, ethics, engineering and his personal values often con-
fused him. But he was dead sure about the two fundamental
principles he had and was following both. Bimal appreciated
those principles and admired Raman for his simplicity and
frankness. They got married.

Their Own Company, Bimal and Raman

Construction Company (BRCC)
With the passage of time, both of them found the working
in WCC suffocating and attitude of bosses nauseating. They
decided to resign and start their own construction company.
 Introduction7

They named the company ‘Bimal and Raman Construction

Company’ (BRCC).
For BRCC, survival was difficult as there were hardly any
contracts coming its way. Somehow, with just petty con-
tracts, BRCC remained afloat. Kamla often met them and will-
ingly advised them on legal matters, but could not do much
for long as it was not possible for her to meet them regularly
and because there were confidentiality reasons also. Bimal
always used to tell Raman to have some understanding of
the legal provisions in contracts, dealings with the govern-
ment, dispute resolution clauses and issues related to banks
and other investors. Due to Kamla’s availability for advice,
Raman did not pay much attention, but then he realised that
after all it was his business and he should not depend too
much on Kamla.
Bimal had become too engrossed with family and had
consciously decided to take a back seat in the company’s
matters, though she was Raman’s silent pillar of strength.

Legal Help
Keeping the importance of ‘a stitch in time saves nine’ in
mind, he decided to engage a competent lawyer with his
company and also develop good understanding of the legal
provisions related to business. The former was not much
difficult and he zeroed in on Dev, a young lawyer with fan-
tastic understanding of business law, and engaged him with
BRCC. The latter part was not so easy and Raman told him-
self, ‘slow and steady wins the race’ and to be patient. He
started interacting with Dev frequently and also read basic
books about business and law. But things were proceed-
ing very slowly, and very often there were new terms and
concepts which he was not able to understand despite his
best efforts. When he told Dev about this problem, Dev sug-
gested him not to go too deep into the legal technicalities
8 CONTRACTS AND ARBITRATION FOR MANAGERS

and rather try to understand the basic principles and how

they were applied in day-to-day business. Dev had also sug-
gested him to ask a few questions to himself whenever he
encountered a legal document, such as why, how, when,
where, etc. This really helped as Raman started trying to
find answers either on his own or with the help of material
available in libraries and on the Internet, and by interaction
with his peers as well.

Dealing with the Government

The first issue that came before him was that of L1. In almost
all government notices inviting tender for projects, two bids
were invited from interested parties—technical and financial
bids. BRCC was always able to qualify on technical grounds,
but could rarely get any government contract on the basis of
financial bid as there was a condition of L1—with all things
being equal technically, contract was awarded to the party
asking for the lowest payment, L1. Raman had never been
able to understand how any of his competitors could bid for
extremely low amounts, which were practically impossible,
and forget about making profit. According to him, each of
such contracts would have surely ended with losses. After
studying the matter and discussing it with a number of peo-
ple, Raman was able to understand that most of his competi-
tors were writing a different amount as L1 in the financial bid
and were able to extract much more from the government
by using escalation clauses and making exorbitant claims in
arbitration proceedings. Raman was now able to understand
the modus operandi used by a number of companies seek-
ing government contracts. He was not comfortable doing the
same thing and abhorred the idea.
With the passage of time, BRCC was able to get contracts
after writing realistic figures as L1 as a number of government
 Introduction9

organisations had realised the importance of the quality of

work done by BRCC and were willing to award the contract
to BRCC. Such was the reputation gained by BRCC that most
of the government organisations did not insist on a bank
guarantee of a large amount of money. It was rare in the
business fraternity that anyone reported that BRCC’s bank
guarantee was encashed. BRCC was following the best of the
global standards and most of its contracts complied with the
Fédération Internationale Des Ingénieurs-Conseils (FIDIC)
conditions, named after the famous French organisation
‘International Federation of Consulting Engineers’ established
in 1913 and headquartered in Paris.

Reputation Building
BRCC paid a lot of attention to detailing and dealing with
realistic figures and timeframes. Being realistic, honest to
the core, proactive, doing things patiently and not cutting
corners helped the company to achieve tremendous heights.
BRCC would always adhere to the contracts and never mis-
use the clauses of contracts. There were hardly any arbitra-
tion proceedings going on with BRCC as the company was
quite satisfied with the amount paid according to the con-
tract, and in the rare cases when there were genuine dis-
putes, BRCC would always try to negotiate and settle the
matter. BRCC was very careful about the force majeure
clause in the contracts. Often there were clauses for LD to
be deducted in the contracts. BRCC honestly figured out
whether the force majeure clause would apply or not in a
plain and simple meaning, rather than going for legal hair-
splitting. Raman was able to anticipate any delay or change
in the schedule quite early in the project and would point it
out to the other party at the earliest opportunity. As Raman’s
reputation was of a no-nonsense person, due seriousness
10 CONTRACTS AND ARBITRATION FOR MANAGERS

was given to his views and usually the other parties were
willing to modify the contract.

Realistic Claims
In very few matters, when claims were either made by BRCC
or the other party, Raman ensured in the contract that the
arbitration clause had mentioned institutional arbitration,
with an institution of high repute. Though Raman had noth-
ing against ad hoc arbitration, and it would have been very
easy for him to get persons willing to act as an arbitrator on
the arbitral tribunal, yet he preferred the institutional mech-
anism primarily for a streamlined procedure and expertise.
So far, BRCC under Raman had a smooth sail. And that is
why there is such high regard for Raman’s leadership capa-
bilities. It is of no wonder that Raman has been awarded the
Business Person of the Year award.

The Most Troublesome Contract

There was one contract which gave maximum trouble to
Raman. It ended up in a dispute, and despite the arbitration
proceedings and award, the matter is still pending in the
courts. BRCC had entered into a contract with the govern-
ment for construction of a 10-km-long road. It was a small
project for BRCC, but Raman had agreed to do it at the
insistence of one of his business friends, who had political
ambitions. There was no problem in the beginning with the
project; however, after a month some persons had filed pub-
lic interest litigation (PIL) and the court had passed a stay
order. After that neither the government nor BRCC was able
to get the stay vacated and the matter had been pending for
several years, with the government accusing BRCC for non-
completion of the road. BRCC did not accept the allegations
 Introduction11

and tried its best to negotiate, but when the negotiations

failed, BRCC was left with no other option but to fight it
out in the legal forum. As there was an arbitration clause
in the contract between BRCC and the government, BRCC
invoked that clause and made a claim, which was awarded
by the arbitral tribunal.
This award was challenged by the government in the
District Court, where it lost the case; then the government
appealed it in the High Court, when again the award was
upheld and the government lost it; thereafter, as the last
resort the government challenged it in the Supreme Court.
The amount involved is not much; however, the interest accu-
mulated is even more than the claimed amount as too much
time has elapsed. While challenging the award, issues were
raised regarding the wrongful appointment of the arbitrators,
and therefore, improper mandate of the arbitral tribunal was
alleged. Also, the award was challenged on the grounds of
public policy in India which has not been defined, and the
courts have always been relying on judicial interpretations.
This matter was going on and on, and Raman was really
fed up with this. He somehow had wanted to put it behind
his back, but the case appeared to go on endlessly.
Bimal shook him and Raman realised where he was. He
said, ‘It seems to me like a dream, from Chakmansab to this
award. It couldn’t have been possible without Bimal. The
person who really deserves it is Bimal.’
2 Contracts

Do you enter into more than a dozen contracts every day?

You will say ‘no’.
OK, but do you buy milk, bread, fruit and vegetables daily?
Do you hire an auto-rickshaw or taxi? Have your ever gone
for a haircut; booked railway tickets; ordered pizza; given a
dress for dry cleaning; enjoyed paani-puri, bhel puri or pav
bhaji1 at a roadside stall; bought a car; bought an expensive
smartphone?
Each of these is a contract. When you work in office, it
is a contract between you and your employer. Every day
we enter into several contracts; some in our individual and
personal capacity and others in official capacity, for and on
behalf of the company; some are oral and others are written;
some are routine and others are notable; some are of low
monetary value while for others we pay through the nose;
some are through electronic means of communication and
some through face-to-face communication and on paper.

Salient Features
Contract—as per its definition in the Indian law, and that is
true as far as the basic principle is concerned, all over the
world—means ‘an agreement enforceable by law’. The agree-
ment can be between two or more parties; by parties we
mean legal entities, which include companies. An agreement
creates rights and obligations for the parties concerned and
is legally binding, which means that for non-performance or
unsatisfactory performance the aggrieved party can sue the
 Contracts13

other party in a court of law. Managers have to deal with

contracts almost on a daily basis and either perform to the
satisfaction of the other party—who maybe the employer or
any client, or anyone else for whom they might have agreed
to perform the contract—or get satisfactory performance
from vendors, sub-contractors, suppliers, employees, etc.
The logical conclusion to a contract is satisfactory perfor-
mance; however, many a time, due to a variety of reasons,
there may not be mutual agreement between the two par-
ties to a contract regarding the performance of the contract
and a dispute may arise. A large number of cases which have
been decided all over the world in different courts tell us that
the liability of a party that, allegedly, has not performed the
contract depends to a large extent on the terms of the con-
tract, context, any unusual circumstances, the understanding
of the terms between the parties and several other factors;
some of them may be beyond the scope of the contract law
and provide a legitimate excuse to the non-performing party
for being exonerated.
As the stakes in contracts rise, the effort on the part of the
parties—both aggrieved and the party in breach—is to take
the maximum help of the contractual provisions to extract
the maximum in case of the former and not to be held liable
even for a single penny in case of the latter. Legal hair-splitting
by top-notch lawyers has helped evolve the contract law to a
great extent; however, still, there are many grey areas which
provide a fertile ground for numerous legal battles.

Contracts in India
Contracts in India are governed by the Contracts Act, 1872.
The law has stood the test of time. It is one of the best-
drafted laws of the British time, and the best example can
be of cases which have transcended from pre-Independence
14 CONTRACTS AND ARBITRATION FOR MANAGERS

to post-Independence using this law. One case which comes

to my mind is that of Col MacPherson, which related to the
sale of a bungalow in Coorg. The dispute had started in pre-
independent India but the final judgement was taken in the
newly formed Supreme Court of India in 1951. We will dis-
cuss this case a bit later in this chapter.
Contract is defined in Section 2(h) as, ‘An agreement
enforceable by law is a contract,’ and one can easily under-
stand it as a mathematical formula or a formula in Physics,
with each term being defined clearly in the Act, leading
to a train of definitions and, thus, to clear understanding.
So, the term ‘agreement’ in the definition of contract is
defined in Section 2(e) as, ‘Every promise and every set
of promises, forming the consideration for each other, in
an agreement.’ Now, promise and consideration are also
defined. Promise is defined in Section 2(b) as, ‘A proposal,
when accepted, becomes a promise,’ and consideration is
defined in Section 2(d) as, ‘An act or abstinence or prom-
ise to act or abstain.’ A contract begins with a proposal—
also called an offer—made by the proposer (or offeror)
to the proposee (or offeree). The offer can be for doing
something, abstaining from doing something, or promising
to do or abstain. An offer may be for the past, present or
future. Thus, the scope of an offer is very wide and spans a
large time span. However, it has to be for only those things
which are within the legal periphery.
Detailed definitions are reproduced at the end of this
book in the appendix for ready reference.

Dynamic Nature of the Legal Periphery

A contract has to be within the legal periphery, which often
is dynamic in nature and may change with time and place.
In rare circumstances, the legal periphery can be static
 Contracts15

and may not change with place or time. That might happen
in highly orthodox and rigid societies but in most of the
evolved jurisdictions, the law changes with the needs of the
people. At the same place at two different periods of time,
the law may be different. There is another possibility that at
the same point of time at two different places the law may
be different. These present interesting scenarios with the
formation and enforcement of a contract depending heavily
on the nature of law. Not only at the time of formation of a
contract should it be well within the legal periphery, but it
should also be within the legal ambit while being enforced. It
might appear to be simple, however, there are circumstances
which may make a contract void at the time of enforcement,
or the contract may be declared void ab initio if it was
outside the ambit of law from the very beginning. The most
interesting scenario is when the contract was legal at the
time of formation; however, as the law changed the contract
did not remain within the legal periphery and had to be
declared void.
Law may change with the passage of time, either by an
action of the legislature or by a fresh new interpretation
given by the judiciary to the same black-letter law. Almost
all the sovereign nations retain the power of changing the
law, mostly in public interest, and some in the interest of
the monarch or the dictator, as the case may be. Not only
the law may be changed with prospective effect, sovereign
nations may even exercise the right of changing the law ret-
rospectively. Thus, there can be a very interesting scenario
in which a contract which was absolutely legal at the time
of formation, and even at the time of enforcement, may be
declared to be illegal if a change is made in the law with ret-
rospective effect.
Such an exercise of sovereign power creates uncertainty
and unpredictability in the legal environment; however,
16 CONTRACTS AND ARBITRATION FOR MANAGERS

there is hardly anything which can be done against sovereign

powers. These possibilities make contracts one of the most
interesting legal aspects to be understood and practised in
business. It is, however, expected, desired and demanded by
businesses all over the world that there should be certainty
and predictability in the legal environment, which will lead
to more foreign investment, therefore, resulting in a robust
business environment with the virtuous cycle in operation.
Good legal environment for business attracts more invest-
ment and business, resulting in a better legal environment
for business, which in turn attracts much more investment
and business to it, and it goes on like this.
Though dynamism is good for business and society in gen-
eral, sticking to the core values of the system does have merit
in the long run. It is very much desired and appreciated that
certain fundamentals of the system do not undergo drastic
change with the passage of time and only the peripheral and
tangential things change. Businesspersons find a somewhat
static core with dynamic outer boundary reassuring.

Free Consent and Consensus Ad Idem

A contract has to be voluntary. The parties enter into a con-
tract on their own volition: on their own sweet will. No one
forces them to enter into a contract. For a valid contract,
there must be free consent. Any element of fraud, coercion,
misrepresentation, undue influence or similar negative ele-
ments may make the contract either void or voidable. The
parties should be major and of sound mind. They must have
an intention to create a contractual relationship. They must
think alike, that is, there has to be meeting of minds, called
consensus ad idem. Both the parties should benefit from the
relationship, which means that there has to be ‘consideration’
for each party in the contract. Ordinarily, consideration is
 Contracts17

understood in monetary terms. Without consideration, a

contract is void. It is not necessary that a contract has to be
in writing. It can be oral. Even without uttering a single word,
parties may enter into a contract. However, it is advisable
to have contracts in writing when either the monetary value
is high or the contract is of great importance though of low
monetary value, and may need to be produced later as evi-
dence. For example, it is better to take a receipt after paying
the library fine of even one rupee.

Consideration: Peppercorn Theory

The law is not bothered about the adequacy or inadequacy of
consideration. This is known as the Peppercorn theory—A
corn of pepper can be an adequate consideration for some-
thing valuable. Thus, the courts are not going to look into the
matter whether a person has paid inadequate or more than
adequate consideration for something which has been done
to one, or which one has bought. For instance, on being hun-
gry one may go to either a five-star hotel or a roadside eating
joint to satisfy hunger. The law is not concerned whether
the person is satisfied or happy after paying a small sum
of money at the roadside eating joint, whereas the same
person may not be satisfied or happy after eating at the
five-star hotel and paying through the nose. So far, the res-
taurant at the five-star hotel served him as promised; here,
is no reason to complain for unreasonably high price of
the food. Similarly, if a person flies business class or first
class, it is that persons’ individual choice, made voluntarily,
and the law has no role in it. Again, there is no reason for
the person to complain that the fare was too high. In the
same way, if a huge bungalow worth several crores is sold
at a throwaway price, assuming the consent was free, the
law considers it to be a valid contract. However, for stamp
18 CONTRACTS AND ARBITRATION FOR MANAGERS

duty and registration purposes, the government fixes certain

circle rates so that unease scrupulous buyers and sellers are
not able to misuse this provision. Another interesting exam-
ple is of a painting made by an artist. Certain buyers may be
willing to pay a heavy price for that, whereas some others
may not take it even if given for free. Thus, consideration
can be any amount; however, there has to be consideration
for a valid contract and consent must be free.

Performance of a Contract
Once a contract has been entered into, both the parties
must endeavour to perform it as envisaged. In case there
are problems which make the performance extremely dif-
ficult or impossible, the law has made certain provisions in
the contract act to take care of such scenarios. If the situa-
tion is something beyond the control of the parties, the law
allows the parties not to perform the contract and consider
the contract to be discharged. But any such problem should
be a legal difficulty—called force majeure. The law does not
bother about commercial difficulty, for instance, increase in
the prices of certain goods or services which make perform-
ing the contract commercially unviable. This is supposed to
be the risk-taking by the parties while entering into a con-
tract and promising to perform it. That is, in fact, one of the
main purposes of entering into a contract: to move from a
zone of uncertainty to a zone of certainty.
The parties, who are entering into a contract, must have
the capability to do so. They should be of sound mind, of the
age of majority, and if a person is acting for and on behalf
of a company, then the authority must flow from the board
of directors, according to the articles of association of the
company and as per the legal provisions of the applicable
companies’ laws and other related laws.
 Contracts19

Public–Private Partnerships and Contracts

Of late, there has been a trend to enter into concession agree-
ments, which are part and parcel of the public–private part-
nership (PPP) contracts. There are a number of issues related
to PPP contracts, which invariably are between the private
party and one of the state entities. Obviously, the bargaining
power of the state entity is higher and private companies are
expected to toe the line; however, unrealistic provisions in
the contracts often lead to disputes. A manager working on
either side of the contract needs to be extremely cautious
about the provisions of the contract, as applicable to the
ongoing projects. Concession agreements, typically, are for
long duration, and private companies strategise to break
even and earn profits, keeping in mind the long duration
of the contracts. Problems arise when there are disputes
between the private company and the state entity with an
injunction order passed by a court. Public interest becomes
the touchstone for the success of any PPP project. Any pri-
vate company proactively can suggest a project to the gov-
ernment; however, as the contract is awarded according to
a transparent and open mechanism providing level playing
field to other players also, such projects are offered to every-
one for consideration, but the company, which had sug-
gested the project initially, is given opportunities to match
the bid amount. This method is known as Swiss Challenge,
and it has experienced partial success in India.

Bank Guarantee
Often, the state entities would like certain type of guarantee
to be provided by the contractors, and bank guarantee is usu-
ally the first choice. An unconditional bank guarantee from a
nationalised bank, which guarantees payment without demur
20 CONTRACTS AND ARBITRATION FOR MANAGERS

on invocation, is preferred. The question arises as to why a

bank would give the guarantee. For the service, the bank earns
certain amount of money as commission or fee and promises
to do as per the bank guarantee clauses in case the guaran-
tees invoked. But, what is the guarantee that the bank will do
as it has promised? Now that depends on the reputation of
the bank, and because of this reason, most of the government
entities rely on a nationalised bank, and in contracts between
private parties, the party engaging the contractor may specify
the names of the banks acceptable to it. It all depends on trust.
The higher the trust and the bank, the more sought after it is.
The previous conduct of a bank is also important to be consid-
ered while negotiating for bank guarantee.

Government Contracts
Government contracts are ultimately for the purpose of pub-
lic interest and are all open to scrutiny by the legislature and
numerous constitutional bodies and government agencies.
The government is answerable to the elected representa-
tives, and hence, contracts coming in have to strictly comply
with the provisions of fundamental rights in the Constitu-
tion, the right to information act, and PIL. There are tens
of thousands of government contracts entered into between
the state on one side and a private company on the other
side. These may be for something as insignificant and for
low monetary value as painting the footpath signs, or as sig-
nificant and of extremely high monetary value as purchase of
defence aircraft. Managers have to manage these contracts
at all levels and under all conditions.
While entering into most of the government contracts, the
private party bidding for them is supposed to offer its services
at the lowest cost and this is either done through a tendering
process or may be by an auction. It is called L1. The EPC
 Contracts21

contracts—engineering, procurement and construction—or

some of the major contracts entered into by major private
companies with the state entities. Most of these contracts are
detailed, complex and, unfortunately, result in a dispute.

Fédération Internationale Des

Ingénieurs-Conseils (FIDIC)
To standardise a number of things and to align with the global
practice, a number of contracts of highly reputed companies
incorporate the FIDIC conditions, which are provided as
per the institution called FIDIC in Paris. It stands for Inter-
national Federation of Consulting Engineers. Globally, the
FIDIC conditions are supposed to be the benchmark for inter-
national contracts, and often, these have been incorporated
into domestic contracts also. One of the greatest advantages
of these conditions is that the parties save a lot of time in
negotiation and also avoid a number of disputes later for the
simple reason that these conditions are so very well known
and established in the business that these are supposed to be
taken as standard conditions, and several companies would
not like even to negotiate any of these conditions. Realisti-
cally speaking, FIDIC conditions only provide a template or
a framework and the parties are free to work around them
because the first and foremost condition of a contract is that
the parties act voluntarily and must give free consent.

Boiler Plates
For managers, it is important to understand the structure of
an agreement. There are boiler plates—standard conditions
and clauses. These are also known as contracts of adhesion
or standard form contracts. Some of the important clauses
are jurisdiction, waiver, amendment or modification, position
22 CONTRACTS AND ARBITRATION FOR MANAGERS

of counterparts, headings or constitution of the contract, sev-

erability or invalidity of certain clauses, indemnity, guarantee
or limitation of liability, intellectual property rights, issues
of improvement, ownership, status, whether the work is for
higher or not, whether the agreement is between principal to
principal and several other issues. We would not like to go into
too much of details as most of these things are to be under-
stood from a legal perspective, and managers need not go into
the legal jargon; however, they must understand the basic prin-
ciples involved and the purpose of including any clause in the
contract. It is important to understand that in case a manager
needs to have clarity regarding something, the first place to
look for that is the contract itself. Almost everything—barring
what cannot be anticipated or is not considered to be neces-
sary by the parties—strikes to be incorporated in the contract
clauses by mature and evolved parties. If something is miss-
ing, the best approach is to talk to the other party and try to
come to a mutual understanding. Such an approach minimises
the possibility of having disputes later on.
Let us discuss a few cases to get the real feel of issues
in contracts. Our emphasis will be on the overall manage-
rial understanding, rather than legal technicalities. However,
while doing so, we will go through the court judgements and
at times go just a bit deeper into the legal provisions to appre-
ciate the issues. As we proceed we may like to develop our
understanding to some of the commonly used legal terms
and relevant matters.

CASE 1: Col MacPherson versus Appanna

(Supreme Court of India, 1951)2
It so happened that one of the British Army officers, Col
MacPherson, decided to quit India just after the freedom
fighters in India had started the Quit India Movement in 1942.
 Contracts23

The Second World War was also on and Col MacPherson might
have felt at that time that it was not a very opportune time
to live in India, so he left India—the land of heat and dust—
to settle in the cooler climes of England. However, he was
prudent enough not to go for any distress sale and must have
decided to retain certain immovable property—a bungalow—
in Coorg, for which he had engaged two caretakers—
Youngman and White—for getting some income out of it by
commercially using it as a lodge called ‘Movern Lodge’.
A local person, Appanna, liked the lodge a lot and had a
desire to possess that lodge. Out of curiosity, he went and
asked the caretakers whether the bungalow was for sale,
and if yes, how much was needed to be paid for it. The
caretakers checked with their master in England through
cable—as in those days there was hardly any other facil-
ity to communicate in a speedy manner—and got the reply
from MacPherson that he would have accepted nothing less
than `10,000. Now in those days, `10,000 used to be a big
sum of money, but Appanna immediately agreed on being
informed by the caretakers for the amount and told them
that he would arrange the money in a few days, as he had
‘accepted the offer’ of the sale of the bungalow for `10,000
made by Col MacPherson.
In the meanwhile, another gentleman called Subbayya
made the offer of `11,000 for the same bungalow, and the
bungalow was sold to him and possession also handed over.
When Appanna got to know of it, he made the allegation that
MacPherson through the caretakers had entered into a con-
tract with him for the sale of the bungalow and by selling the
same to Subbayya and handing over the possession as well,
MacPherson through his agents had breached the contract
made with Appanna.
Appanna filed a case in the court of Judicial Commis-
sioner of Coorg for specific performance—that is, the
bungalow should be handed over to him for the amount
24 CONTRACTS AND ARBITRATION FOR MANAGERS

MacPherson had promised. The court did not allow specific

performance, however, ordered that there was a concluded
contract between MacPherson and Appanna and, therefore,
MacPherson must compensate Appanna for the breach of
contract by paying `3,000. MacPherson was taken aback;
he challenged it in the Supreme Court of India and argued
that there was no concluded contract between him and
Appanna as he never made any offer to Appanna. Accord-
ing to MacPherson, whatever he had conveyed to Appanna
by saying, ‘won’t accept less than `10,000’ was not at all an
offer, but was a mere piece of information furnished on an
enquiry made by Appanna.
The Supreme Court accepted the contention of MacPherson
by highlighting the difference between ‘an offer’ and ‘an
invitation to offer’. The court held that MacPherson had
never made any offer, rather, he had only provided a piece of
information, and when Appanna had said that he was willing
to buy the bungalow for `10,000, it was for MacPherson to
make a decision whether to accept the offer or to reject it.
Thus, the offer was never made by MacPherson to Appanna,
and hence, there was no question of the offer being accepted
by Appanna. The Supreme Court set aside the decree passed
by the Judicial Commissioner of Coorg.

Comments and Questions

This is one of the most interesting cases which was decided
by the newly formed Supreme Court of India in 1951. The
case became even more interesting because of the fact that
it had started in pre-independence India in 1944 and was
decided finally during post-independence that too after India
became a republic in 1950, with the Supreme Court of India
also being established the same year.
The case distinguishes between an offer and an invitation
to offer. It is often said that an acceptance to an offer is like a