Time as Essence in Construction Contracts: Need for a Comprehensive Relook

The issue of time as essence in construction contracts is controversial and is frequently litigated. The law on the subject is largely unsatisfactory. In a paper titled "The Law on Time as Essence in Construction Contracts: A Critique" published in Volume 8 Issue 1 of the RGNUL Financial and mercantile Law Review (here), the law on the subject is critically evaluated. The paper argues that the precedent on the issue, Hind Construction Contractors v. State of Maharashtra, AIR 1979 SC 720 ("Hind Construction"), was wrongly decided and requires reconsideration. It also argues that:

• Hind Construction is no more relevant to the current times and provides incentives to inefficient contractors leading to delay in project completion; 
• Contracting parties do not appear to have circumvented the adverse effect produced by Hind Construction through the use of appropriate language in their contracts despite various decisions following the said decision; and 
• One of such reasons for the phenomena appears to be a lack of direction by courts as to what contracting language could constitute future courts to construe a contractual condition providing that time is of the essence as such.

The paper concludes by arguing that concludes by highlighting possible contractual clauses and contract management strategies that could further party intent that time is of the essence in construction contracts notwithstanding Hind Construction and later decisions following it.

Abstract of the Paper is provided below:

"The concept of time as essence in construction contracts is a controversial topic. Even though parties routinely provide in their agreements that time is of the essence, these clauses inevitably figure in construction disputes. Arbitral tribunals and courts have mostly decided such disputes holding those clauses to be of no legal effect, mainly by relying on the decision of a three-judge bench of the Hon’ble Supreme Court in Hind Construction Contractors v. State of Maharashtra. This paper argues that Hind Construction was wrongly decided, that it is not good law and that it requires reconsideration given the changing times. The paper further notes that parties do not appear to have circumvented the adverse effect of Hind Construction. Usually, in such situations, there is a change in contracting behaviour by the use of appropriate contracting language. Perhaps, this is due to the lack of direction by courts as to what appropriate language could be used in contracts to make time as the essence of the contract. This paper concludes by suggesting possible methods by which courts and arbitral tribunals could validly enforce time-as-essence clauses."

Critique of the paper is welcome as comments to this post. Readers can also write to lawbadri@gmail.com

* Image from here.

Default Rules (Finally!) Enters into Indian Jurisprudence: SC Decides on Unreasoned Arbitral Awards

In this blog, we have been writing about the concept of default rules for the past decade. In many posts, we have lamented the absence of this useful concept in analysing various provision in Indian Contract Law. Finally, a recent three judge Bench of the Supreme Court in Dyna Technologies v. Cromption Greaves (SC: 2019) has expressly recognised the concept of default rules. The Supreme Court stated:

"29. Similar to the position under the Model Law, India also adopts a default rule to provide for reasons unless the parties agree otherwise. As with most countries like England, America and Model Law, Indian law recognizes enforcement of the reasonless award if it has been so agreed between the parties.
30. There is no gainsaying that arbitration proceedings are not per se comparable to judicial proceedings before the Court. A party under Indian Arbitration Law can opt for an arbitration before any person, even those who do not have prior legal experience as well. In this regard, we need to understand that the intention of the legislature to provide for a default rule, should be given rational meaning in light of commercial wisdom inherent in the choice of arbitration." 

With the introduction of the concept, hopefully there will be more clarity on the classification of various contract law rules as default and mandatory. 

The case dealt with the issue relating to the interpretation of Section 31(3) of the 1996 Act, which provided: "(3) The arbitral award shall state the reasons upon which it is based, unless- (a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under section 30.” (Section 31(3) has remained unamended since enactment of the 1996 Act.)

The Supreme Court held that the requirement of reasons in Section 31(3) meant that the reasoning should be intelligible and adequate. The court also held that in addition to intelligibility and adequacy, a reasoned award should be proper. However, the court took pains to clarify that propriety or pervasity in the reasoning of the award should be judged "strictly on the grounds provided in Section 34".

On intelligibility, the court held that if the award suffers from unintelligibility, it is "equivalent of providing no reasons at all". 

On adequacy, the court stated that the validity of the award should be tested on the touchstone of "degree of particularity of reasoning having regard to the nature of issues" that the tribunal had to decide. The court was not in favour of any precise formulation of the concept of "degree of particularity" but clarified that even if "there were gaps in the reasoning for the conclusions reached by the Tribunal, the Court needs to have regard to the documents submitted by the parties and the contentions" so as to ensure that "awards with inadequate reasons are not set aside in a casual and cavalier manner".

Distinguishing between the tests for setting aside the award suffering from inadequacy of reasoning and unintelligibility, the court held that unlike inadequacy in reasoning, even "ordinarily unintelligible awards" could be set aside, the only restriction being where parties agree that no reasoning is required. 

These aspects have been dealt with in Paras 35 and 36 of the court's decision.

The court also provided guidance on how an award suffering from the aforesaid infirmities could be dealt with. The court stated that Section 34(4) can be used in cases where there is "complete pervasity in reasoning" (by which the award could be challenged under Section 34) so as to cure the defects (Para 38). Even so, the court did not want to apply the said provision on facts considering that it had taken 25 years for the adjudication of the dispute. On facts, the Supreme Court set aside the award for want of reasons. 

It is also to be noted that Section 34(4) can be used when there is a request from a party [See, Kinnari Mullick and Ors. vs. Ghanshyam Das Damani (20.04.2017 - SC) : MANU/SC/0514/2017]. The SC did not take the said decision into consideration. It should not be taken that the decision of the SC in the case under discussion in any away deviates from the requirements under Section 34(4) as clarified in Kinnari Mullick, where another three Judge Bench of the SC held:

"In any case, the limited discretion available to the Court Under Section 34(4) can be exercised only upon a written application made in that behalf by a party to the arbitration proceedings. It is crystal clear that the Court cannot exercise this limited power of deferring the proceedings before it suo moto. Moreover, before formally setting aside the award, if the party to the arbitration proceedings fails to request the Court to defer the proceedings pending before it, then it is not open to the party to move an application Under Section 34(4) of the Act. For, consequent to disposal of the main proceedings Under Section 34 of the Act by the Court, it would become functus officio. In other words, the limited remedy available Under Section 34(4) is required to be invoked by the party to the arbitral proceedings before the award is set aside by the Court."

Can Parties Give Up Limitation by Consent?

Assume a hypothetical scenario: Claimant invokes arbitration and makes a claim. The Respondent contends that the claim is barred by limitation and makes a counter-claim. The Claimant replies to the counter-claim by putting forth the defence that counter-claim is also time-barred. When the arbitrator is to frame issues, both parties give up their respective defences of limitation. The tribunal allows the claim but dismisses the counter-claim on merits. 

The Respondent challenges the award under Section 34(2)(b)(ii) arguing that the award is against the fundamental policy of Indian law since the tribunal has awarded a time barred debt to the Claimant. The Respondent contends that limitation cannot be given up by consent of the parties and limitation law cannot be contract around. In other words, the Respondent's contention is that the law of limitation consists of mandatory rules and not default rules, which could be contracted around. 

Whether parties can contract around the law of limitation? Whether the Respondent was correct in so arguing in the Section 34 petition is the subject-matter of this post.

Unlike most other cases on limitation, this is a rare case where both the parties gave up the issue of limitation in the arbitral proceedings. In India, the question as to whether parties can enter into an agreement or a consensus regarding giving up defences regarding limitation before or after the cause of action has arisen has never been dealt with in detail considering the international practices. There are one or two old decisions (pre-1950) which question the validity of agreements to give up the plea of limitation. Some commentaries also state that agreements which extend limitation periods fall foul of Section 23 of the Indian Contract Act, 1872 (regarding unlawful objects and consideration). It is the endeavour of this post to argue that such views do not take into account provisions such as Section 25(3) of the Indian Contract Act, 1872 which expressly permit such agreements and also are in discordance with the current realities of international commercial law and best international practices.  

At the threshold, it is important to explore whether there is scope for contracting around or agreeing to extend, limit, or otherwise alter the Law of Limitation through contract. 

The Basis of the Law of Limitation and Contracting it Around

The law of limitation is based on public policy as encapsulated in the legal maxim- interest reipublicae ut sit finis litium (it is for the general welfare that a period be put to litigation). [See, for instance, Popat and Kotecha Property vs. State Bank of India Staff Association (29.08.2005- SC): MANU/SC/0516/2005, Para 8]. 

However, merely because the law is based on public policy does not mean that there is no scope for contracting about or, even, around it. The most common example of the law allowing such contracting about or around the law of limitation is the enforceability of agreements to pay the whole or a part of debt that was enforceable but for the law of limitation [See, Section 25(3)]. Other examples of such agreements include standstill agreements and agreements extending the period of limitation. International practice suggests that such agreements are routinely enforceable in the commercial world. Let us first look at the international practice on this point. 

Standstill Agreements and Tolling Agreements- International Practice

Standstill Agreements in the context of the law of limitation operate to suspend time, that is, they preserve or freeze both sides' positions so that, at the end of the agreement, they are both in the same position in relation to limitation as they were when they entered into the agreement. Such agreements have been regarded as enforceable under English Law. 

In Oxford Architects Partnership v Cheltenham Ladies College, [2006] EWHC 3156 (TCC), the England and Wales High Court (TCC) held:

“The Limitation Act 1980 provides a statutory defence which a party may rely on. A party is not obliged to rely on a statutory limitation defence but is generally entitled to do so. It is possible for a party to agree that it will not rely on a statutory limitation defence or for the parties to agree that a statutory limitation defence will apply from an agreed date, for instance in a standstill agreement. In certain circumstances a party may be precluded from relying on a statutory defence because of an estoppel. However, absent such an agreement or an estoppel a party is entitled to rely on a statutory limitation defence. In common with all other such rights any provision which seeks to exclude a party's right to rely on a statutory limitation defence must do so in clear terms.”

{See also, Russell & Anor v Stone (t/a PSP Consultants) & Ors [2017] EWHC 1555 (TCC)}

The said case suggests that English law is not averse to an agreement, which provides even for extension of limitation period since the argument regarding whether the agreement had actually extended the time was considered and rejected not on the basis of whether law allows it but on the basis of construction of contract (see, Paras 46 to 56 of Russell v Stone). 

These agreements are called as Tolling Agreements in USA and are also enforceable. For instance, the New York General Obligations Law Section 17-103 - Agreements waiving the statute of limitation provides:

“1. A promise to waive, to extend, or not to plead the statute of limitation applicable to an action arising out of a contract express or implied in fact or in law, if made after the accrual of the cause of action and made, either with or without consideration, in a writing signed by the promisor or his agent is effective, according to its terms, to prevent interposition of the defense of the statute of limitation in an action or proceeding commenced within the time that would be applicable if the cause of action had arisen at the date of the promise, or within such shorter time as may be provided in the promise.

2. A promise to waive, to extend, or not to plead the statute of limitation may be enforced as provided in this section by the person to whom the promise is made or for whose benefit it is expressed to be made or by any person who, after the making of the promise, succeeds or is subrogated to the interest of either of them.

3. A promise to waive, to extend, or not to plead the statute of limitation has no effect to extend the time limited by statute for commencement of an action or proceeding for any greater time or in any other manner than that provided in this section, or unless made as provided in this section.” 

Such agreements have been recognized as valid by various courts in USA such as in Department of Labor v. Preston, et al (US Court of Appeals 11th Circuit, No. 17-10833 dt. 12.10.2017)

In the Australian context, the Limitation Act, 2005 as applicable to Western Australia allows agreements to extend or restrict time periods. Section 45 reads: 

“(1) Nothing in this Act prevents a person from agreeing to extend or shorten a limitation period provided for under this Act. 

(2) Despite subsection (1), a provision in, or condition of, an agreement is of no effect if it purports to — 

(a) exclude the operation of section 33, 36 or 38; or (b) extinguish (rather than bar) a right or title in relation to an action in a manner that would be inconsistent with a provision of Part 5.”

Therefore, international practice suggests that clauses that contract around limitation period are not invalid, except in certain limited extents. 

Agreements regarding Limitation Periods in India 

Section 3 of the Limitation Act, 1963 does not deal expressly with consequences of agreements which contract around or alter the law of the limitation or the limitation periods prescribed in the said law. Section 3(1) reads: “Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.”

Section 28 expressly bars agreements that limits the time within which a party may enforce its rights. The relevant portion of Section 28 provides: “Every agreement- (b)… which limits the time within which he may thus enforce his rights… is void to that extent.” 

But for this provision, there is no statutory provision that bars other types of contractual clauses regarding limitation, such as clauses extending the period of limitation or even reviving them. Section 28 was amended in 1997 to bring about the above quoted provision. It would be correct to argue that by consciously using the phrase "limits the time", the legislature barred only agreements limiting and not expanding the time period for limitation. Had the legislature intended to bar agreements expending the time period, it would have consciously used the phrase "expands or limits" or its variant. 

Section 25(3) of the Indian Contract Act, 1872 is an important example of a provision by which parties can agree that one of them would pay a time-barred debt. In other words, it allows parties to contract around the law of limitation. Even Sections 18 and 19 refer to unilateral acts and not agreements or consensuses. 

Mutual Giving up of the Plea of Limitation

It is true that the settled law is that even if a party does not raise a plea of limitation, the court, by virtue of Section 3 has to look into the question of limitation. However, Section 3 of the Limitation Act, 1963 neither bars nor allows an agreement or a consensus between the parties to give up a defence of limitation altogether. In other words, Section 3 as well as the Limitation Act, 1963 is silent on whether parties can expressly give up the defence of limitation or not. 

In such a case, it is not that the court or the arbitral tribunal does not look into the question at all. It is a situation where the court or the arbitral tribunal does look into the question but the parties state that they were willing to give up the defence of limitation thereby leaving the tribunal to deal with the issues relating to merits. In other words, the court or the tribunal deals complies with its duty under Section 3 but because of the parties’ mutual act of giving up, the court or the tribunal goes to the other questions. 

Such an agreement or a consensus is no different from any other agreement or a consensus to give up any other defence in a suit or an arbitral proceeding. [See, for instance, Gopalakrishna Pillai v. K.M. Mani (1984) 2 SCC 83]. 

While there are umpteen case laws on whether a party has waived the defence of limitation or not, there seem to be no case law on whether parties mutually give up the plea of limitation. 

It is well-settled law that when the law of limitation is set up as a defence it cannot be extended to cases that are not strictly within its enactment. As early as in 1898, a Full Bench of the Calcutta High Court held in Poorno Chunder Ghose and Ors. v. Sassoon and Ors. (04.02.1898 - CALHC) : MANU/WB/0060/1898: 

“Reading the language of Section 13---a section be it remembered in a Limitation Act, the provisions of which must be construed strictly, and which, when set up as a defence, must nit be extended to cases which are not strictly within the enactment, whilst exceptions or an exemption from its operation are to be construed liberally...” 

Therefore, when Section 3 does not have the effect of covering cases where the court or the tribunal looks into the issue of limitation but the parties mutually give up the same, there is no question of going back on such mutual agreement or consensus. Such agreements are enforceable unless expressly prohibited by law more so in the case of arbitrations where the arbitral tribunals are creates of contract have to act within the confines of the agreement between the parties.

Conclusion

To conclude, there is no law which expressly bars parties from agreeing for increase in the time period given in the law of limitation. Limitation law is not something sacred or sacrosanct that parties should not be allowed to contract around by mutually giving it up or by agreeing for freezing or extension of limitation periods. International practice is in that direction. However, in the light of Section 28, agreements which limit the time period for limitation purposes are invalid. 

[Full disclosure: The subject-matter of this post is a question to be decided by the Madras High Court in a pending case. The author of this post was an employee till recently with one of the parties to the case.] 

Force Majeure under Indian Contract Law: Energy Watchdog v CERC (SCI)

Recently, newspapers reported that certain power producers proposed to sell large amount of their stake in the Ultra Mega Power Projects.  The proposal to sell their stakes is a direct outcome of the recent decision of the Supreme Court of India in Energy Watchdog & Ors. v. Central Electricity Regulatory Commission & Ors. The dispute between power producers such as the Tata Power Co. Ltd. (“Tata”) and Adani Power Ltd. (“Adani”) on the one hand and the electricity regulators on the other was adjudicated upon finally by the Supreme Court by ruling in favour of the latter.

Followers of commercial law in India would be well aware of this issue on compensatory tariff allowed by the Central Electricity Regulatory Commission and the appellate proceedings thereon in the case of these power producers. The case has enormous implications on contract law, in general, and the law on force majeure, in particular. The seminal decision also impacts energy and regulatory laws. This post analyses the decision and its possible impact on contract law and the electricity sector in India.

Brief Facts

Mundra Ultra Mega Power Project (“MUMPP”) was conceived to be a huge power project which was to supply power to at least three states- Gujarat, Haryana and Rajasthan through the state power procurers. The tariff for the sale of power was to be determined through a competitive bidding process as per the electricity regulatory laws, which was undertaken. In the competitive bidding process, the bidders had the flexibility to choose escalable or non-escalable tariff (that is, tariff based on an increase in tariff formula). Both Adani and Tata quoted a non-escalable tariff. This was because the only major component that required an escalable tariff was an increase in fuel (coal) price. Since Adani and Tata had long term fuel supply agreements from coal mines in Indonesia at fixed/ predictable prices, there was no need to factor in price escalation.

Accordingly the lowest tariff was arrived at and power producers began to sell power at the said tariff after executing Power Purchase Agreements (PPAs) with the state power procurers. In two-three years after the determination of tariff, there was a massive jolt to the power producers in the form of new regulations passed by the Indonesian Government. The effect of these regulations was that the coal price under the long term fuel supply agreements  was to be benchmarked to the international prices instead of the then prevailing pricing mechanisms. This meant that the price under those agreements had drastically increased, thereby making the tariff at which these price producers sold price to the power procurers totally unviable. It may be recollected that a non-escalable tariff was quoted because of the long term fuel supply agreements.

Proceedings before the CERC and the APTEL

Consequently, Adani filed an application in 2012 with the Central Electricity Regulatory Commission (CERC) under the Electricity Act either to discharge them from performance of the PPA due to frustration of contract or to evolve a mechanism to restore them to the same economic position prior to occurrence of force majeure and/ change in law. The CERC did not accept the prayer of Adani but held in April 2013 that the CERC had the power to redress grievances of power producers considering larger public interest and constituted a committee to look into the difficulties of power producers so as a to find an acceptable solution. A Committee was constituted in August 2013 and the Committee recommended grant of compensatory tariff to Adani in its report. Consequent to the report, the CERC proceeded to grant compensatory tariff in February 2014.

Against this decision, appeals and cross-appeals were filed before the Appellate Tribunal for Electricity (APTEL). A summary of APTEL’s decision on the dispute is worth noting here:

• Performance of the PPAs was hit by force majeure under the provisions of the Indian Contract Act, 1872 (ICA).

• Changes in Indonesian law did not come within the purview of “Change of Law” clause in the PPA.

• The purported power exercised by the Commission in constituting a committee and awarding compensatory tariff was beyond the statutory mandate of the Commission and the terms and conditions of the sale and purchase of power was governed by the PPAs.

• Where there is an express or implied term of contract on force majeure, the same is covered under Section 31 of the ICA dealing with contingent contracts. Where there is no such term, force majeure is governed by Section 56.

• In Indian law, under Section 56, as held in Satyabrata Ghose v. Mugneeram Bangur 1954 SCR 310 impossibility is not simply physical or literal impossibility but means impracticability and futility in performance from the perspective of object and purpose of the parties.

• A more onerous performance method of performance or a mere rise in price would not amount to frustration.

• Application of the frustration doctrine required a multi-factorial approach and some of the factors that are to be considered are the contract itself, the context, the parties’ knowledge, expectations, assumptions and contemplations, especially as regards risk at the time of contracting which the parties could reasonably foresee.

• Application of the doctrine is not straightforward since it involves not only the contract but also an inquiry into the “contemplation of the parties”.

• The “Change of Law” contemplated in the PPA was only of Indian law and which were made by Indian Governmental Instrumentalities or Competent Courts in India.

• Certain clauses referred to the expression “Indian law” but such an expression nowhere found its place in the clause pertaining to “Change of Law”. Consequently, it would be dangerous to interpret the Change of Law clause merely on the basis of such usage in other parts of the PPA.

• For these reasons, the contention that since the PPA envisaged import of fuel, Law should also be taken to mean non-Indian law should also be negated.

The APTEL remanded the matter back to the Commission to determine the impact of force majeure so as to grant compensatory tariff to the power producers. The Commission arrived at a compensatory tariff in December 2016. 

Judgement of the Supreme Court

Appeals were filed to the Supreme Court. The Supreme Court held against the power producers on the force majeure as well as the change of law arguments. 

Summary of the judgement of the Supreme Court on contentions relating to force majeure is given below:

• The doctrine of frustration is inapplicable to the present case as the fundamental basis of the PPA remains unaltered, the PPA nowhere states that coal is to be procured only from Indonesia at a particular price, and the fuel supply agreement is only a part of the PPA to establish that fuel supply is available and is in order. When the power producers quoted the tariff, they very well knew the existence of the risk of increased prices of Indonesian coal and knowingly took it by quoting a non-escalable tariff. However, mere fact that they quoted non-escalable tariff does not mean that they would be disentitled from raising a plea of frustration if they were otherwise entitled to under law.
• Force majeure clauses are to be narrowly construed. On a construction of the force majeure clause in the PPA, “Hindrance” could mean an event wholly or partly preventing performance.
  But mere rise in prices is not hindrance, whole or part. Clause 12.4 specifically excluded rise in fuel cost or agreement becoming onerous to perform from the purview of force majeure. 
• Since Clause 12.4 specifically excluded rise in fuel cost from force majeure, since the fundamental basis of the contract was never dislodged and since alternative modes of performance were available even though at a higher price, there was no force majeure. Further, since there was a specific clause addressing force majeure, Section 56 did not have any application.

Another argument taken up by the power producers was that the change in Indonesian regulations fell within the scope of the “change of law” clause in the PPA and that they were entitled to relief under the said clause. Among other things, the PPA defined “Law” to mean “all laws including Electricity Laws in force in India… and any statute…. Or any interpretation of any of them by an Indian Governmental Instrumentality... and shall include all applicable rules… by an Indian Governmental Instrumentality…” Article 13.2 of the PPA provided that in case a party was affected by Change of Law, such party was entitled to be restored through Monthly Tariff Payments to the same economic position as if such change had not occurred. The Court dismissed the argument of the power producers and the following is a summary of the judgement on this aspect:

On facts, the court also noted that there was a Change of Law insofar as a change in India law was concerned. During the currency of the PPAs, the Ministry of Power issued a Notification in 2013, which was reflected in the Revised Tariff Policy of 2016. The Court held that if these notifications resulted in affecting Indian coal procurement, the Change of Law clause would be applicable. But change in Indonesian law affecting coal supply or prices would not amount of “Change of Law” for PPA purposes.

The Court ultimately set aside the decisions of the APTEL and the Commission and remanded the matter back to the Commission on the minor issue as to determination of effect on Change of Indian law on the power producers.

The decision of the Supreme Court clarifying the law on the issue is of fundamental importance on several counts. First, the judgement constitutes an important restatement on the law of force majeure. Second, special word about RF Nariman, J. Since assuming judgeship, he has passed several judgements clarifying and restating various aspects of commercial law thereby rendering clarity and updating various contract law concepts to the present times and breathing in fresh air to the 145 year old Indian Contract Act, 1872. Third, in the context of regulatory law, the decision offers clarity in the extent to which a tribunal/ court can go in balancing the competing interests of protecting consumers on the one hand and preserving the efficacy of the industry sought to be regulated on the other. Balancing the competing aims of preserving the efficacy of the industry by upholding the legitimate interests of the regulated on the one hand and protecting consumer interests on the other is the fundamental challenge in regulatory law. This case affords considerable clarity in the extent to which a regulator of a tribunal could or could not rewrite contractual terms between the regulator and the regulated.

The decision calls for an off-the-cuff remark. One of the arguments of the power producers was that Section 56 ICA operated de hors the force majeure clause in PPA. It may be recollected from the above analysis that the court negatived this contention. It would have been great if RF Nariman, J. referred to the concept of default rules to explain away how Section 56 operated as a default rule and how the PPA clause on force majeure eclipsed Section 56 and occupied its field instead. Even so, the effect of RF Nariman, J’s analysis remains the same.

One last remark. The decision of the Supreme Court has received considerable criticisms from the power industry. A direct result of the judgement has been that both Adani and Tata have asked the State power procurers to take control of the power projects (see here). Adani seems to have discontinued power supply from its power plant (see here). Experts also argue that the once-power surplus state of Gujarat could be facing the risk of power scarcity (See here). There is a strong argument that the power producers are to be protected considering that they had invested in public goods which was meant for consumption of the economy and that in case of failure to protect such investors, economy, and ultimately, the consumers will suffer. From the other end of the spectrum it has been argued that the power producers attempted to engage in crony capitalism by entering into unviable contracts knowing fully well that they could later demand renegotiation of the PPAs (see here). The reality, perhaps, lies somewhere in between.

Power producers have suggested two alternatives for the current arrangement. The first one is that they would forego their security deposits under the PPA and that fresh bids should be called from power generators. The second alternative is that the state power procurers should import coal directly and that the power producers would offer their power generation capacity (see here). It will be interesting how this issue would be resolved. For now, the Centre has taken a stand that the issue is for the power producers and the State power procurers to resolve but it doubtable if the stance is correct considering that the problem pertains to the nation as a whole. 

Arbitration and Contract Law: Some Judgements & Links

Contract Law Theory:

Contracts Profs blog calls these set of podcasts the hottest download ever. Check out the post in Contracts Prof that gives links to papers relating to Contract Law Theory. Contract Law Theory lovers would definitely enjoy these.Some of the podcasts are available as papers in SSRN and can be accessed from here.

Randy Barnett (Georgetown), "Contract is Not Promise; Contract is Consent"

Jean Braucher (Arizona), "The Sacred and the Profane Contract Machine: The Complex Morality of Contract Law in Action"

Gregory Klass (Georgetown), “Promises, Etc.”

Avery W. Katz (Columbia), "Virtue Ethics and Efficient Breach"

Juliet Kostritsky (Case Western), "The Promise Principle and Contract Interpretation"

Tenancy Agreements:

Mohamad Ahmed v Atma Ram Chauhan (MANU/SC/0614/2011) is an important decision on Lease Agreements. The decision starts off with a statement made by Deepak Verma, J:, which reads:

"One half of the lis between landlord and tenant would not reach courts, if tenant agrees to pay the present prevalent market rate of rent of the tenanted premises to the landlord."

Empirical legal scholarship aficionados might get upset for the fact that the judge's number is just an estimate and is not backed by data. But the judge is probably right in opining that it is not right on the part of the tenant in paying a rent that was fixed quarter of a century ago. The court stated that "majority" of the cases were filed by landlords because they did not get fair rent from the tenants. So the court, in the guise of laying down some guidelines "for such type of litigation" introduced judiciary made legislation (what are the state legislatures doing?).

The first guideline is in the form of a default rule. According to the Supreme Court, if parties have not agreed for any escalation in their agreement, the default escalation rate would be 10% every three years. The first guideline is in the form of a direction to the authority deciding on fair rent under the Rent legislation to go by a valuation report or on the basis of reliable estimates of building materials in surrounding ares let out on recent in the recent past.

The second guideline is akin to Section 64A of the Sale of Goods Act, 1930 which reads:

"(1) Unless a different intention appears from the terms of the contract, in the event of any tax of the nature described in sub-section (2) being imposed, increased, decreased or remitted in respect of any goods after the making of any contract for the sale or purchase of such goods without stipulations as to the payment of tax where tax was not chargeable at the time of the making of the contract, or for the sale or purchase of such good tax- paid where tax was chargeable at that time.-

(a) if such imposition or increase so takes effect that the tax or increased tax, as the case may be, or any part of such tax is paid or is payable, the seller may add so much to the contract price as will be equivalent to the amount paid or payable in respect of such tax or increase of tax, and he shall be entitled to be paid and to sue for and recover such addition, and

(b) if such decrease or remission so takes effect that the decreased tax only, or no tax, as the case may be, is paid or is payable, the buyer made deduct so much from the contract price as will be equivalent to the decrease of tax or remitted tax, and he shall not be liable to pay, or be sued for, or in respect of, such deduction."

The second guideline states that

1. property tax, water tax, maintenance charges, electricity charges would be borne by the tenant and
2. any enhancement in the rates of the above would be borne by the tenant alone.

The purpose of giving this guideline seems to give the landlord a rent free from any deduction. While this guideline is in accord with the standard practices, the issue is whether this rule is a mandatory rule or a default rule (that is, subject to agreement between the parties). According to this blawgger, this should be subject to an agreement to the contrary.

The third and the fourth guidelines allocate the responsibility of maintenance between the tenant and the landlord. Major repairs is the responsibility of the landlord and the usual maintenance is the responsibility of the tenant. In case the tenant wants to do major repairs, he is to seek written permission from the landlord and both of them should agree on the modalities of cost-sharing. 

Another radical guideline is that in case the tenant pays market rate as rent, he cannot be evicted for at least five years. Now, what if the landlord wants to get the tenanted premises for his own purpose? This might cause major hardships to the landlord.Two more guidelines deal with the determination of rent.

This blawgger is of the opinion that some of these guidelines seem to take a wrong approach. The five year immunity guideline is an example.

Class Action Waivers, the Canadian and the American Supreme Courts:

What is with phone services companies and class action waivers? The Canadian and the Supreme Courts had to decide validity of class action waivers in arbitration clauses contained in phone services contracts. The Canadian Supreme Court held in Michelle Siedel v. TELUS Communications Inc. that the Consumer Protection Law (CPL) of the province allowed a "public interest plaintiff" to sue to enforce the CPL's standards. Therefore, class action waivers in such cases are, according to the Canadian Supreme Court, not valid. (Link to the Judgement)

The United States Supreme Court had to consider in AT & T v Concepcion if class action waivers in arbitration clauses were valid. Like the Canadian case, this case was also against a phone services company. The arbitration clause provided that the customer was deemed to have his right to invoke arbitration against AT&T only under his individual capacity and not as a representative of any class action. The Supreme Court had to decide whether such a clause was valid. The Court held, to the consternation of many consumer rights activists, that a class action waiver was valid and enforceable. We had analysed the Court of Appeal judgement in an earlier post. Access it from here. The Supreme Court's decision can be downloaded from here.

Booz Allen:

In Booz Allen Hamilton v SBI Home Finance, the court held that a suit for enforcement of a mortgage by sale is not arbitrable. The court also stated some general rules to decide on questions pertaining to non-arbitrability. We'll deal with this case in a detailed post. Apart from arbitrability, this judgement is also interesting for one another issue. In this case, the Supreme Court held:

"While considering an application under section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue of `arbitrability' or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the arbitral Tribunal."

Thus, according to the court, arbitrability questions would only be decided by the arbitral tribunal under Section 11. This, on the face of it, appears to be contrary to the justifications given in SBP  Co. v. Patel Engineering. We will have a small series of posts on the decision. For now, check out Lex Arbitri Blog's descriptive comment on the case.

Guest Post: Default Rules in the Indian Contract Act

In one of our previous posts this month, we posed this "poser": What are the Default Rules in the Indian Contract Act, 1872 (at least in the provisions pertaining to contracts generally)? In this guest post, Ms. Lovely Dasgupta, Assistant Professor (Law) at the National University of Juridical Sciences (NUJS), Kolkata, explicates the methodology for identifying default rules in the relevant portion of the Indian Contract Act, 1872 that deals with the general principles of contract. She teaches Contracts I and II, (part from several other courses) at NUJS. 

 

In this post, Ms. Dasgupta gives us two simple guidelines on how to identify default rules. We thank her immensely for writing us this guest post. Here goes the post.

"Default rules, as the name suggests are those rules that lay down the basic guidelines as to the formation, performance and discharge of a contract. However these rules operate in the absence of any contract to the contrary. On the other hand mandatory rules are those which cannot be contracted around. In other words they can be said to be binding on the parties even before the parties decide to contract. One can also argue that the mandatory rule both limit and protect the ‘freedom to contract’ principle. It restricts the freedom to contract by imposing obligations, and it protects freedom to contract by protecting the bargaining powers of the parties to the contract.

Default rules therefore will have to be ancillary to the mandatory rules, as without complying with the latter it will not be possible to contract out of the former. Theoretically it is easier to detail out the nature of a default rule vis-à-vis a mandatory rule but practically it may be difficult to distinguish the default rules from the mandatory rules. One needs to therefore minutely navigate through the various sections of the Indian Contract Act 1872 (hereinafter called the Act) to identify the default rules. This write up will survey the sections of the Act dealing with the general principles of contract, and attempt to identify the default rules. In the process the attempt would be to identify the method by which one can term a rule as a default rule in the context of the Act.

The Act, from sections 1-75 lays down the general principles of contract viz. from formation, to performance to discharge, breach and damages. Of the seventy five sections, sections 1-36 deals with the formation of contract, sections 37-72 deals with performance, discharge and quasi contractual obligations, and sections 73-75 deals with breach and damages. If one looks into the sections pertaining to formation especially Section 10 of the Indian Contract Act, one finds that the same embodies the mandatory rules of contract formation. This means that any contract to be valid has to comply with this checklist. The other sections in this part, that precedes or follows section 10 are mere elaboration of the mandatory rules prescribed in section 10.

However when it comes to performance, then the rules appear to be flexible. Thus for example Section 40 of the Act makes it clear that the parties are free to decide as to who should perform the contract i.e. either the promisor or any third party can perform the contract. Similarly Sections 42, 43and 45 are clear examples of default rules which can be contracted around, as is evident from the language of these sections. On the other hand Section 53, 64 and Section 75 of the Act makes it clear that restitution does not prevent the claim of damages. In other words one cannot have a contract to the contrary wherein one claim is barred vis-à-vis the other. Similarly the sections 46-50 and section 55 are examples of default rules as they leave on the parties to decide the time of performance and the place of performance and the mode of performance.

Similarly the section 56 dealing with frustration/impossibility of performance is an example of default rule, as it merely states when the contract is said to be impossible to perform. This thereby gives ample leeway to the parties to draft the conditions that they regard as will render the contract as impossible to perform. One look at section 62 and section 63 makes it clear that the rules regarding novation, recission and alteration, as well as performance of the original promise are all at the discretion of the parties to the contract. However so far as the right of restitution under section 64 and 65 is concerned, the same cannot be contracted out, hence is a mandatory provision.

One need not say anything about the sections from 68-72, as they are quasi contractual obligations imposed by law and hence binding. One last example of mandatory rule is Section 74 of the Act, which restricts the right of the parties to impose penalty on the defaulting party. Thus the brief overview of the few provisions of the Act for identifying the default rule proceeded on two simple guidelines. (One) Is to read the bare language of the sections and ask the question: whether it is possible to have a contract without complying with this requirement? If the answer is no then the rule embodied in the section is a mandatory rule and not a default rule which can be contracted around. (Second) To think about the purpose of having the particular section and ask: what is the need to have this section? If the answer is that the rule embodied in the section is a guideline as to the possible manner in which the contract can be drafted/ formed, a guideline which if not adhered to will not affect the efficacy of the contract, then the rule is a default rule.

At the end the process of identifying the default rules in the Indian Contract Act is nothing but a process of reading and re-reading the bare act. As a student or a practitioner of law, one has to be thorough with the fundamentals to be able to identify the spirit of the sections that form the foundation of the Indian Contract Act i.e. the sections embodying the general principles of contract. I believe that most of the problem arises because of the lack of this clarity both amongst the student as well as the practitioners. Since identification of default rules successfully is also about one's conceptual clarity."

Sree Kamatchi Amman Constructions v. The Divisional Railway Manager (Works), Palghat and Ors.

Sree Kamatchi Amman Constructions v. The Divisional Railway Manager (Works), Palghat and Ors.

Decided by R.V. Raveendran and H.L. Gokhale, JJ on 20 August 2010, these Civil Appeal Nos. 6815-6816 of 2010 were pertaining to the question of award of interest.

In this dispute, the High Court had previously remitted the matter to the arbitral tribunal for making a reasoned award (the award was an unreasoned one) after fresh consideration. Instances where Courts have remitted the matter to the tribunals are rare. See, for example, Gayathri Projects Ltd. V. Airport Authority of India 2007(3) Arb. LR 416 (Del.); Union of India v. Prem Kumar Lihala 2005(Suppl.) Arb. LR 506 (Del.).

On remission, the tribunal considered the matter and had rejected all the claims raised by the Respondent (Railways) and a few claims raised by the Appellant (KAC). Hence the “cross petitions” under S 34. Dissatisfied with the decisions of the lower courts both KAC and Railways had approached the Supreme Court.

The Court had to consider two issues:

“(i) whether the contract between the parties contains an express bar regarding award of interest?

(ii) If so whether the arbitral tribunal was justified in refusing interest for the period between the date of cause of action to date of award?”

The court had to interpret Clause 16(2) of the General Conditions of the Contract. The said Clause read:

"No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the Contract, but Government Securities deposit in terms of Sub-clause (1) of this Clause will be repayable (with) interest accrued thereon."

The court interpreted the expression “amount payable… under the Contract” to mean any amount that the Railways had to pay as a part of the Contract. Thus, the Contractor could claim no right under the Contract for interest.

While deciding on the second question, that is, the correctness of the tribunal in refusing to award interest, this blawgger noticed an interesting aspect. While discussing the law on the power of the tribunal to award interest, the court listed the leading judgements on the point and only then did it look at the statute. Does this imply that the court accorded a higher stature to its own judgements even compared to the statute? Or is this blawgger reading more into the judgement than what it actually says?

The relevant provision [S 31(7)] in the Arbitration and Conciliation Act, 1996 on interest is quoted below:

"(a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen percentum per annum from the date of the award to the date of payment."

The judicial lingo used as regards interest rate is as follows:

Pre-reference interest: Interest prior to the period of reference to arbitration.
Pendente lite interest: Interest for the period when the litigation is pending.
Post-award interest: Interest between the date of award and the date of payment

Unlike the court, we shall first analyse the statutory provision. Note that S 31(7)(a) deals with pre-reference interest and pendente lite interest, and S 31(7)(b) deals with post-award interest. Note also that S 31(7)(a) is a Default Rule, and hence is subject to the contract to the contrary. However, prima facie, S 31(7)(b) does not seem to contain a Default Rule. Rather, it leaves it to the discretion of the arbitral tribunal. However, numerous judgements of the courts would tell us that the arbitral tribunal has to act within the “four corners” of the contract that forms the basis of their jurisdiction. Hence, if the contract provides for a particular post-award interest, the tribunal has no alternative but to enforce the same.

On the second question (whether the tribunal was justified in refusing to grant pendente lite interest?), the court held:

“Where the arbitral tribunal has exercised its discretion and refused award of interest for the period pendente lite… the award of the arbitrator could not be interfered with.”

The court was probably right in refusing to set aside the award of the tribunal on this point. But, where is the question of the arbitral tribunal having “discretion”? The contract is very clear: No interest is payable on any amount payable under the contract. That being so, from where does this “discretion” arise?

In the passing, it may also be noted that there were two decisions under the 1940 Act which were decisions supporting a contrary point. The SC held that these decisions were under the 1940 Act and were not binding, considering that the wordings in both the respective provisions on interest rate being dissimilar. 

P.S.: On further reading materials pertaining to default rules, see the link given above on default rules. A poser to the readers. What are the Default Rules in the Indian Contract Act, 1872 (at least in the provisions pertaining to contracts generally)?