SESSION 2

CONTRACTS
MEANING OF CONTRACTS – MEETING OF MINDS – ESSENTIALS: OFFER, ACCEPTANCE, INTENTION TO CREATE
LEGAL RELATIONSHIPS - LETTER OF INTENTION - CONTRACTING WITH THE GOVERNMENT: LETTER OF AWARD
– ROLE OF CENTRAL VIGILANCE COMMISSION
 The Indian Contract Act, 1872 prescribes the
law relating to contracts in India. The Act was
passed by British India and is based on the
principles of English Common Law.

INDIAN It is applicable to all the states of India except

CONTRACT ACT, the state of Jammu and Kashmir.
1872
It determines the circumstances in which
promises made by the parties to a contract shall
be legally binding and the enforcement of these
rights and duties.
 The Indian Contract Act may be divided into two
parts:

INDIAN Part 1:
CONTRACT ACT, Deals with the General Principles of Law of
1872 Contract Sections 1 to 75

Part 2:
Deals with Special kinds of Contracts
MEETING OF MINDS

ENTERING INTO A CONTRACT….

CONTRACT
AGREEMENT + ENFORCEABILITY
HOW IS AN AGREEMENT FORMED?

Agreement is about two people coming to a consensus.

The formation of an agreement is about meeting of

minds. People agree when their minds meet, that is, when
two minds come to be one on an issue or point.

This happens through communication. One person

initiates communication and another person responds.
 There must be an offer

An offer is an expression to contract

without further negotiations.
FORMATION OF
AN AGREEMENT
It requires only acceptance from the
other party to form a contract.
 An advertisement/notice inviting tender is simply
an invitation to offer.

Similarly, advertisement for auctions is an

invitation to offer.

Invitation to offer is a useful concept to describe

FORMATION OF advertisements and communications soliciting
AN AGREEMENT business.

Harris V Nickerson: (1873)

An invitation to attend an auction is only inviting
persons to participate and make bids.
 Is display of goods in a shop window an offer?
Fisher V Bell: (1961)
Display of a flick knife in window – does it violate Restriction of
Offensive Weapons Act, 1959? – any person who manufactures,
sells…or offers for sale….to any other person a flick knife – court
ruled otherwise – Law subsequently changed to include expression
‘possess, store or expose for sale’.

FORMATION OF
AN AGREEMENT The display of goods in a self-service store is also an invitation to
offer.
Pharmaceutical Society of Great Britain V Boots Cash Chemists
(Southern) Ltd: (1953)
The law in UK provided that no person could sell certain specified
drugs without sale being supervised by a registered pharmacist. The
pharmacist sat next to the cashier.
 There must be unqualified acceptance of the offer

An offer should be accepted without changing its

FORMATION OF terms.
AN AGREEMENT Changing the terms of the offer amounts to an
implied rejection of the offer.
An acceptance changing the terms of an offer
is a counter-offer.
 Provisional acceptance is no acceptance.
[The last line of a written lease
agreement stated: This agreement is
FORMATION OF made subject to the preparation and
AN AGREEMENT approval of a formal contract. Whether
a binding agreement was formed by the
written agreement? Court held ‘there is
no binding contract’….]
FORMATION OF AN AGREEMENT

Felthouse V Bindley : (1862)

Silence can only imply rejection, Case of a horse sold inadvertently by the
not acceptance. auctioneer even as the owner was grappling
with his uncle’s letter which said, ‘If I hear no
more about the horse, I consider the horse is
mine for £30 15s.’
 When the offer is in writing, it reasonable to assume that
the acceptance should also be in writing. If the offer is
oral, one could say that oral acceptance would be
adequate.
Encashing a cheque is only realising the consideration in
advance and cannot be construed as communication of
acceptance.
FORMATION OF Life Insurance Corporation of India v. Raja V. Prasad:
AN AGREEMENT (1984)
Proposal form with 1st premium received 27/12/60–
Cheques encashed 11/01/61 – Prasad died on 12/01/61
– beneficiary claimed the insurance money – SC notes
that as LIC has not communicated acceptance to
Prasad there was no contract between LIC & Prasad.
 The communication of the offer shall
be complete when it comes to the
knowledge of the person to whom
COMMUNICATION 
WHEN COMPLETE the offer is made and the communication
of the acceptance shall
be complete when the acceptance is put
in a course of transmission to the offeror.
 All contracts are agreements, but all agreements
are not contracts!
AGREEMENTS +
ENFORCEABILIT
Social Agreements
Y

Domestic agreements
 The requirement of intention to create legal
relations in contract law is aimed at sifting out cases
which are not really appropriate for court action. Not
every agreement leads to a binding contract which
can be enforced through the courts. For example you
may have an agreement to meet a friend at a
restaurant. You may have a moral duty to honour that
INTENTION TO agreement but not a legal duty to do so. This is
because in general the parties to such agreements do
CREATE LEGAL not intend to be legally bound and the law seeks to
RELATIONSHIPS mirror the party's wishes. In order to determine which
agreements are legally binding and have an intention
to create legal relations, the law draws a distinction
between social and domestic
agreements and agreements made in a commercial
context.
 No Void Contract Voidable Contract
1 Definition : Definition :

Section 2(g) of Indian Contract According to Section 2(i) of

Act defines void contract as Indian Contract Act 1872, “An
“An agreements not enforceable agreement which is enforceable
by law is said to be void” by law at the option of one or
more of the parties thereto, but
not at the option of the other or
others, is a voidable contract”

DISTINCTION
BETWEEN VOID
& VOIDABLE 2 Example : Contract with a
minor.
Example : When consent to an
agreement is caused by

AGREEMENT coercion, fraud,

misrepresentation the
agreement is avoidable at the
option of the party whose
consent was so caused.

3 It is not at all enforceable by It can be enforced at the

law. option of the one party.
NEGOTIATING A
CONTRACT
 1. The objectives, scope & boundaries have to be
clearly defined.
2. Preliminary negotiating strategies should be
developed.
3. A unified voice has to be presented to the
supplier/contractor during negotiations.
BASIC 4. There is no place for sentiments.
PRINCIPLES 5. Nothing is given free.
6. Evolution of clauses depends on the relative
strengths of the parties.
7. Contract negotiation is a dynamic activity requiring
strategy to keep changing.
 1. Don’t disclose your deadline.
2. Know what you want.
3. Think & then speak.
4. Know your market & your opponent.
5. Learn to walk away.
6. Perseverance pays.
7. Keeping your mouth shut & listen.
RULES 8. Do not rush to close a deal.
9. Have the right people in your team
10. Learn to let go.
11. Make friends, not enemies.
12. Look at the Big Picture
 1. Basic lack of trust
2. Clearly establishes the risks and obligations
of each party
3. Provides means by which performance can
be assessed and measured
WHY DO WE 4. Provides means by which breaches can be
NEED WRITTEN identified
CONTRACTS?
5. Provides means by which default can be
established
6. Establishes the owner’s means of control
7. Establishes the contractor’s scope of work
 A written contract provides the document
WHAT DOES A by which risks, obligations, and
WRITTEN relationships of both parties are clearly
CONTRACT DO established, thus ensuring the
FOR US? performance of these elements in a
disciplined manner.
 1. Preamble
2. Interpretation & definitions
3. Scope, technical specifications &
performance parameters
4. Price
5. Terms & mode of payment
STRUCTURE OF A
CONTRACT 6. Price variation
7. Taxes & duties
8. Scheduled delivery date
9. Force majeure
10.Export license
 11. Defaults & liquidated damages
12. Inspection & acceptance
13. Shipment
14. Passing of title & risk
15. Warranty
STRUCTURE OF A 16. Patents & copyrights
CONTRACT
17. Indemnities
18. Spares
19. Options
20. Assignments
 21. Termination
22. Resolution of disputes
23. Confidentiality
24. Survival
25. Amendments
STRUCTURE OF A
CONTRACT 26. Applicable Laws
27. Effective Date
28. Notices
29. Contract Signatures
30. Forms
 1. Expression of interest (prequalification)
2. Request for proposal (invitation to
tender/bid)
3. Pre-bid conference
PRESENT 4. Submission of bids
POSITION 5. Technical & commercial evaluation
6. Selection of the lowest technically
acceptable bid
7. Letter of Award (LOA/LOI*)
8. Signing of the contract
 1. Tender is sealed*.
2. Tender documents must clearly specify
evaluation criteria.
3. Two types of Bids:
EVALUATION
a. Technical
PROCESS (GOVT.)
b. Financial
4. Tender evaluation to be in accordance with
evaluation criteria.
*Nowadays, it is largely an e-tender
 1. Time taken for evaluation and extension
of tender validity.
2. Process of tender evaluation to be
confidential until the award of the
EVALUATION contract is notified.
PROCESS (GOVT.) 3. Difference between TOC (Tender
Opening Committee) & TEC (Tender
Evaluation Committee)
 The factors for initial examination:
a. Whether the tenderer meets the eligibility
criteria ?
EVALUATION b. Whether the crucial documents have been
PROCESS (GOVT.) submitted & duly signed / attested ?
c. Whether the requisite EMD (Earnest
Money Deposit) has been furnished ?
 1. Financial and Technical sanction of competent
authority is available.
2. Adequate and wide publicity is given.
Advertisement is posted on website and tender
documents are available for downloading.
3. Convenient tender receiving/opening time and
CVC address of the tender receiving officials/tender
GUIDELINES: box are properly notified.
PRE-AWARD 4. In the case of limited tender, panel is prepared in
STAGE a transparent manner clearly publishing the
eligibility criteria. The panel is updated regularly.
5. Pre-qualification criteria are properly defined/
notified.
 6. Short listed firms/consultants are fulfilling the
eligibility criteria. There is no deviation from notified
criteria during evaluation.
7. Experience certificates submitted have been duly
verified.
8. Tenders/bids are opened in the presence of
CVC bidders/their authorised representative.
GUIDELINES: 9. Corrections/omissions/additions etc., in price bid are
PRE-AWARD properly numbered and attested and accounted page –
STAGE wise. Tender summary note/ Tender opening register is
scrupulously maintained.
10.Conditions having financial implications are not
altered after opening of the price bids.
 Circular No. 4/3/07, 3rd March, 2007
As post tender negotiations could often be a source of
corruption, it is directed that there should be no post-
tender negotiations with L-1, except in certain
exceptional situations. Such exceptional situations
CVC would include, procurement of proprietary items, items
GUIDELINES: with limited sources of supply and items where there is
NEGOTIATIONS suspicion of a cartel formation. The justification and
details of such negotiations should be duly recorded
and documented without any loss of time.
CLARIFICATIO
N OF CVC ON
NEGOTIATION
 The Tender advertisement is simply an invitation
to offer:
1. Notice Inviting Tender (NIT) and the tender
documents provide the manner in which the
tender has to be submitted. The tender
documents have to be completed in the
specified manner.
TENDER
REQUIREMENTS 2. The tender also may have to be
accompanied my Earnest Money Deposit
(EMD).
3. The important question is whether the
party inviting tender can reject a tender,
if it does not meet the requirements?
 M/s. BISMI ABDULLAH AND SONS V. THE
REGIONAL MANAGER, FCI, TRIVANDRUM
(1986)
- Case of non payment of security deposit –
Clause in tender document ‘tenders not
accompanied by the required amount of security
TENDER deposit liable to be rejected’ – B’s tender
REQUIREMENTS accepted by FCI without security deposit - B
does did not want to go ahead with the contract
& contests that a valid contract was not formed –
Held it was up to FCI to reject the tender, since
they hadn’t a valid contract had come to be
formed.
 An auction is concluded with the
auctioneer striking the hammer, bonding
the last bidder & the auctioneer. Thus the
AUCTION striking of the hammer is an implied
acceptance of the offer put up by the last
bidder.
 In an auction, each call made by a
participant is an offer capable of being
accepted by the auctioneer. A subsequent
call quashes the previous call and puts
itself as the offer.
AUCTION If the bidder is not bound till the hammer
is stuck, the auctioneer is also not bound
to the highest bidder or for that matter,
any bidder.
 VERGHESE V DIVISIONAL FOREST OFFICER,
TRICHUR (2003)
- Case of failure to remit balance bid amount & failure
to execute an agreement within 15 days from the date
of intimation of confirmation orders – Verghese fails to
remit as per bid conditions despite extension of period
– fails to execute agreement – but plucks the usufruct –
DFO re-auctions – Verghese contests the right to re-
AUCTION auction – Argues that there is no concluded contract as
bid amount is not deposited & agreement is not
executed– held, mere fact that plaintiff was reluctant to
execute the agreement would not mean that there was
no concluded contract, moreover, Verghese was the
one who committed the breach.
 Article 299 of the Constitution of India imposes
restrictions on how government contracts would
be made.
EXECUTION OF
Article 299 of the constitution requires that
GOVT.
contracts of the Govt. must be executed in the
CONTRACTS
name of the President or Governor as the case
may be.
 It follows that if the contract between Govt. &
another person is not in full compliance with Article
299 it would be no contract at all and could not be
enforced either by the Govt. or by the other person
as a contract.
EXECUTION OF
GOVT.
In view of the mandatory terms of Article 299 no
CONTRACTS
implied contract could be spelled out between the
government and another person at the stage of
bidding for Article 299 in effect rules out all implied
contracts between Govt. and another person.
 SARDAR SUCHA SINGH V UNION OF INDIA (1986)
- Case of acceptance of tender by chief engineer
eastern command vide letter of acceptance stating that
S Singh’s tender has been accepted by him on behalf of
the President of India and also stating the requirement
of a sum of Rs. 700 as additional security – S Singh
contends (a) No contract was executed (b) Additional
EXECUTION OF deposit meant that the acceptance was conditional –
Held that (a) Section 175(3) of the Government of
GOVT. India Act, 1935 does not requires the execution of a
CONTRACTS formal document. (Two essential requirements enjoined
by the said provision were that acceptance must be in
writing and that it must be in the name of the Governor
General.) (b) The letter requiring the deposit of further
sum of Rs. 700 was after the tender was accepted and a
contract came into existence.
 CHAIRMAN-CUM-MD, T.N., TEA PLANTATION
CORPORATION LTD.V. M/s SRINIVASA TIMBERS
(1998)
- Case of tender with conditions (a) Successful tenderer
to pay sale value of timber minus EMD within 15 days
of receipt of confirmation order (b) Execute the
agreement within said period (c) the period of contract
EXECUTION OF will be from the date of execution of the agreement –
GOVT. Corporation cancels the order after there is a delay in
remittance of amount & execution of agreement in
CONTRACTS spite of extensions of time – Contention as to whether
contract was formed – Held contract is not concluded. (
When the requirement is in compliance of tender
conditions subject to execution of a formal
agreement, such a contract is not a concluded
contract & cannot be executed or enforced)
 The significance of ‘Letter of Intent’.
A letter of intent is customarily employed
LETTER OF to reduce in writing a preliminary
INTENT understanding of parties who intend to
enter into contract, or who intend to take
some other action.
 WELLMAN HINDUSTAN LTD., Vs. NCR
CORPORATION (1992)
- Case of letter of intent signed by the two
corporations with a view to jointly establish a
company in India with 60:40 share to manufacture,
and market the product of NCR – Parties incorporate
LETTER OF a company called NCR India Pvt. Ltd. – Land
identified and purchased by Wellman – Govt.
INTENT clearance was also obtained for the joint venture –
NCR develops cold feet and wanted to ‘wriggle out
from the joint venture on the plea that they did not
want to risk investing six million dollars in India’ –
Contention was whether the letter of intent create a
contract between the parties?
 The significance of ‘Letter of Intent’.
The law as it stands, based on court rulings, is
that a term of a letter of intent may of course
negative the contractual intention but it would
be open to the courts to hold the parties bound
LETTER OF by the terms of the terms of such letters,
INTENT especially:
1. If the parties had acted on these terms
for a long period of time or
2. If they had expended considerable sums
of money in reliance of them.
 Contracting with Government Bodies – a
few important issues.
Article 14 of the Constitution:
DISCRIMINATION The State shall not deny to any person
equality before the law or the equal protection
of the laws within the territory of India
Prohibition of discrimination on grounds of
religion, race, caste, sex or place of birth
 M/S ERUSIAN EQUIPMENT AND CHEMICALS LTD.
V. STATE OF W.B (1974)
- Party getting tender contracts from Govt. of West
Bengal subsequently was not awarded the contract
despite having made the best bid as the State
Government had blacklisted the plaintiff as there was
a case of violation of FERA pending against the party
– state govt. argues that it could choose any person
DISCRIMINATION for entering into a contract – held that the state govt.
will give an opportunity to the petitioners to represent
their case, and the authorities will hear the petitioners
as to whether their name should be put on the
blacklist or not – state government’s argument
dismissed as the option of choosing any person does
not lie with the state government.
 R.D.SHETTY V. INTERNATIONAL AIRPORT
AUTHORITY OF INDIA (1979)
- Case as to whether an instrumentality of State-
Authority calling for tenders of a job could accept a
tender not conforming to conditions in notice – IAAI
had stipulated in notice inviting tenders the condition
for eligibility being ‘Registered 2nd Class Hotelier
DISCRIMINATION having at least 5 years experience’ – Tender accepted
was of a person not fulfilling this condition –
Contention is that if this was the case R D Shetty,
who was not a ‘Registered 2nd Class Hotelier having
at least 5 years experience’ could also have applied –
held that IAAI could not discriminate.
Thank you for listening!