Diwan Advocates

Contract Law Practice

A construction company signs a contract to build a commercial complex. The contract has a liquidated damages clause: for every week of delay, the company pays one percent of the contract value. The project is delayed by 14 weeks due to a combination of the client's own changes to the specifications, monsoon disruption, and the contractor's own management failures. The client invokes the LD clause for the full 14 weeks. The contractor disputes that it was responsible for more than four weeks of delay. The answer turns on the contract's drafting, the applicable Indian law on liquidated damages, and whether Section 74 of the Contract Act allows the client to claim the full LD amount without proving actual loss.

A startup founders' agreement contains a non-compete clause requiring departing founders not to work in the same industry for three years. One founder leaves. The other wants to enforce the non-compete. Under Section 27 of the Indian Contract Act, agreements in restraint of trade are void. A blanket post-employment non-compete has been consistently held void by Indian courts. The clause cannot be enforced. Only a well-drafted confidentiality and non-solicitation provision might have given any practical protection.

Contract law is where almost all legal disputes begin. At Diwan Advocates, we draft, review, and negotiate commercial contracts, advise on the interpretation and performance of existing contracts, and represent clients in disputes before commercial courts, arbitral tribunals, and the High Courts.

Formation and Validity

A valid contract under the Indian Contract Act, 1872 requires offer, acceptance, consideration, the capacity of both parties to contract, and free consent. Consent is not free if it was induced by coercion, undue influence, fraud, misrepresentation, or mistake. Contracts induced by misrepresentation or fraud are voidable at the option of the party whose consent was induced. We review contracts for validity issues and advise on the circumstances in which a party can avoid or rescind a contract.

Electronic Contracts

Section 10A of the IT Act, 2000 confirms that contracts formed electronically are not invalid merely because of their electronic nature. A click-wrap agreement accepted by ticking a box, a contract signed using a digital signature, and a contract formed by email exchange are all legally binding in India subject to the ordinary rules of contract law.

Key Provisions: What Every Contract Needs

Limitation of Liability

A well-drafted limitation of liability clause caps the damages recoverable by one party from the other, excludes consequential and indirect loss, and excludes liability for specific categories of risk. Under Indian law, such clauses are generally enforceable as part of the bargain between commercial parties. However, clauses that purport to exclude liability for fraud or wilful misconduct are typically not enforced. We draft limitation clauses that are specific enough to be enforceable and broad enough to actually provide protection.

Liquidated Damages

Section 74 of the Contract Act allows a party to recover a reasonable compensation from the court where a sum is stipulated as the amount payable on breach, not necessarily the stipulated sum itself. This differs from the English law position where a genuine pre-estimate of loss is recoverable in full. Under Indian law, the court will award what is reasonable in the circumstances, which may be less than the contractually agreed amount. We advise on drafting LD clauses and on challenging LD claims that significantly exceed actual loss.

Frustration Under Section 56

A contract becomes void when its performance becomes impossible due to an event that could not have been foreseen at the time of contracting and that is not the fault of either party. Section 56 of the Contract Act codifies this as the doctrine of frustration. The COVID-19 pandemic generated a significant body of Indian case law on whether lockdown-related impossibility qualified as frustration under Section 56. We advise on force majeure and frustration arguments in contracts where circumstances have changed significantly.

Remedies for Breach

Damages

Section 73 of the Contract Act entitles the innocent party to recover compensation for loss arising naturally from the breach or which the parties knew was likely to result from the breach at the time they contracted. This mirrors the Hadley v. Baxendale rule on remoteness. Loss of profit, wasted expenditure, and consequential losses are recoverable where they meet this test. Speculative losses, losses that could have been mitigated, and losses the breaching party had no knowledge of are generally not recoverable.

Specific Performance After 2018

The Specific Relief (Amendment) Act, 2018 changed the landscape for specific performance. Before 2018, specific performance of a contract for the sale of immovable property was discretionary; courts could award damages instead. After 2018, specific performance is the general rule and must be ordered unless the contract itself has become impossible to perform or the plaintiff has not been ready and willing. This change significantly strengthened the position of buyers in real estate contracts whose sellers backed out, and has changed the risk calculus in all contracts involving immovable property or unique goods.

Non-Compete and Confidentiality

Post-employment non-compete clauses are void under Section 27 of the Contract Act as agreements in restraint of trade. Indian courts have consistently refused to enforce them regardless of how narrowly they are drafted. Confidentiality obligations and non-solicitation of clients and employees post-employment are more likely to be enforced as they do not constitute a restraint on the person's ability to earn a livelihood. We draft employment and commercial agreements with this distinction clearly in mind.

Cheque Dishonour Under Section 138 NI Act

Section 138 of the Negotiable Instruments Act, 1881 makes dishonour of a cheque a criminal offence where the cheque was drawn for a debt or liability. The complainant must serve a demand notice within 30 days of the bank's return memo and file a complaint within one month of the expiry of the 15-day response period. Section 143A allows a court to order interim compensation of up to 20 percent of the cheque amount during trial, which significantly changes the dynamics of settlement in Section 138 matters. We file and defend Section 138 complaints and advise on compounding.

Why Diwan Advocates for Contract Law?

Legislative Reference Index

Good contracts prevent disputes. When disputes happen anyway, the quality of the original contract determines how the dispute is resolved.

Diwan Advocates delivers quality at both stages.

Diwan Advocates  |  Delhi, India