India: Contracting Under Indian Or English Law: Part 2 – Key Contract Differences

Last Updated: 1 September 2008
Article by Jonathan Riley

Introduction

This article is the second in a series of three articles looking at some of the key differences between contracts made under Indian law and those made under English law. The articles assume that the reader is familiar with the principles of English contract law, and so in explaining the differences the focus is on the position under Indian law.

This article highlights a number of key differences between specific contract provisions. In our first article we looked at the statutory framework in India to the extent that it is relevant to contracting, and the final article will consider some of the issues which arise in relation to technology contracts.

Limitations on Liability

A limitation of liability clause is generally valid and enforceable under Indian law, except that limitations on liability arising by reason of death or personal injury, fraud or gross negligence are not enforceable. Additionally the limitation of liability provision must be reasonable and not amount to a penalty to be enforceable. The position is therefore similar to English law.

The ability of a party to claim damages for breach of contract is limited to the actual damages or losses suffered by that party arising from the breach. Section 73 of the Indian Contract Act (ICA) provides that, in order to recover for breach of contract, the aggrieved party must show that such damage naturally arose in the usual course of things from the breach, or was damage which the parties knew would be likely to result when they made the contract.

However, Section 73 also provides that compensation for loss or damage caused by breach of contract is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

This is different from English law where, although we have the same two types of loss that can be recovered (the two limbs in the case of Hadley –v- Baxendale) we do not have any statutory prohibition on the ability of a party to recover for indirect loss. English law simply relies on the application of the rules of remoteness.

Under English law we are used to describing the second limb of Hadley –v- Baxendale – loss which does not arise naturally from the breach but which must still have been within the reasonable contemplation of the parties when the contract was made – as 'indirect loss', but under Indian law it is better not to use that expression in order to avoid classifying the loss as an irrecoverable loss under Section 73, unless that is positively what is intended.

It is worthwhile also reminding ourselves that, under English law, per the British Sugar case, "consequential loss" does not mean loss flowing naturally as a consequence of a breach, which might seem the obvious meaning, but loss 'over and above that which arises as a direct result of the breach' (in other words a form of indirect loss), and Indian law views consequential loss in the same way.

Liquidated Damages

Section 74 of the ICA provides that "when a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract 'reasonable compensation' not exceeding the amount so named or, as the case may be, the penalty stipulated for."

As under English law, if the parties have agreed that the sum is a genuine pre-estimate of the loss or damage likely to be suffered then that sum is generally awarded, and the Act is clear that the plaintiff does not have to lead with evidence to prove his actual loss. However, the plaintiff does have to show some legal injury and it is open to the defendant to contend that the reasonable compensation to which the claimant is entitled should be less than the stated amount, which is most likely to be considered by the Courts when it is difficult to show the actual damage suffered by the claimant.

This means that there are circumstances where a liquidated damages provision may be treated as valid, but where the plaintiff still might not recover the specified amount but may instead receive a level of reasonable compensation as determined by the Courts not exceeding the stated liquidated damages.

Note that Indian law does not draw the same distinction as English law between a valid liquidated damages provision and an invalid penalty clause. Indeed, Section 74 refers to both "a sum named in the contract as the amount to be paid in case of such breach", and "any other stipulation by way of penalty" and says that they are both to be treated in the same way, the exercise in each case being to determine the reasonable compensation entitlement. Under English law, of course, we would avoid any use of the expression 'penalty clause' in our drafting for fear of invalidity.

The leading cases on the principles of liquidated damages are Maula Bux –v – Union of India (1969) and Oil & Natural Gas Corporation –v- Saw Pipes (2003), and from those cases it at least seems clear that liquidated damages provisions must be clearly drafted, any calculation of the liquidated damages should be easy to follow, and the claimant ought to be prepared to demonstrate that the amount was a genuine pre-estimate of the loss or damage likely to be suffered if he is not to be at risk of the Court determining a level of reasonable compensation below the stated liquidated damages.

Restrictive Covenants

The ICA provides that a contract will not be enforceable to the extent that it restrains a person from exercising a lawful profession, trade or business. Non-compete and non-solicitation provisions can both fall into this category. There is an exception under the Act, however, for non-compete provisions that reasonably protect a party's proprietary or commercial interests in relation to its acquisition of the goodwill of a business.

In addition cases have shown that, in certain circumstances, Indian courts will enforce a restrictive covenant which does not constitute an unlawful restraint of trade, in other words a covenant which does place some restraints on a person but meets a "reasonableness" test.

For example, a restrictive covenant which applies during the period of employment is more likely to be upheld then a covenant which operates after the termination of the employment. In Niranjan Shankar Golikari v Centre for Spinning and Manufacturing Company Limited, the Supreme Court of India upheld a restrictive covenant in an employment contract under which the employee was not to reveal or misuse any trade secrets that the employee had learned during the period of his employment; but in Krishna Murgai –v- Superintendence Company of India (1979) it was held that a restraint imposed on the employee to operate after the expiry of his period of service was prima facie void.

Note that this means that non-compete provisions in contracts for the sale of a business or franchise benefit from the statutory exception, but non-compete provisions in contracts for the provision of services are subject to the "reasonableness" test applied by the Indian courts, so that the drafting of those provisions in long term service contracts, such as outsourcing contracts, will be an important task.

Agents and Distributors

The ICA does define the status of "agent", and contracts of agency are based on two principles:

  1. Whatever a person can do personally is allowed to be done by an agent except in the case of contracts involving personal services; and

  2. A person who does an act through a duly authorised agent does it by himself and so the acts of the agent are considered the acts of the principal.

These principles will be familiar to English lawyers, and the commentary in relation to agents and distributors is simply that at a commercial level, the expressions 'agent', 'representative' and 'distributor' tend to be used more interchangeably in India. Whilst it is generally understood that an agent will only procure business and will be paid through a commission, business people generally are less focussed on the legal distinction between agent and distributor than we are in the UK because of, for example, the different consequences of termination of agencies and distributorships under our Commercial Agents Regulations.

So care is needed when appointing an agent or a distributor, or when including provisions in a contract that refer to agencies or distributorships, to make sure that the Indian counterparty has the same understanding as to what this entails.

Data Protection

Currently, there is no data protection legislation in India. This means that from an Indian legal perspective there is no requirement for a contract under which personal data will be processed in any manner to address that processing, and equally means that if the contract does not include any such provisions then there will be no obligations on the parties akin to the EU's data protection principles. This is a 'hot topic', particularly for businesses in Europe subject to the Data Protection Directive, and even for companies from countries such as the US – which lack a statutory framework for data protection but nevertheless expect standards of data security to be met.

Whilst the Government of India is presently considering enacting data protection legislation, or amending the Information Technology Act, based on industry feedback and a draft data protection law drawn up by a Government taskforce, until that legislation is in place it is necessary to protect personal data by imposing contractual obligations on the contracting parties – and at least the good news is that Indian law does not prohibit the imposition of such obligations.

The common law principles of confidentiality may at least apply to provide some safeguards for personal data. There is also the Indian Penal Code 1860 which prohibits theft of data, and the Information Technology Act 2000 which prohibits computer hacking.

So, where protection of data is relevant, there should be a data policy that regulates the sharing of that data, and express contract provisions dealing with all aspects of the processing of the data and the consequences for breach of those processing obligations. The data should also be expressly categorised as confidential information.

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