Contract Law

[By Swarnendu Chatterjee & Shreya Mittal] The authors are Advocate-on-Record, Supreme Court of India and a student at National Law Institute University, Bhopal respectively.   (This is in continuation of the Part I of the blog where the author discusses the background and the verdict of the Supreme Court in the above-captioned case. In this Part, the author highlights the principle of arbitral autonomy and minimum judicial intervention and the doctrine of harmonious construction as applied in this case. Finally, the author concludes by summarizing the judgment and underlining the apparent criticism.) A. Arbitral Autonomy and the Principle of Minimum Judicial Interference Arbitration is a voluntary method for resolving disputes between parties that is founded on their agreement to submit their issues to an arbitral tribunal made up of one or three impartial arbitrators, who are either selected by the parties themselves or on their behalf.[1] The Judgement visits important principles enshrined in the Arbitration and Conciliation Act, 1996 to reason its decision. The principle of arbitral autonomy gives the Arbitral Tribunal the power to govern its own jurisdiction. It comes from the consent of the parties which excludes or limits the jurisdiction of legal systems to that specifically given in the concerned statutes, i.e., for India being the Arbitration and Conciliation Act, 1996. The principle of judicial non-interference also encompasses the principle of arbitral autonomy. The Supreme Court holds that the principle of separability goes beyond the issue of Kompetenz-Kompetenz principle. The word “authority” under Section 33 of the Stamp Act includes the Arbitral Tribunal as it is a creation of law supported by the provisions of the Arbitration Act and the intention of the parties to arbitrate. The stamp objection could be before the Arbitral Tribunal and taking the issue before the court would hold up the process. Rather, the alternative could be to limit the jurisdiction of the Court to interfere to the stage after the Arbitral Award has been passed instead of derailing the process. B. Harmonious Construction of the Arbitration Act, the Stamp Act, and the Contract Act Every statute is enacted by the Parliament with a legislative intent which gives purpose for the existence of the statute that must be taken into consideration while interpreting various provisions of the statute. However, it may be possible that while interpreting a provision of a statute, it may come into conflict with some other statute. Here, the Courts try to interpret the conflicting provisions harmoniously, so that it does not defeat the purpose of the statute. While interpreting, the Courts should keep in mind to not render the statute a “dead” letter and it must be so interpreted to give full effect to the conflicting provisions. With emerging developments in the field of Arbitration and UNCITRAL Arbitration Rules coming into place, the Arbitration Act was enacted by the Parliament to put India’s domestic laws at par with the international standards. On one hand, the intent of the legislature in enacting the Arbitration Act was to ensure the facilitation of an effective arbitration process and the reduction of judicial intervention within the arbitral proceedings. While on the other, the object of the Stamp Act was to generate revenue for the State. The two Acts come into conflict over here which is most precisely dealt by in the Judgement. The Judgement gives primacy to the Arbitration Act over the Stamp Act and the Contract Act, in matters involving arbitration agreements. This is reasoned by the way of classifying the Arbitration Act as a special legislation and the other two as general laws. The Arbitration Act governs the domain of arbitration in India. The issue here is in relation to arbitration agreements and not in general agreements or contracts as defined in the Contract Act. The Arbitration Act defines arbitration agreements and broadly deals with all the legal aspects of them. The Court in N N Global 2, while interpreting the various conflicting provisions, observes that in proceedings under Section 11 of the Arbitration Act, the interdict in Section 5 of the Arbitration Act would not take away limb from Sections 33 and 35 of the Stamp Act, and that it would not amount to judicial interference. However, interpreting differently, the Judgement does not agree with the said position of law laid down. The Judgement gives importance to the non-obstante clause in Section 5 of the Arbitration Act which reads as, “5. Extent of judicial intervention.—Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.” The Arbitration Act being a special law coupled with the non-obstante clause, the Judgement observes that it excludes the operation of Sections 33 and 35 of the Stamp Act, thus observing that the decision in N N Global 2 was not the correct position of law. The unqualified object of the Stamp Act is, among others, securing revenue for the state. However, the consequent cost of holding an unstamped or under-stamped agreement as unenforceable would result in derailing many arbitration proceedings over the country. Eventually, the price to be paid would be disastrous and it would miss the purpose of the Stamp Act. On the other hand, the principles upheld in the SC Judgement by letting the Arbitral Tribunal decide the issue of the validity of unstamped or under-stamped arbitration agreements while not interrupting the arbitration process would be in the best interests of revenue. Additionally, the revenue demand could be met during the arbitration process. II. CONCLUSION In the author’s view, the Supreme Court has set the jurisdictional framework in line with accepted and expected international arrangements of arbitrability. The Supreme Court has effectively gone on record to say that it was the Parliament’s view to further endeavor to make India an arbitration friendly regime. In the same vein, the Supreme Court has correctly set the legal framework in the right direction by upholding the validity of arbitration agreements contained in the

[By Swarnendu Chatterjee & Shreya Mittal] The authors are Advocate-on-Record, Supreme Court of India and a student at National Law Institute University, Bhopal respectively.   Abstract: By a judgement dated December 13, 2023, a seven-judge bench of the Supreme Court in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, unanimously decided on the issue surrounding the admissibility of unstamped or insufficiently stamped instrument in evidence. By overruling the five-judge bench verdict in NN Global Mercantile Private Limited v. Indo Unique Flame Limited, the Court held that an unstamped or insufficiently stamped instrument would be inadmissible in evidence, however, the same is a curable defect and that in itself does not make the agreement void or unenforceable. In this case comment, we discuss the facts and view of the seven-judge bench verdict and critically analyze this decision and its impact while delving into the conflicting reasoning of previous judgements. The comment sheds light on the various key aspects discussed by the Supreme Court such as the distinction between admissibility and voidness, doctrine of arbitral autonomy, and the harmonious construction of the three statutes. Finally, the comment observes that even though the judgement promotes arbitration friendly regime in the country, it leaves room for further discussion. I. INTRODUCTION On December 13, 2023 the Supreme Court of India (“Supreme Court”) delivered the judgement In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899[1] (“the Judgement”). The Court laid to rest the long standing quandary of whether arbitration agreements would become non-existent, unenforceable, or invalid if the underlying contract is unstamped or under-stamped.Theseven-judge bench led by CJI D. Y. Chandrachud delivered its verdict to over-rule the law laid down inM/s N N Global Mercantile Pvt Ltd vs M/s Indo Unique Flame Ltd And Ors[2](“N N Global 2”). The issue arose in the context of three Statutes – the Arbitration and Conciliation Act 1996[3](“the Arbitration Act”), the Indian Stamp Act 1899[4] (“the Stamp Act”), and the Indian Contract Act 1872[5] (“the Contract Act”). On one hand, the quandary revolving around the enforceability of unstamped agreements has been a long-standing issue.On the other hand,Arbitration is a fast-emerging alternate dispute resolution mechanism.Unstamped or under-stamped arbitration agreements have,therefore,become a matter of exploration by the Courts in India. The conflicting decisions on this issue have been laid to rest by the Supreme Court. II. BACKGROUND The controversy began with the decision by the Supreme Court in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd[6](“N N Global 1”),where Special Leave of the Court invokedto determine the enforceability of an arbitration agreement contained in an unstamped work order.It was observedthatthe arbitration agreements are separate and distinct from the underlying commercial contract and would not be rendered invalid, unenforceable, or non-existent by virtue of unstamping or under-stamping of the principal contract. The non-payment of stamp dutybeing a curable defect would not invalidate even the underlying contract. This was an important juncture in the series of cases as the view taken by the Supreme Court was at variance with previous decisions rendered by the Supreme Court. Relying on the decision in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd,[7](“SMS Tea Estates”), where the Court held that an arbitration agreement in an unstamped contract could not be acted upon, the Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd[8] (“Garware Wall Ropes”)was of the opinion that an arbitration agreement in an unstamped commercial contract would not exist as a matter of law and could not be acted upon until the underlying contract was duly stamped.  This was further fortified in the three-judge bench verdict of Vidya Drolia v. Durga Trading Corporation,[9]where the Court observed that an arbitration agreement exists only when it is valid and legal, thereby arbitration agreements must satisfy requirements of both the Arbitration Act and the Contract Act. However, N N Global 1 doubted the correctness of this position of law and referred the question of applicability of the statutory bar on arbitration agreement contained in an instrument, where the payment of stamp duty was pending,to a five judge bench which decided the matter in the case of N N Global 2. The court in N N Global 2 observed that the position of law given in N N Global 1 was not correct and reiterated the position of law as decided in SMS Tea Estates and Garware Wall Ropes. The majority judgement in N N Global 2 may be summarized as under: In accordance with Section 2(g) of the Indian Contract Act, 1872 an instrument lacking proper stamp duty and incorporating an arbitration agreement is rendered void. An instrument devoid of proper stamping, not constituting a contract and lacking legal enforceability, is non-existent in the eyes of the law. The arbitration agreement contained therein can only be given effect subsequent to its appropriate stamping; The conceptualization of the “existence” of an arbitration agreement as contemplated in Section 11(6A) of the Arbitration Act transcends mere facial or factual existence and encompasses a requisite “existence in law”; A tribunal operating pursuant to Section 11 of the Arbitration Act is precluded from overlooking the imperatives delineated in Sections 33 and 35 of the Stamp Act, mandating thorough scrutiny and impounding of instruments lacking proper stamping; The authenticated copy of an arbitration agreement must transparently delineate the discharge of the stipulated stamp duty. In Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram v. Bhaskar Raju and Brothers,[10](“Bhaskar Raju”) the court cited SMS Tea Estates with approval. Bhaskar Raju was decided before N N Global 1. On 7 December 2022, a curative petition was filed seeking a reconsideration of Bhaskar Raju. On 26 September 2023, a Bench of five judges took up the curative petition. Considering the larger ramifications and consequences of the decision in N N Global 2, the Court referred the proceedings to a seven-Judge Bench. Hence, the Supreme Court in the Judgement considered

[By Ritesh Raj] The author is a student of NLSIU, Bangalore.   Introducing the Theories of Expectancy and Reliance in Damages The theories of expectancy and reliance in assessing damages became discreet with the publication of LL Fuller and William R Perdue Jr’s paper. Reliance interest was defined as damages paid to restore the plaintiff to the pre-contractual status quo position as if the contract had never existed. The object is to compensate the plaintiff for the loss suffered by relying on the promise. Expectation interest is damages paid to put the plaintiff in the same position he would have acquired had the contract been performed. The object is to fulfil the plaintiff’s expectations to the extent possible. In India, it is well-established that both damages cannot be claimed at once.[1] However, the distinction between the two becomes unclear in the periphery. Though the courts have explicitly mentioned not to award both the damages, it ends up doing the same.[2] Also while awarding, the courts have not followed a uniform principle for determining which damages to award: reliance or expectancy. This paper argues that expectancy damages should be the rule and reliance damages be an exception to the general rule. To that end, the first part elaborates on both the damages. The second part argues why this principle should be followed. The third part demonstrates how the courts have erred in following this principle. It recommends a test to do so. The final part concludes. Expectancy Damages Should be the Rule, let Reliance Damages be an Exception It has long been accepted that damages for breach of contract are given in order to put the plaintiff in the same situation he would have been in if the contract had been completed. This reasoning, however, is insufficient to persuade the courts to embrace the principle of expectancy damages as the rule and reliance damages as an exception. As a result, this section elaborates on the reasons why courts should adhere to this concept. I. In circumstances when the breach is purely for monetary gain, expectation damages operate as a deterrence to breach of contract. An illustration: Mr X contracted to sell his car to a reselling company PLX. PLX, relying on the same, purchased some parts required to restore it (incurred expenditure). Mr X, however, breached the contract. PLX can now either claim the loss of profits (expectancy damages) that the company would have earned had the contract been performed or the expenditure wasted in buying those parts (reliance damages). If it’s claiming expectancy damages, it cannot claim reliance ones as it would have to buy parts if the contract was to be performed. Awarding expectation damages includes the wasted expenditure which is reduced to compute the loss of profits. In this scenario, if Mr X broke the contract by selling his car to another firm TLX that paid more than PLX, it would be ethically wrong to award reliance damages. This is because the defendant is in a better position (received a greater amount for his car) at the expense of the plaintiff (wasted expenditure in buying parts for restoration). However, paying expectation damages would dissuade Mr X from breaking the contract since he would have to compensate PLX for lost earnings. This would limit the additional profit he would have gained from selling his car to TLX. In essence, the fact that expectancy damages tend to be excessive than reliance damages acts as a deterrence to contract breaches. II.[3] Reliance damages are not enough in cases where it is difficult to measure damages. In the very cases where calculating expectancy damages is difficult, it is the most important to award the same. However, since it is difficult and because the burden of proving that the damage has occurred often falls on the plaintiff,[4] reliance damages become the only viable remedy available. However, in RK Malik and Ors v Kiran Pal and Ors, where 29 children died in an accident, the SC awarded damages even for future prospects. The court held an extensive discussion about the children’s future possibilities based on how well they fared in school and awarded expectation damages as a result. Though estimating such damages may appear implausible and arbitrary, the court stated that even if the precise sum cannot be calculated, some fair recompense should be provided. The above case demonstrates that expectancy damages can be awarded on the basis of just and reasonable compensation even in circumstances where they are difficult to quantify. The question now is why the courts do not follow suit in commercial cases. The reason for this is the feasibility and brainstorming that the courts must go through in determining how much expectation damages are justified. Because there is no bodily injury involved in commercial claims, the courts take the easy route. Bungo Steel Furniture Pvt Ltd v UOI is a case in point demonstrating the easy path the Tribunal adopted. While awarding damages for incomplete bins, the Tribunal awarded loss of profits as the difference between the contract price and the cost of the bins. It did not, however, take into account that the bins were still unfinished. So, the real loss of profits, which was ultimately awarded by the SC, would have been the difference between the contract price and the cost of labour and steel required for the manufacture of the incomplete bins. This shows that courts do award damages on the basis of feasibility. This should be avoided when awarding expectancy damages. In essence, the courts should award expectancy damages to the extent possible. Feasibility should not be the basis for deciding whether expectancy damages are to be awarded or not. III. Even illustrations under S 73 of the Indian Contract Act, 1872 (hereinafter, ‘the ICA’), prefer awarding expectancy damages to the extent possible. Out of the 18 illustrations given, expectancy damages were given in 12 of them. In illustration (b), there was no expectancy damage, so that can be excluded. Even in the remaining 5, reliance damages were

[By Smriti Jaiswal] The author is a student of National Law University of India, Bangalore.   Introduction In January 2022, the Insurance Regulatory Development Authority of India (‘IRDAI’) released IRDAI (Surety Insurance Contracts) Guidelines, 2022 for India’s emerging surety bonds market. As the current guidelines stand, the surety bonds in India shall be treated as a contract under Section 126 of the Indian Contracts Act 1872 (‘ICA’). Section 126 of ICA defines a special type of contract – the Contract of Guarantee – and the subsequent Sections 127-147 of ICA lay down the law for governing such contract. Therefore, the existing principles of suretyship as interpreted by the courts within the confines of ICA will be applicable to surety bonds. This means that even Section 133 of ICA which deals with discharge of surety by variance in terms of contract will be applicable to the surety bonds. This would act  as a hindrance in the growth of the surety bonds market as there are remarkable differences in surety contracts as envisaged under ICA and surety bonds. Therefore, this paper argues that the position of law for Section 133 should not be applied to surety bonds for the sake of economic efficiency and infrastructural growth. Firstly, this paper analyses the position of law in India with respect to Section 133 of ICA by tracing case laws from 1920 to 2021. Secondly, the key differences between surety contracts as envisaged under ICA and surety bonds will be highlighted to show that the effect of applying Section 133 to surety bonds will be unfavorable for the emerging surety bonds industry. Thirdly, the potential solutions will be explored for promoting the surety bond growth in India. Legal Position of Section 133 under ICA a.      Section 133: General Explanation Section 133 of ICA states that the surety is discharged from his obligation if any alteration (‘variation’) is made in the contract without his consent. This is based on the principle of equity and consent of the parties. [1] The liability of a surety is stricissimi juris as surety is considered a favourable debtor and he receives no benefit or consideration. This is the strict rule of variance where even a slight change would be considered variance without any inquiry into its materiality or effect on the surety. This strict rule was rejected in Holme v. Brunskill stating that if the change in the contract is prima facie unsubstantial or for the benefit of the surety then surety may not be discharged; yet, if the court cannot conclude that the change is unsubstantial or cannot be prejudicial to the surety, the surety shall determine whether to continue or be discharged with the contract. The strict rule was also criticized for being repugnant to justice and common sense as it would render various contracts unenforceable. The shortcomings of the strict rule led to the emergence of materiality of variance rule. Therefore, the Bombay High Court in Keshavlal Harilal Setalvad v. Pratapsing Moholalbhai Sheth stated that – if any material variance is made in the terms of the contract, the surety alone is to judge whether he should undertake the burden in respect of the new contract or not. Section 133 discharges the surety once a material variance is made without his consent in the contract of continuing guarantee but not in cases of trivial or unsubstantial changes. b.     Materiality of Variance Rule The materiality of variance rule is not crystal clear in itself. The courts grappled with the challenge of determining what constitutes material variance and what does not. Though materiality is to be decided on a case-to-case basis, a trend can be observed in Indian case laws revealing the main factors to be considered for determining the materiality of variance in contracts. Would surety have agreed if the variance was known while entering the contract (hereinafter ‘would have entered test’): In the case of D.K. Mohammad Ehiya Sahib v. R.M.P.V.M. Valliappa Chettiar, the Madras High Court stated that if upon revealing the variance made in the contract to the surety while entering the contract would have prevented him from becoming a part of the contract, then the variance is material. The test assumes a reasonable man standard for determining the surety’s judgement about the variance. Contemplation of Parties (hereinafter ‘contemplation test’): In the case of Parvatibai v. Vinayak Balwant Jangam, the Bombay High Court stated that if the contractual parties had contemplated the variance while entering the contract, then the variance is not material. This test shows a wide departure from the strict rule. The surety could be made liable for something more than he agreed if he could reasonably foresee the variance. However, the court made it clear that the nature of the contract should not be altered. Intention of Parties (hereinafter ‘intention test’): The Supreme Court in MS Anirudhan v. The Thomco’s Bank Ltd., said that if the variance is made in order to give effect to intention of the parties or something that parties unintentionally omitted, then the variance is not material. This intention should be apparent on the face of the deed. The Madras High Court applied this intention of the parties test in S. Perumal Reddiar v. BoB while dealing with the question whether filling in the material information after obtaining the surety’s signature would amount to variance. The court held that any material additions cannot be done once the surety has consented to the contract. The case of Lachmi Rai v. Srideo Rai was referred to show that addition of any word unintentionally omitted in the original contract shall not amount to material variance. Beneficial to the Surety (hereinafter ‘benefit test’): While in Holme’s case, the court said that the surety “may not be discharged” if the variance is beneficial to the surety, Indian courts have stated that the cardinal rule is that the surety cannot be liable for beyond the terms of engagement. When the variance benefits the surety, it is not beyond but within the terms of

[By Shashwat Lohia & Shreya Saswati] The authors are students of National University of Study and Research in Law, Ranchi & National Law University, Odisha.   Introduction Rapid technological advancements haven’t always made it easy for the law to keep up. A recent judgement of the Canadian Courts (“Canadian Judgement”) has determined that the ‘thumbs-up’ Emoji can be utilised to create a legally binding contract. Allowing this action to be a method of deemed acceptance to a proposal has terrifying implications in the long run. Ambiguity is a result of a multiplicity of meanings followed by misunderstandings arising from such discrepancy strikes at the heart of Contract Law. The presence of consensus ad idem or the ‘meeting of minds’ being an essential element governing the validity of a contract, may inevitably be overlooked with this new mode of acceptance. Of all the essentials of a contract, the intent to accept a proposal through adequate communication via the use of Emojis, Emoticons, and GIFs(“EEG”) is under scrutiny. This lacuna can be resolved through a better study of the intent of parties and their subsequent conduct revolving around consent in their digital contractual agreements. Multiplicity of Meaning Pictorial representations for communication are not new to the world. Ancient Egyptians had mastered communicating via cuneiform using hieroglyphics. In the past decade, due to the growth of technology and the parallel development of social media, there has been an upsurge in non-linguistic communication through the medium of EEGs. The problem arises when language and interpretation come to play. It is in this gap of intention that Emojis carry a multiplicity in the interpretation. The connotation they signify is greatly dependent on the culture of the parties in the conversation, as well as the common parlance and overall tone of a conversation. It is interesting to note the discrepancy arising out of cross-platform and cross-device use of Emojis which inevitably renders many Emojis to be misidentified or show up as ‘unknown’ which leaves the conversation disputed. The Canadian Judgement is not the first (see here and here) development towards a ‘Law on Emojis’. However, it is one of the first to establish that a commonly denoted meaning behind an Emoji would suffice to prove the intent of the parties. Essentials of a Contract, Intent, and the Modern Dilemma The Courts of India have not adequately discussed the law of contracts taking place over mobile phones in the manner it has so evolved. This modern contract is formed with elements of contracts made by fax as well as telephonic conversation being galvanised due to instantaneous communication conducted over text messages. Of the essentials of a modern contract, the formative element which concludes the existence of a contract is acceptance. The courts have derived in multiple cases that so long as a contract is not vague, unreasonable and/or against public policy, it is held valid while considering the illustrative situations under Section 8 of the Contracts Act, 1872. However, a unique type of contract that does not explicitly direct one is the unilateral contract. The communication of assent or acceptance for a contract may mislead either party. However, EEGs used sarcastically or otherwise may not directly imply acceptance, which therefore leads to no consensus ad idem. Thus, the modern dilemma is understanding when there is intent present. The ‘core’ of a contract[i] is formed by the basic, most fundamental aspect of the agreement and is generally then bound by caveats and exceptions to form a commercial contract as we may imagine it to be. These caveats are rendered irrelevant when considering whether the contract was formed or not. When there is an intention, this ‘core’ of the contract is agreed upon and therefore held valid. Implied contracts in the Indian Contract Act, 1872 have been well discussed by the Law Commission of India[ii]. The Commission has emphasized that a contract would also be binding by the beginning of the performance of the offeree, which creates unilateral contracts. The Canadian Judgment and the facts of the case therein support this. Therefore, it would be best to conclude that a contract so formed by EEGs would be a unilateral contract subject to performance with a pre-existing relationship between the individuals. A judgement of the Israeli Courts has followed this rule without directly averring to it. Analysis The Canadian Court’s reasoning behind allowing acceptance by way of the thumbs-up Emoji was based on the premise that consensus ad idem has been reasonably reached from a bystander’s viewpoint upon examining the entire conversation. Thus, implying a requirement for a pre-existing relationship between the parties to form an essential aspect of this modern contract. A contract is deemed voidable if either of the parties hasn’t given free consent or has misinterpreted the terms of the contract. Such informally acknowledged contracts, although convenient, are quite unreasonable in the long run due to a higher chance of misinterpretation by either party and a lack of commercial certainty. A GIF sent by one party with the intention of rejecting the other party’s offer might easily be misinterpreted as acceptance on the other end, rendering the entire contract voidable. Beyond the Law of Contracts Accepting this new form of consent to be valid would open new channels of litigation, both civil and criminal. The provisions of the penal laws (e.g. Criminal Conspiracy) could greatly be misused against people. Any sarcastic use of EEGs can easily be misinterpreted as an agreement to conspire. The essentials of an agreement and that of Criminal Conspiracy are similar, as they both require agreement to do an act or omit a thing via a meeting of minds and an object. The point of distinction is whether the object is lawful or not. Common intention could be easily established in such cases, wrongfully implicating innocent parties who simply replied or reacted to the text, not knowing that they implied assent. At the same time, entirely limiting the laws from accepting such agreements would be wrong, as genuine agreements to conspiring might

[By Ashish Kumar and Rebecca Singh] The author are a students of NMIMS School of Law, Bangalore.   Introduction In the realm of construction and infrastructure contracts, the inclusion of a Latent Defect Period is essential to address the potential emergence of hidden flaws or deficiencies after project completion. However, this provision poses legal challenges regarding limitations and applicability. Determining a reasonable timeframe and defining eligible defects are crucial considerations. Additionally, notice requirements for timely defect reporting must be established. By effectively navigating these challenges, the Latent Defect Period can ensure project quality and protect the interests of both clients and contractors. This article will be analyzing the legal standing of India on Latent Defect Period with the application of law of limitation and liability of contractor with a comparison with other jurisdictions. What is Latent Defect? A latent defect refers to a flaw or fault that is not readily apparent to the naked eye or noticeable upon ordinary inspection. It represents a concealed flaw in either workmanship or design, which may not be immediately detectable but can impact the functionality, safety, or value of the subject matter. This distinction is crucial, as the focus lies on the defect itself rather than the potential danger it may pose. Characteristics of Latent Defect: Concealment: A latent defect is characterized by its hidden nature, making it difficult to identify through routine observation or ordinary care.[1] Lack of Knowledge: The defect is one that the owner or party responsible for the subject matter does not possess knowledge of or should not have had knowledge of, even with reasonable care exercised[2]. Reasonable Inspection: To determine the presence of a latent defect, the level of inspection that a party should reasonably anticipate the subject matter to undergo is considered. The defect must remain undiscovered within the bounds of such anticipated inspections.[3] Legal Analysis In the context of sales where goods are described as the basis of the contract, the accuracy of the description is vital. The Indian perspective recognizes that the falsity of this description, resulting in substantial differences, constitutes a failure of consideration. Moreover, when goods are bought by description, an implied condition exists that the goods should be of merchantable quality, i.e., free from defects[4]. This article explores relevant cases and legal observations to provide insights into the Indian perspective on defects, implied conditions, and latent defects in the sale of goods by description. Defining Latent and Patent Defects: In Sorabji Hormusha Joshi and Co. vs V.M. Ismail and Anrs, the court established a distinction between two types of defects: patent defects and latent defects. Patent defects are those that can be reasonably identified by a person of ordinary prudence through a careful examination of the goods. On the other hand, latent defects are not readily detectable through such an examination. The seller implicitly bears responsibility for latent defects, while the buyer assumes responsibility once they have been identified. Whether a defect is considered latent, or patent depends on various factors such as the nature of the goods, the specific defects involved, and the level of examination required to discover such defects. Each case must be individually evaluated based on its own circumstances. Implied Conditions and Examination: Under the Indian Sale of Goods Act, an implied condition exists that the goods sold by description must be free from latent defects. However, for a seller to be absolved of responsibility, the buyer must have had a genuine opportunity to examine the goods thoroughly. If the buyer only conducts a superficial examination of the goods, the implied condition that they are free from latent defects may be nullified. This is because defects that could have been discovered through a more thorough examination are no longer the seller’s responsibility. The required level of examination by the buyer varies depending on the circumstances and nature of the goods. Board of Trustees of the Port of Calcutta v Bengal Corporation Pvt: In this case, where wire ropes were supplied for crane use, the court held that the goods were bought by description, and the seller was obligated to supply goods reasonably fit for use in cranes. As the defective nature of the goods was not apparent through ordinary examination and could not be detected before use in cranes, Section 16(2) of the Sale of Goods Act, 1930,regarding defects, was not applicable. The Section 16(2) of the Sale of Goods Act prescribes when the goods are purchased from a seller on the basis of the description then there is an implied condition that the goods must be of satisfactory quality. However, if the buyer has examined the goods, there is no implied condition for defects that could have been discovered during the examination. Thus, there was an implied condition of merchantable quality, which the goods supplied by the seller did not meet. Hasenbhoy Jetha, Bombay v New India Corporation Ltd., Madras: In this case, the court noted that when the defect is latent and cannot be revealed through ordinary inspection, the opportunity for inspection or a hand-operated inspection is insufficient. The defect must be revealed through a demonstration with electric power, as in the case of a crushing machine producing only 1.5 tons per hour. In such situations, the buyer is entitled to damages for breach of contract or warranty. Law of Limitation The liability for latent defects in India is an area where the law lacks explicit clarity. However, the Limitation Act provides guidance by establishing a three-year limitation period for bringing claims related to latent defects. This period commences from the date when the cause of action accrues or when the relevant contract is breached or ceases to exist. To address latent defects in the construction industry, the Delhi Development Authority has issued guidelines for decennial latent defect liability. The term “decennial latent defect liability” refers to the liability arising from latent structural defects discovered or becoming apparent within ten years from the date of issuing the occupation cum building completion certificate by the authorized sanctioning

[By Mayank Jain] The author is a student of Jindal Global Law School. Introduction  The Indian Judiciary has time and again faced the problem of ascertaining whether the issuance of a cheque for the repayment of time-barred debt is valid or not. The Limitation Act of 1963 puts a bar of 3 years. This means that if a cheque for repayment was issued on 01.01.2011 and the money was borrowed on 01.01.2005, the same amount would not be ‘legally enforceable debt’ and resultantly, the recovery of the said amount would be barred by the law of limitation. The article aims to address the question of whether a default u/s 138 of the Negotiable Instruments Act 1881 would apply to cheques issued with the intent of paying off time-barred debts. Unorderly Application in Indian Judicial Dicta The Courts have adopted extremely divergent and contradictory approaches while dealing with this issue. S. 138 the Negotiable Instruments Act 1881 provides that when a cheque has been drawn by a person in favour of another, and the same is returned by the bank on grounds of (i) insufficient balance or (ii) when the amount exceeds the limit set by the bank in pursuance of an agreement with the person drawing the cheque, such person is guilty of an offence. In Girdhari Lal Rathi v. P.T.V. Ramanujachari and Ashwini Satish Bhat v. Jeevan Divakar, the Courts held that when the cheque is issued for a time-barred debt, then in the event of the dishonour of cheque in such instances, a claim u/s 138 of the Negotiable Instruments Act 1881 cannot be made. This is so because the provision is only attracted when the impugned debt is ‘legally enforceable’ in character. A similar judicial opinion was upheld in Chander Mohan Mehta v. William Rosario Fernandes, wherein the Bombay High Court, by relying on Narender V. Kanekar v. Bardez Taluka Co-op Housing Mortgage, concluded that since, in a time-barred debt, the loan recoverable is not of sound legal nature, the penalty u/s 138 of the Negotiable Instruments Act 1881 is inapplicable. However, in Dinesh B. Chokisi v. Rahul Vasudeo Bhat, the Court overruled all previous precedents and came up with a decision that is regarded as a piece of legal talent. In paragraph 9, it was noted that S. 25(3) of the Indian Contract Act 1872 lays down that a promise in writing to pay off a debt that is time-barred amounts to an agreement that is to be deemed as a valid contract. The Court here categorically stated that in the event of a time-barred debt, the issuance of the cheque after the elapse of the limitation period amounts to the requirement of promise as postulated in S. 25(3) of the Indian Contract Act 1872. This judgement, despite being pronounced by a lower court, was able to decode the cryptic law in the area and fill the lacuna in legal interpretation that was created by the Apex Court in A.V. Murthy v. B.S. Nagabasavanna. In this judgement, it was noted that in cases of time-barred debt, provisions of S. 25(3) can be attracted provided there is subsequent acceptance/acknowledgement of the existing liability. However, what this Supreme Court judgement failed to establish is whether the mere issuance of a cheque in itself amounts to a promise in writing, a prerequisite enlisted u/s 25(3). To further decode this gap, reliance can be placed on National Insurance Co. Ltd. v. Seema Malhotra, in which where the Division Bench noted that a cheque is a bill of exchange, and the latter is an instrument in writing, directing one individual to provide a certain sum of money to another. Based on this interpretation, Courts have gone ahead and interpreted a cheque to be a form of written promise capable of sufficing S. 25(3). Until now, the Apex Court has failed to provide an unequivocal definition of the nature of a cheque. Recently, in Kotak Mahindra Bank Ltd. v. Kew Precision Parts Pvt. Ltd., the Supreme Court further strengthening the lacuna of law held that u/s 25(3), a debtor can enter into an agreement with the creditor to pay off the time-barred debt, however, there must exist some form of a written acknowledgement of the same. The judgement failed to address the issue of whether a cheque is equivalent to any such acknowledgement. Considering the existence of ambiguity with respect to the nature of a cheque, the state High Courts have adopted their own standards to remove this vagueness of the law. The Kerala High Court in Ramakrishnan v. Parthasaradhy, opined that if a cheque is dishonoured on the grounds of insufficiency of funds, the accused person will not be entitled to take the defence of time-barred debt when the cheque was signed. Hence, such an accused will not be excused from the rigours of S. 138 of the Negotiable Instruments Act 1881. The Court rejected all contravening precedents and granted validity to a cheque constituting a written promise made u/s 25(3) of the Indian Contract Act 1872 despite the demise of the limitation period. The dicta of the Kerala High Court were also noted in paragraph 7 of Vijay Ganesh Gondhlekar v. Indranil Jairaj Damale, wherein the Court observed that once a fresh promise is made u/s 25(3) of the Indian Contract Act 1872, then a fresh period of limitation of 3 years begins from the date of issuance of the cheque. Consequently, the liability that would arise is of a ‘legally enforceable debt’. Vikas Bahl in Sultan Singh v. Tej Partap[i] gave a decision largely in favour of the complainant based on precedents of other state High Courts and cardinal principles of equity, justice, and good conscience. It was noted that when an individual consciously issues a cheque for a time-barred debt, then, upon committing an offence u/s 138 of the Negotiable Instruments Act 1881, they cannot claim the relief of frustration of limitation period as that would – (i) be prejudicial and cause injustice to the complainant and