LEGAL ASPECTS IN

PROCUREMENT

T. Sudhakar, SMM/M&E/LGD
 Introduction
• Stores Department main role is contract making which comprises minimum of 2
parties. Buyer and Seller are the major parties, other parties includes Inspecting
agency, Consignee, Transporting agency etc.
• As Multiple parties are involved in an agreement , high chances of disagreement of
thoughts & dispute are there.
• Thus framing proper contract is utmost important to avoid differences/disputed
between various parties .
• Procurement has evolved in past 2 decades with advent of Information technology.
Now dealing with contracts has taken new shape and dimensions.
• It involves various other challenges like supply failure, supply not as per standards,
Party disputes, litigations etc.
• To avoid and deal with these we need to have a good understanding on legal side &
its role in Procurement.
• In a Nutshell having legal knowledge:
1) Avoid risks & troubles in procurement.
2) Helps in achieving organizational goals more efficiently.
 Objective
 Understanding Role of Contract writing in
procurement.
 Understanding what is contract & its formulation.
 Understanding various other terms & conditions
in procurement.
 Performance in Contracts.
 Remedies for poor performance & non
compliance
 Dispute/Conflict Resolution
 Applicable Laws and Contracts
 Understanding the concept of Arbitration.
 Studying examples.

Objective: Mitigate Risks and to ensure Cost effective and efficient contract mangement.
 Role of Contract Writing in Procurement:
 Several disputes/problems may arise in procurement due to mistakes
at pre-contract stage itself.
eg. Supplier is quoting based on our tender T&Cs and specifications.
What if our specs. are wrong and unclear !!
or
What if our T&Cs mentioned are contradictory and unclear.
 Proper Planning at initial stage solves majority of
the issues. (Identifying quality requirements &
drafting proper specifications, framing correct
payment Provisions, delivery & commercial terms
& Conditions in accordance with requirement &
rules)
 Use checklist at tendering stage so that all key issues
are covered to prevent complications at post
contract level.
Checklist for Minimum T&Cs
 Scope of contract & description/specifications .
 Duration of the contract/Delivery (When, Where ??)
 Price (What is included, Tax, Freight, Insurance etc, SVC !!)
 Inspection (Agency, Cost of inspection, Where, When, Final
Acceptance?)
 Warranty (When commenced?, How Long?, T&C of warranty?)
 Payment schedule ( When due?, Who pays?)
 Damages & Liabilities? ( Indemnification?, Insurance)
 Disputes (How to resolve?, Arbitration T&Cs !!)
 Termination & Damage claims (How much Damages?, GD,LD etc.)
 Environment Compliance & other legal compliance.
 LAW

 Law is a system of rules usually enforced through a set of

institutions.
 Law is required to avoid/settle disputes in the society between
various parties.
 The Contract Law regulates everything from buying a pin to buy an
airplane etc.
 Store officer role is purchaser in purchase contract and seller in a
scrap sale contract. The role of same person can be different.
 What is Contract?
 A contract is an exchange of promises between two or more parties to do so,

“a legally binding agreement between two or more persons which the courts of
Law will enforce."
 Generates Right & obligations that may be enforced by courts.
 Agreement arises as a result of offer & acceptance.
 Offer and acceptance does not
leads to a contract until it fulfills
some other conditions !!
 A contract can be:
 Executed contract or
Bilateral contract
 Executory contract
 Unilateral contract
 INDIAN CONTRACTS ACT
1872
 OFFER - An offer is an proposal form one person to
another, to do or to abstain from doing something.
 PROMISE - When a person, to whom proposal is made, accepts the proposal it becomes
a promise.
 AGREEMENT - Every promise having a consideration for each other is a agreement.
(AGREEMENT = OFFER + ACCEPTANCE)

Agreement LAW (Legal enforceability)

Contract
 CONTRACT: Agreement which is enforceable by Law is called as a contract. The
Agreement must create a legal obligation or duty.
“All contracts are agreements but all agreements are not contracts.”
Essential elements of a Valid Contracting as per
Indian Contracts Act
The essential ingredients for an agreements to be a Legal Contract:
I. An lawful Offer and unconditional acceptance of offer.
II. Presence of Consideration. (Money, remuneration)
III. A Lawful Object i.e. Legality of object, eg. A Contract of a
prohibited Drugs is void, Etc.
IV. Intention to create legal relationship.
V. Free and Genuine Consent between the parties. (No coercion)
VI. Capacity of Parties- Competency to contract or Competent
Parties. eg. Authorized, Not Minor, For IR authorized to enter in
contract as per SOP etc.
VII. An agreement must be free of vagueness and ambiguity, which
may render it unascertainable for performance. (Agreement not
expressly declared void).
Essential elements of a Valid Contracting
as per Indian Contracts Act (Contd. )
VIII. Certainty and possibility of performance (Eg.
1. An agreement to discover treasure by magic, because of its
impossibility of performance, is void.
2. B agrees to sell a tract of land to SCR but owing to some
Governmental policy this tract of land has been taken by the
state government for some official purpose. The agreement
stands frustrated & void)
“An agreement to do an act impossible in itself is void.”
VIII. It must be in writing whenever the law so requires.
IX. It must have been duly attested or registered if so required by
the law.
X. It must not be void otherwise on any respect, which shall
render it unenforceable by law.
Parties in a Railway Stores Procurement are the Contractor & Purchaser as mentioned in
clause 200 and as defined in clauses 0105 and 0113 of IRS conditions of contract.
Elements of Contract: Offer

 A proposal from one party to make a contract.

 It is Binding and has willingness to create a contractual
relationship.
 Must have a legal commitment
 From Railway Perspective, an offer is a quotation from a
firm which we receive in a tender enquiry of
procurement.
 TYPES OF OFFER
• Express offer - When offer is given to another person either
in writing or in oral.
• Implied offer - When offer is given to another person neither
in writing nor in oral.
• Specific offer - When offer is given to a specific person.
• General offer - When offer is given to entire world at a large.
• Cross offer - When both the persons are making identical
offers to each other in ignorance of other’s offer.
• Counter offer - When both the persons are making offers to
each other which are not identical in ignorance of other’s offer.
• Standing offer - An offer which remains continuously
enforceable for a certain period of time
 Essentials of a Valid Offer
 An offer can be general or specific.
 It Must have Intention of creating legal obligation.
 It must be definite and certain.
 A statement of intention and an invitation to offer are not
offers.
 It must be communicated to the offeree i.e. purchaser.
 Terms and conditions of offer should be communicated
explicitly.
 Two identical offers do not make a contract. (Acceptance of
offer makes).
Elements of Contract: ACCEPTANCE

 Contracts are complete when a quotation (which is an offer) is submitted

by the supplier and acceptance in made.
A contact is sent subsequent to acceptance, within the specified period
of time (if time is stipulated or within a reasonable time, if no time is
stipulated)
 The acceptance is given in form of Purchase Order in Railway Procurement.
 Acceptance of a offer is an indication of an offeree/purchaser to be
bound by the terms of an offer.
 Elements of Contract:
ACCEPTANCE Contd..
 If the terms of contract differ from the quotation/offer of
bidder, it is not an acceptance but a counter offer & it must be
accepted by the party concerned to make the contract
concluding and binding on them.
 Part supply/performance against an a contract/PO constitutes
an acceptance by the supplier of the terms and conditions of the
order. Similarly acceptance of the goods by the buyer
tantamount to acceptance of the supplier's terms and conditions
unless, he has protested at the time of receiving the goods.
Classic Case Study Harvey
Vs. Facey (1893) Case
Classic Case Bordgon Vs.
Metropolitan Rly. Co Case (1877)
Other Rules Regarding Acceptance
 An offer can be accepted only by the competent person.

 Acceptance must be given as per the mode prescribed.

 Acceptance should be unconditional and absolute.

 Acceptance should be communicated.

 Mental acceptance is not an acceptance or acceptance must not be

derived from silence.
 Acceptance cannot be given before an offer i.e. Acceptance must be
provoked by an offer only.
 Acceptance must be given before the offer lapses.
Provisional acceptance is no acceptance.
 Elements of contract: CONSIDERATION

Consideration in a contract is
defined as:
“something” that one party in an agreement, who
promises to do something, gets in return from other
party.

- Consideration may take the form of money, goods, an

act or service, an exclusive dealing, promise or the giving
up of an existing right.

“A contract by which only the seller is obliged to supply certain

goods, without consideration or price is not a enforceable contract.”
Competent Parties/ Capacity To Contract
 A valid contract must be made by persons who are competent to contract.
 As per Railway Rules, Rly. Officers are entering contract on behalf of President
of India. The authority is defined by Schedule of Powers.
 Other conditions for a person to enter into contract-
 He must not be a minor
 He must be of sound mind. For Eg. Lunatic, Not In Intoxicated state etc.
 He must not be disqualified by any other law. For eg. Insolvent, Convict
etc.
Note: According to Indian majority act sec(3) minor is defined as :
1) Person under the age of 18 years.
2) Person under age of 21 years who is:
i) Under the Guardian & Wards Act ,1890
ii) Under Superintendence of law/legal representative
 Free Consent
The agreement between the parties must be with free
consent. The consent of a person is said to be free when it is
not obtained by:
(i) Coercion
(ii) Undue influence
(iii) Fraud
(iv) Misrepresentation or
(v) Mistake
If there is no free consent between parties, the
contract becomes void.
 Lawful Object

 For having a lawful object ,

the subject matter of the
transactions in contract should not be illegal or opposed to
public policy. e.g
 Buying at prices higher than those fixed by the Government or
buying from unlawful sources, etc.
 An agreement to do an illegal act.
 Sale of Arms & Aminations, Banned Drug without approval of
CA Etc.
“Having unlawful object makes
the contract void”
 What Is Performance Of Contract ?
 Performance is fulfilled when the parties to the contract
fulfill their obligations as per contract within the time and in
the manner prescribed.
 To fulfill criteria of performance, the parties (i.e Purchaser or
firm in Rly procurement scenario) must either perform or
offer to perform, their respective promises, unless such
performance is dispensed with or excused. (Sec 37):
 If one party refuses to perform as per the contract (eg. Firm)
, the other party (Eg. Rlys) may put an end i.e terminate
the contract.
 Performance in contract in which Time is
essence of Contract
 When the contract condition says that supply/performance has
to be done by a party (firms in Rly procurement case) within a
specified time & it fails to do so, the contact becomes
cancellable at the option of the other party (which is purchaser
in procurement case). (Sec 51)
IMP: FOR CONTRACT TO BE VOIDABLE, IT SHOULD BE
MENTIONED IN CONTRACT CONDITIONS THAT TIME IS ESSENCE
OF CONTRACT.
 As per IRS conditions of contract para 700 it is mentioned that:
“Time for and Date of Delivery; the Essence of the Contract: The
time for and the date specified in the contract or as extended
for the delivery of the stores shall be deemed to be of the
essence of the contract and delivery must be completed not
later than the date (s) so specified or extended. ”
 PERFORMANCE OF CONTRACT Contd..

 CONTRACTS WHICH NEED NOT BE PERFORMED:


An Contract to do an act impossible is void. (sec.56)

When the parties to it agree mutually to substitute a new
contract for it or to rescind or alter it original contract(sec.62).

When the promisee neglects or refuses to afford the promisor
reasonable facilities for the performance of his promise(sec.67)

When the performance as per contract is illegal
 BY WHOM CONTRACTS BE PERFORMED?
 It should be as mentioned in the contract. Like: The promisor, legal
representative, third person etc.
 In Rly procurement it is mentioned in clause 201 of IRS conditions of
Contract,
“Person signing the tender or any other documents in respect of the
Contractor on behalf of the Contractor without disclosing his authority
to do so shall be deemed to warrant that he has authority to bind the
Contractor.”
 Further as per clause 1500 of IRS conditions of contract it is
“Responsibility of the Contractor for Executing the Contract”
• ASSIGNEMNT OF CONTRACTUAL OBLIGATIONS:
1. The promisor may transfer his liability with the consent of the promisee
and of the transferee.
 Clause 1505 of IRS condition of contract, relates to Subletting and
Assignment of a contract in Rly procurement cases-

“ The Contractor shall not save with the previous concern in writing of the
Purchaser, sublet, transfer or assign the contract or any part, thereof or
interest therein or benefit or advantage thereof any manner whatsoever.
In the event of the Contractor’s subletting or assigning this contract or
any part thereof, without such permission, the Purchaser shall be entitled
to cancel the contract and to purchase the stores elsewhere on the
Contractor’s account and risk and the Contractor shall be liable for any
loss or damage which the Purchase may sustain in consequence or arising
out of such purpose.”
TERMINATION/DISCHARGE OF CONTRACT
Termination/Dishcharge of Contract: contd..
 Novation
Novation occurs when a new contract is substituted in place of an existing
contract, either between the same parties or between different parties. The
consideration for the new contract results in discharge of the old contract
legally.
 ALTERATION
Alteration of a contract means change in one or more of the terms of a
contract. Alteration is valid if it is done with the consent of all the parties to
the contract. If alteration is done without mutual consent, it is non binding on
other party & he can terminate the contract.
 RESCISSION
Rescission occurs when the parties to a contract agree to dissolve the contract.
Eg. Cancellation of Rly. Stores contract with mutual consent.
 WAIVER
Waiver means the abandonment of a right. A party to a contract may
relinquish (waive) his rights under the contract. Eg. Waver of Loan by Bank.
 REMISSION
Remission means accepting lesser degree of performance for contract
completion.
Termination/Dishcharge of Contract: contd..
 MERGER
When a superior right and an inferior right coincide and meet in one and the same person, the inferior
right vanishes into the superior right. This is known as merger.
 DISHARGE BY PERFORMANCE OF PARTIES.
 DISCHARGE BY BREACH OF CONTRACT.
 DISCHARGE BY OPERATION OF LAW.
A contract terminates by operation of law in case of death insolvency, and merger, lapse of time &
unauthorized material alteration.
 Death
In contracts involving personal skill or ability, death terminates the contract.
 Insolvency
When a person is adjudged insolvent, he is discharged from all liabilities incurred prior to his
adjudication. Upon insolvency, the rights and liabilities of the insolvent are, with certain exceptions,
transferred to an officer of the court, known as the Official Assignee/Receiver.
Termination/Dishcharge of Contract: contd....
 Lapse of time
Contracts may be terminated by lapse of time. In civil cases the
obligations and liabilities in contracts are barred by limitation & the
provisions of law are stated in the Limitation Act.
 Unauthorised material alteration
If the terms of a contract is altered by any party to the contract
without the consent of other parties then it leads .
 Breach of Contract
 Breach means failure of a party to
perform their obligations
under a contract in accordance
with contractual conditions.
 The major remedies for breach of contract are:
 Cancellation/Termination of Contract.
 Compensation for breach of Contract: Imposing Damages/ Penalty.
 Compensation can be for:
 Loss or damage caused by breach of contract.
 Failure to discharge obligation resembling those created by
contract.
 Cancellation & Damages

 In contract where it has been specified what damages has to be

paid on breach of contract, then the party who has broken the
contract has to pay the damages: (Sec: 74)
“Whether there is actual damage or not, whether the other party
proves damages or not, he is entitled to receive compensation as
defined.”
 Further a Penalty can be taken for the exceeded amount.
 As Per IRS conditions of Contract:
 As per Clause 504, in case of Breach of Contract Purchaser reserves
right to forfeit SD.
 As per Clause 702 (a), in case of delayed delivery contractor may
impose Liquidated damages & accept supplies.
 Cancellation & Damages contd..

 As per Clause 702 (b), in case of Breach of Contract Purchase

can initiate Risk Purchase. However the same is withdrawn as
per revised rules and also mentioned in SCR Inst. to tenders
document para 14.8., that “Risk Purchase clause shall not be
applicable”.
 As per para 14.6 of SCR Inst. to tenders, Purchaser shall have
Right to levy damages from the supplier, for failing to comply
with contractual conditions an amount equal to SD amount
which would have been applicable if he was not exempted
from payment of SD.
 Sale of Goods Act, 1930
 The Indian Sale of Goods Act, 1930 relates to laws regarding
sale and purchase of goods.
 According to Sale of Goods Act, contract of sale of goods is a
contract whereby the seller transfer or agrees to transfer
the property in goods to the buyer for a price. (Sec 4(1) ).
 Essentials of a contract of sale:

There should be two parties, a buyer and a seller.

Goods which has to be sold.

Transfer of property(ownership) should be involved.

All essential elements of a valid contract must be fulfilled.

There should be a consideration in the contract.
 A contract for sale includes both Sale and an Agreement to
Sale.
 Purchase Order that we issue is the Agreement for Sale if we
see from the perspective of a seller.
 Difference Between Sale And Agreement To Sale
Contract of Sale
Sale Agreement to sell
 It can be in case of existing and specific goods.
It can be in case of existing goods or future /
 Ownership passes to the buyer immediately
unascertained goods.
after contract.  Ownership remains with the seller.
Nature of Rights: Buyer becomes owner & get the Nature of Rights: Buyer does not get rights of
rights against the goods. goods. He gets rights against the seller.
 Seller cannot resell the goods. Seller can sell goods to third party.
 In case of breach of a contract, seller can sue for  In case of breach of a contract, seller can sue only
the price of the goods. for damages & not for the price or recovery of
Risk of loss falls on the buyer i.e. If goods are
goods.
destroyed buyer suffers loss. (even if the goods are  Risk of loss falls on the seller i.e. If goods are
in possession of seller) destroyed sellers has to suffer a loss .
Insolvency of Buyer: Legal representative of  Insolvency of Buyer: The seller can refuse to sell
Buyer can demand for goods . If price of goods is the goods to the buyer until the price is paid by legal
unpaid, the seller can claim price of goods representative of buyer.
proportionately & goods can be given. Insolvency of Seller: If the seller becomes insolvent,
Insolvency of Seller: If the seller becomes
if the buyer has paid the price, he can recover the
insolvent, the buyer can recover the goods from price proportionately . He cannot get goods as
Official Receiver because the ownership of goods is owner ship of goods is still with seller.
with the buyer.  It is a executory contract.
It is a executed contract.
Sale of Goods is in case of Existing & Agreement for Sale of Goods is mostly in case
Specific Goods. of Future & Contingent (Not existing) Goods.
 Goods & Price Of Goods
 Defintion- The term ‘goods’ means ‘every kind of movable property
other than actionable claims and money and includes stock and shares,
growing crops etc. (Sec 2(7).
Price of Goods forms an essential part of the contract and price must be

expressed in terms of money.

 The price should be fixed at the time of sale or later .

 However, the buyer must pay to seller a reasonable price.

 The reasonable price is dependent on the circumstances of each

particular case.
 Transfer Of Ownership
 In terms of Law “Transfer of Property” is “Transfer of Ownership”.
 A contract of sale of goods involves transfer of ownership from the seller
to the buyer. Transfer of ownership or property in goods is in fact the
object of making a contract of sale.
 Significance of transfer of ownership-
 The time of transfer of ownership of goods decides various rights and
liabilities of the seller and buyer.
 Thus exact time of transfer of ownership of goods from seller to the
buyer is important for the following reasons:
• Who shall bear the risk
• Who can take action against third party, like transporter etc.
• Whether a seller can sue for price.
• In case of insolvency of a buyer whether the official receiver or
assignee can take possession of goods from seller
• In case of insolvency of a seller whether the official receiver or assignee
can take the possession of goods from buyer.
 RULES RELATING TO TRANSFER OF
OWNERSHIP FROM SELLER TO BUYER
Three categories in which transfer of ownership can happen-

1 Transfer of ownership of specific or ascertained goods-[ Sec 19 - 22]

The ownership is transferred immediately at the time of making the contract if

contract is for the specific goods & goods are deliverable state.

2 Transfer of ownership of unascertained goods or future goods-sec [18 and 23]

The ownership of unascertained goods is transferred to the buyer when the goods
have been ascertained & must have been unconditionally appropriated by the seller
or the buyer.
 3. RULES RELATING TO TRANSFER OF OWNERSHIP OF
GOODS SENT ON SALE FOR APPROVAL OR ON SALE FOR
RETURN
 The term sale on approval basis may be defined as the sale in which the buyer
takes goods after approval for acceptance. The buyer may return the goods
within reasonable time.
 This is also known as sale on return basis. It means the buyer has the option
either to return or retain the goods. The ownership of goods does not pass from
the seller to the buyer immediately & ownership is passed in following cases:

When the buyer When the buyer does When the buyer Fails
signifies his approval some act adopting the to return goods within
for acceptance. transaction. time specified.

When the approval of After the lapse of time

buyer is When the act of the ownership is
communicated to the adoption in done. transferred even w/o
seller. communication.
 Rules For Delivery
 Meaning of delivery-

Delivery means the voluntary transfer of possession from one
party to another. (Sec 33)

Delivery shall be as specified in agreement like, Where?
When? etc. In express contracts seller need not to take
confirmation for delivery and can deliver as per contract
conditions. (Sec 36).

Delivery of part goods transfers the possession of part goods
only. It does not implies the delivery of the remainder. (Sec
34)

Unless otherwise agreed, the expenses and incidental charges
of delivery shall be borne by the seller.

Seller has to supply in instalments as specified in the
contract.
 Rules For Delivery.
 Contd..
Delivery of wrong quantity: (Sec 37)
1. If seller delivers less Qty. than mentioned in the contract,
buyer has a right to reject whole, but if the buyer accepts the
goods so delivered, he shall pay for them at the contract rate.
2. If seller delivers more Qty. than the contract, buyer has right
to reject to reject the goods as a whole or accept the goods as
per contract & reject rest. Buyer can accept the excess qty
also but if the buyer accepts the excess goods so delivered, he
shall pay for them at the contract rate.
3. If the seller gives mixed goods, i.e. some are acceptable and
some are non acceptable, then buyer has right to reject the
whole goods or buyer may also accept the goods which are in
accordance with the contract and reject the rest.
 Rules For Delivery.
Contd..
 Risk of Goods when delivered at Distance place (Sec
40) : Risk of Goods transfers as mentioned in the contract.
 Acceptance of Goods


Buyer is deemed to have accepted the goods when:

He intimates to the seller that he has accepted them.

or
When the goods have been delivered to him and he
does any act in relation to them which is inconsistent
with the ownership of the seller
or
When, after the lapse of a reasonable time, he retains
the goods without intimating to the seller that he has
rejected them.
Rules for Acceptance, Risk & Delivery in Rly.
Procurement

 As per IRS conditions of Contract Para 1501,

“The Goods shall remain in every respect at the risk of the
Contractor, until their actual delivery to the consignee at the
stipulated place or destination or, where so provided in the
acceptance of tender, until delivery to a person specified in the
contract as interim consignee for the purpose of dispatch to the
consignee.”
 As per para 1502 of the IRS condition of Contract:
“Consignees Right to Rejection: Final acceptance of the material
has to be consignee.”
Rules for Acceptance, Risk &
Delivery in Rly. Procuremnt contd..
 The delivery has been specified as Para 600 to 604 & 121 of
IRS conditions of contract & mentioned below:
 Delivery of the stores to take place as per the conditions of
contract after approval of inspection officer (if third party
inspection is applicable).
 As per IRS conditions of Contract delivery at the place
specified which can be:
“Consignee at his premises, interim consignee at his
premises, the consignee at the destination station or carrier
or other person named in the contract for the purpose of
transmission to the consignee.”
Rules for Acceptance, Risk &
Delivery in Rly. Procuremnt contd..
 The delivery, will not be deemed to be complete until and
unless the stores are inspected and accepted by the
Inspecting officer as provided in the contract.
 Property/Ownership in the stores shall not pass on to the
Purchaser until the stores have been received, inspected
and accepted by the consignee.
DOCTRINE OF CAVEAT EMPTOR- “Caution Buyer or
Let the buyer Beware”
 As a general Rule, a person buying something is bound to see whether the
thing he buys suits his purpose. Or.
When a contact of sale is between a buyer and seller it is the duty of the
buyer to examine the goods before buying to his satisfaction.
 Exceptions to the doctrine of Caveat Emptor[sec.16]:

Sale or Purchase in case of sale by description and sample[sec.15 & 17] :
Where there is a contract for the sale of goods by description, there is an
implied condition that the goods shall correspond with the description. The
purchaser can reject goods and entitled to receive damages.

The goods sold must fulfill the Implied Conditions about the fitness of goods
for a particular purpose for buyers in terms of quality and usability. Eg: A water
cooler procured has implied condition that it must cool water and must fullfill
the purpose of cooling water. [Sec 16]
DOCTRINE OF CAVEAT EMPTOR- Contd..

In case of concealment of latent

defects by the sellers: The defects which a not visible
normally or traceable, then seller is responsible for that if
later found.
In case of Sale by Fraud: A seller who is guilty of fraud i.e
where purchaser relies on false representation of seller &
suffers damages. Then seller shall have no protection under
this doctrine and it shall be his responsibility & purchaser can
claim damages and reject goods.
 Effects of Destruction of Goods
1. In case of Contract of Sale[Section 7]-
The contract of sale is void if the following three conditions are satisfied:
 There must be a contract of sale for specific goods.
 The goods must have become perished/damaged before making of the
contract.
 The seller must not be aware about the destruction of goods.

2. In case of an ‘Agreement to sell’[Section 8]- An agreement to sell

becomes void if the following four conditions are satisfied:
 There must be an agreement to sell specific goods.
 The goods must have become perished/damaged before making of the
contract.
 There must not be any fault of seller or buyer.
 The goods must have perished before the agreement to sell becomes sale.
 Meaning:
Auction of sale
Sale of auction is the public sale where the goods are generally
sold to the highest bidder.
 Rules of Auction Sale:
In case of a sale of auction the following rules apply (Sec 64):
 Where goods are put up for sale in lots, each lot is deemed as

separate contract of sale;

 The sale is complete when the auctioneer announces its completion

by the fall of the hammer or in other customary manner & bidder

may retract his bid before that time.
 A right to bid may be reserved expressly by or on behalf of the seller

and seller or person on his behalf may bid at the auction;

 Where the sale is not notified to be subject to a right to bid on

behalf of the seller, it shall not be lawful for the seller to bid himself
or to employ any person to bid at such a sale, or for the auctioneer
knowingly to take any bid from the seller or any such person.
 Limitation Act 1963
 It is basic requirement of Justice, that every suit must be filed in court within the time
period prescribed for the same.
 The Law of limitation specifies the statutory time frame within which a person may initiate
a legal proceeding or a legal action can be brought.
 If a suit, appeal or application is filed after the expiry of the time prescribed by this Act it
will be barred by the Limitation.
 Any suit brought before the Court after the expiry of the time within which a legal
proceeding should’ve been initiated will be restricted.
 Period of Limitation is the time period provided for any suit, appeal or application
prescribed in the various schedule of the Act.
Root Principle:
“Interest of the state as a whole there should be a limit to Litigation or law suits. “
“Law will come to help those who are vigilant, not sleepy”
 Period of Time from which
Description of suit/appeal
Limitation period begins to run

Any suit for which no period of limitation is Three

When the right to sue
provided elsewhere in this Schedule. years
accrues.

 As per article 113 of the Limitation Act 1963:

 For IR procurement, the period of limitation for refund of Earnest
Money as well as Security Deposit is 3 years as contained in Article
113 of the Indian Limitation Act of 1963).
 Claims for refund, beyond this period, should be treated as time-
barred claims against the Railways and should ordinarily be refused.
 No such claim can be paid without the sanction of the Railway
Board.
 Dispute Resolution in Railways
 Methods of Dispute resolution:
A. Mediation/Conciliation of Disputes
B. Arbitration
C. Litigation
 Conciliation of Disputes
 The Arbitration and Conciliation Act, 1996 (as amended by 2015) gives
a formal recognition to conciliation in India.
 As per para 2901 of IRS Condition of Contract Disputes shall be
Referred by Parties through a Notice of Dispute to CMM/DRM/ED.
 CMM/DRM/ED to notify the name of conciliator within 30 days of
receipt of notice. Eg. case should not be dealt by him
 Conciliators shall assist parties to settle dispute.
 Parties shall not refer to arbitral/judicial proceedings during
Conciliation.
 Conciliation is terminated by:

Signing a Settlement agreement

Written declaration of conciliator that
efforts of conciliation are no longer justified

Any of party terminating conciliation.
Arbitration

 Arbitration is a method of settling civil disputes between parties by

referring the dispute to an independent and impartial third
person, called arbitrators, instead of litigating the matter in the
usual way through Courts.
 It saves time and expenses. It also avoids unnecessary technicalities
and at the same time ensures “substantial justice within limits of
the law”.
 Governed by provision & rules of Arbitration and Conciliation Act,
1996 & its amendments'.
 For having Arbitration, Arbitration agreement should be there
between parties. (Sec 7 of Arbitration and Conciliation Act, 1996)
Arbitration in Railways
 Arbitration conditions are incorporated
in IRS condition of Contract para 2903 to
2910. By accepting IRS conditions, the supplier agrees for
Arbitration agreement T&Cs of IR.
 Matters which cannot be referred to Arbitration: Matters of
criminal nature, insolvency matters etc.
 Arbitration conditions per IRS condition of contract :
 Demand for Arbitration shall mention matter which are in dispute
item wise and claims should also be given item wise.
 Arbitration proceeding start the day on which a written and valid
demand for arbitration received by the Railway not from the date of
appointment of Arbitrator.
 Appointment of Arbitrator to be done by Rly. within 60 days of receipt of
notice in case of sole arbitrator.
 Where tribunal of Arbitrator is to be appointed, Rly. To send a panel of arbitrator
to firm within 60 days of receipt of notice.
 No new claim is allowed to added during Arbitration proceeding but party may
amend or supplement the original claim or defence thereof during Arb.
Proceeding subject to acceptance by Tribunal.
 The Place of Arbitration to be within the Division of Rly. or HQ. or any location
mutually agreed.
 Claimant has to submit claims within 30 days of appointment of Arbitral Tribunal.
 Respondent has to submit defence statement/
counter claims within 60 days of receipt of
claims from Tribunal.
 Appointment of Arbitrator
in Indian Railways

Where Section 12(5) Waived off • Where Section 12(5) Not Waived off:

• For Claims value< 1 Cr: • For Claims value< 50 Lakhs:

Sole Arbitrator Not below rank of JAG Rly Sole Arbitrator Not below rank of retired SAG Rly
Officer, appointed by GM. Officer, appointed by GM. Railway have to
sent a panel of at least four names of Retired
• For Claims value > 1 Cr: Railway officers to the firm, out of which firm
The Arbitral Tribunal consisting of 3 gazetted to suggest names of two members. GM will
Rly. officers not below rank of JAG or 2 select one member as Sole Arbitrator from
Gazetted Officers not below rank of JAG & the list of two suggested member by the firm.
a retired officer not below rank of SAG. • For Claims value > 1 Cr:
Railway have to sent a panel of at least The Arbitral Tribunal consisting of 3 retired Rly.
four names of Gazette officer to the firm, officers not below rank of SAG. Railway have
out of which firm to select 2 member of to sent a panel of at least four names of
panel. GM will select one member from Retired Railway officer to the firm, out of
the list of two suggested member by the which firm to select 2 member of panel. GM
firm and other 2 members from the panel will select one member from the list of two
or outside the panel. suggested member by the firm and other 2
One of the of the panel members should members from the panel or outside the panel.
be Accounts officer. One of the of the panel members should be
Accounts officer.
 Qualification of
Arbitrators
 Retired Railway officers not below the
rank of SAG level, one year after his
date of retirement.
 Age of Arbitrator at the time of appointment shall be below 70
years.
 Arbitrator may be appointed notwithstanding the total number
of arbitration cases in which he has been appointed in the past.
 The person appointed as Arbitrator should not deal the matters
to which contract is related.
 Challenge of appointment of Arbitrator can be on following grounds (Sec 12 of Arbitration &
Conciliation Act)
 Circumstances exist that give rise to justifiable doubts as to his independence or impartiality;
(mentioned in 5th schedule of act) or
 He does not possess the qualification agreed by the parties.
 If Rly. fails to appoint arbitrator within 60 days then firm may go to High Court for appointment of
Arbitrator. (Sec 11 of Arbitration & Conciliation Act)
 Essential Elements of Arbitral Award
 Should be in written form.
 Signed by the Arbitrator.
 Shall contain the reason for the passing of Award.
 Date and place of the arbitration.
 The signed copy should be delivered to all parties.
 The Award is binding on all parties and is enforceable as it was a decree
of court.
 Correction and interpretation of award/additional award: Any typographical,
computation clerical errors can be requested to Arbitrator for correction within 30 days
of award. (Sec 33)
 An application in Court for setting aside Arbitral award to be made within three months
after receipt of the Arbitral award under Section 34.
 The award shall be enforced once the time limit for making above application expires.
(Sec 36). Other party can approach court to enforce award.
 An application to set aside the arbitral award filed in the Court, will not by itself render
that award unenforceable, unless the Court grants an stay order on the arbitral award.
(application for stay can also be filed under Section 36(2).)
 As second recourse, appeal can be made in
Supreme court under Section 37.
 A firm cannot directly go to court for dispute
resolution if Arbitration is there,
it should be challenged.
Payment Rules as per
MSMED Act
 For MSE firms, Purchaser is liable to
make 100% payment within 45th day from the date of delivery of
goods/services at the nominated place/Depot in good condition by the
consignee. (Sec 15)
 If buyer fails to make payment within 45 days, purchaser shall be liable
to pay compound interest to the MSE firm at three times the bank rate
notified by RBI, apart from principle amount. (Sec 16).
 In case purchaser refuses to pay amount to MSE firm, the firm can
make a reference to Micro and Small Enterprises Facilitation Council to
resolve dispute. (Sec 18).
 This will supersede over the Arbitration and Conciliation agreement
conditions as mentioned in Rly. Contracts & dispute will be resolved as
per provisions of MSMED Act.
 Continued..
 Upon receipt of representation, MSE Facilitation council can itself
conduct conciliation or seek assistance of the concerned Govt. deptt. or
any agency to resolve dispute.
 If dispute is not settled by Conciliation, MSE Facilitation council can
either itself take up the dispute for arbitration or refer it to the
concerned Govt. Department or any other agency to resolve dispute via
Arbitration in line with provisions of Arbitration and Conciliation Act.
 Every reference made under this section shall be decided within a period
of ninety days.
 An Arbitration award given under this provision, can be challenged by
Purchaser in court only after depositing seventy-five per cent. of the
amount as per the decree & amount deposited shall be paid to the
supplier. (Sec 19)
 INCOTERMS 2020
 InCoTerms (International Commercial Terms) are universally recognised rules defining
the terms of sale.
 Published by International Chamber of Commerce (ICC).
 They guide buyers and sellers when formulating and fulfilling a contract for the
shipment of goods.
 Globally recognized, Incoterms prevent confusion in foreign trade contracts by
clarifying the obligations of buyers and sellers.
 There are four main areas of responsibility that Incoterms cover:
 Delivery stage: the goods exchange hands and the seller’s responsibility.
 Transportation stage: Which party is responsible for transportation stages, costs
 Documentation and formalities: Which parties take responsibility for dealing with all
customs, export, and import documentation, formalities, and duty payments.
 Insurance: Which party is responsible for providing insurance during transportation.
INCOTERMS
INCOTERMS contd..
CASE STUDIES
 Case 1
 DyCMM/Hq has released a PO on firm, X for supply of Y item with delivery in single spell by
31.03.21 (. The delivery condition is FOR destination to consignee.
 X dispatched item within delivery schedule but item is received after the Delivery Schedule.
Material is received by consignee on 03.04.21.
 Meanwhile the material is not required by consignee and DyCMM/Hqs cancels the PO on
04.04.21.
 Supplier claims the material should be accepted as he has dispatched before the expiry of delivery
date & material is received before cancellation.
 Ques: Will Rlys be liable for acceptance of supplies?
 Ans: No.
 Explanation: The supplies have been received after DD. Condition of supply as per contract is
FOR destination & as per IRS conditions of contract para 0700 of contract the “Time for and Date
of Delivery; the Essence of the Contract”.
Supplier has not made deliveries as per contract schedule hence it is breach of contract and Rly.
Reserves right to cancel the contract.
Case 2
 DyCMM/Hq has released a PO on firm, X for supply of Y item with delivery in single spell 31.03.21.
 DyCMM/Hq defers the DD on 01.02.21 without firms consent, to Supply material after 01.05.21 &
before 31.05.21.
 X writes a letter to DyCMM/Hq in 07.02.21 for willing to supply as per original DD & refuses the
amended delivery schedule.
 DyCMM/Hq refuses and reiterates firm to supply after 01.05.21 & by 31.05.21. vide letter reply
written on 15.02.21.
 X does not send back any reply. X even does not supplies material in March as well by May.
 Ques: Will he be liable for Cancellation under Penality?
 Ans: No.
 Explanation: As per Sec 38 of Indian Contract Act, where a promisor, i.e. X firm here, has made an
offer of performance to the promise, i.e. Rlys, as per original contract, and the offer of performance
has not been accepted by Rly., the firm is not responsible for non-performance, nor does he thereby
lose his rights under the contract. It also excuses the firm for further performance as well as penalty.
Alternatively a contract is also deemed to be terminated as SCR has altered contract without consent
of firm.
Case 3
 SMM/Hq releases an order for procurement of item A imported from Y Country.

 After release of PO & DD still due, Indian Government declares war against the Y
country & bans all imports to India from that country.
 Firm is unable to get material and fails to supply. Firms claims cancellation without
penalty.
 Ques: Will the firm be liable for Cancellation under Penality as he has failed to supply?

 Ans: No.

 Explanation: As per Section 56 of Contracts Act, an agreement to do an act impossible

in itself is void. Since the import from that country is barred hence the contract
becomes impossible to perform and becomes void.
 Alternatively if firm invoke a Force Majure condition, then contract can be cancelled
under Force Majure clause.
Case 4
 If a supplier X sold to SCR, all 700 bags of cement lying in his Secunderabad
godown during spot purchase. State the legal position in following cases:
1.If unknown to X, all bags had been stolen before the contract was made.
2.If unknown to X, all cement had become stone as a result of heavy rainfall.
3.If unknown to X, 109 bags had been stolen at the time of making the
contract.
Solution: As per Sec 7 of Sale of Goods Act in case of Sale:
1.In Case the contract is void because the goods have perished before making
of the contract.
2.In Case 2 also the contract is void because the goods became so damaged as
no longer to answer to their description.
3.In Case 3 also the contract has become void and the purchaser cannot be
compelled to accept 591 bags because the contract was indivisible.
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