Contract Principles – Equity, Justice and Reasonableness

Dear Readers

In the earlier posts we covered two important acts related to Contracts and Procurements i.e. Indian Contract Act and Sale of Goods Act. To read this post again, please click the link below:

http://www.rkstrainings.com/sale-of-goods-act-law-governing-supply-contracts/

In this post we are going to discuss Contract Principles. These principles not only are the basis of enacting such laws, but, courts also apply them while deciding a case and arriving at the fair judgement

Contract Principles

Contracts and procurements transactions between the parties are governed by Indian Contract Act and Sale of Goods Act. Therefore, we should draft and administer a Contract in accordance with certain fundamental principle which applies to other laws. Any law whether civil or criminal is based on the principle of natural justice and equity. Accordingly, we need to give due importance to the following principles both during contract formation and administration stage

A) Equity

Equity means equal or even or fair. This essentially means each party of a contract have same status and no one is bigger or smaller. Accordingly, all parties should be treated equally, without any prejudice, bias or discrimination

A contract document is paramount with respect to rights and obligations of the parties. Hence, each party is liable to fulfil its respective obligations for the other one strictly as per the contract and no one deemed to be superior or inferior. All general duties (e.g. applicable laws; general defaults, indemnities and other) of a party towards other one and consequences for breach shall also apply on reciprocal basis

B) Justice

Justice means fair treatment for all and punishment for wrong doing. In context to contractual relationship, it implies that the defaulting person, who has broken the promises, should not be able to escape freely. Also, the genuine person (victim), who has been complying with the agreement in good faith, should get compensation for loss or damages suffered. Defaulting person who has failed to fulfil its obligations under the contract shall face consequences under the law

A contract writer needs to give due importance to this principle while drafting an Agreement. Accordingly, he should incorporate remedial provision in the contract for all possible breach of promises. This is necessary to compensate the party who has sustained loss or damage due to other party. Similarly, during Contract Administration stage, both parties should attempt to resolve their disputes by applying the sense of right and wrong and fair play

C) Reasonableness

Reasonableness means what is actual, factual and true rather than assumptions, perceptions and feelings. It also signifies: logical, rational and sensible. This means that both parties need be genuine and should act based on facts and reasons. No one should be taking undue advantage of the situation or mis-using its dominating position

It signifies that no party should raise any demand or claim on other unless it has really incurred cost because of the reason of other party. Also, other party is liable to compensate the loss actual suffered and proved through documentary evidences. Both parties should act towards other with good conscience and mutual trust

Significance of Applying Contract Principles

Let us apply above principles during contract formation, interpretation and administration. This is necessary to avoid any dispute at later stage. The cost one may incur in contractual dispute could be multi-fold in comparison to the cost of applying such principles.

In the event a contract goes to litigation, court gives the justice based on above principles only. So, writing certain clauses and getting these accepted by other party may not hold well in the court, if such clauses violates above principles

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