Contracts refer to agreements between parties in accordance with certain legally enforceable rights and responsibilities. They provide viable solutions to resolve disputes that may potentially arise between such parties and define specific approaches that must be taken in different conflicting scenarios. However, contracts can only be enforced if they define clear guidelines and adhere to all applicable laws. This is vital as any ambiguity can significantly compromise a party’s ability to enforce the agreed upon terms of the contract on the other.
- Agreements between a client and a contractor for work related to a construction project are known as building and construction contracts. Such contracts basically define the scope of work and the rights and responsibilities of all parties involved.
- It must be noted that the Indian construction industry does not adhere to any specific format of construction contracts; thus, allowing each contract to have its own set of provisions that may be enforced in case of disputes.
- Employers and contractors may also get into engineering, procurement and construction management contracts, where the latter shall be liable to effectively manage and ensure the completion of the construction project.
Let us now get into the legal requirements a contract must fulfill to be deemed a ‘valid contract’.
Legal Requirements for a Valid Contract
An engineering/construction contract shall be considered valid if it fulfills the requirements of the various provisions of the Indian Contract Act, 1872 (hereafter referred to as ‘Act’).
- The parties must be competent enough to enter into a contract.
- There must be an offer from a party along with acceptance of such an offer from the other party.
- There must be lawful purpose and lawful consideration.
- The parties must freely consent.
| Note: Free consent, as per Section 14 of the Indian Contract Act, refers to consent that has not been gained through fraud, manipulation, misrepresentation, coercion, mistake, or through undue influence. |
Although the Act does not demand contracts to be drafted in writing, the complex and comprehensive nature of engineering/construction contracts makes it imperative to simplify the job by preparing a written draft of the contract.
It is also imperative for engineering/construction contracts to adhere to some other regulations related to labor, taxes and health and safety to be deemed valid.
Potential Ambiguities in Contracts
Keeping the complexity of contracts in mind, it is not unfathomable to understand that different parties to the contract may choose to interpret the rights and responsibilities under the contract differently as per their own interests. As such, any ambiguity in contracts may result in disputes between the involved parties.
Some provisions that are often interpreted differently are related to:
- Approval of design (includes the period within which it must be approved).
- Quality of materials.
- Time period for completion.
- Price escalations (includes who shall be responsible to account for such escalations).
- Scope of work.
- Timely payments.
- Dispute resolution mechanisms.
The above-mentioned provisions define certain key aspects of a contract and, thus, ambiguities in these provisions are prone to result in disputes.
Types of Ambiguities
Ambiguities in a contract can be mainly categorized into two types – Latent Ambiguity and Patent Ambiguity.
Such ambiguities may arise in a contract when the words of the contract do not seem to have any ambiguity, but when applied to a specific context or question, they are likely to result in multiple outcomes. This is often referred to as ‘extrinsic ambiguity’.
Such ambiguities are clearly visible on the face of the agreement and may be caused due to the usage of defective or obscure language in the instrument.
How to Resolve Ambiguities?
Here is how you can resolve the ambiguities of a contract:
- Identify and understand the involved parties’ true intentions in getting a contract.
- Decipher the meaning of the terms and phrases used in the contract; it is one of the principal tools used to ascertain the true intentions in a contract.
- When interpreting the words of the contract, the Court shall look at the words for interpretation in the context of other provisions of the contract as well as in the context of the contract (as a whole).
Note: The above are known as ‘intrinsic tools of interpretation’.As an interpretation rule, Courts do not refer to materials external to the contracts when determining the intention of parties.
However, if the contract has latent ambiguities, there may be a deviation from this rule.
In case of latent ambiguity, extrinsic proofs are admissible both to understand the meaning of the words of the contract and to determine the objects they are to be applied on.
Doctrine of Contra Proferentem
The doctrine of contra proferentem, derived from the Latin phrase meaning ‘against the offeror’, states that when a provision of the contract has multiple interpretations,
the interpretation favorable to the party that did not draft the contract shall be preferred by the Court.
The understanding behind this approach is that it is often found that parties to a contract are not on an equal footing as one party may draft the contract while the other party would be made to sign without the power to amend, alter or modify the provisions mentioned therein.
Such a situation is often found around government lenders, where one of the conditions put forward is that the bidder shall not put any conditions in the tender.
Contra proferentem puts the cost of losses faced on the party who put themselves in the best position to avoid facing any problems, i.e., the drafter of the contract.
| Note: This doctrine is only applicable when the various interpretations of the contract are equally sound and practical and have no visible intention contrary to the interpretation being adopted as prima facie evident in the contract. |
Conclusion
Considering contracts play the most vital role in an agreement between two parties, it is imperative to ensure that the contract prepared addresses all relevant aspects of the deal while also providing apt solutions for issues that the involved parties may potentially face in the future. Besides, even if you are not the party drafting the contract, you must pay utmost attention to all the provisions mentioned therein and make amendments and alterations as per your requirements as well.
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