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. It is essential as any sort of ambiguity in the contract can disrupt the ability of any party to be in accordance with the terms of the contract.
- An agreement between contractor and a client for a construction project are termed as construction or building contracts. These contracts lay down the scope of work along with the rights 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 delve into the legal requirements that must be fulfilled by a contract to be considered as a ‘valid contract’.
Legal Requirements for a Valid Contract
An engineering/construction contract shall be considered valid if it fulfils the requirements of the various provisions of the Indian Contract Act, 1872 (hereafter referred to as ‘Act’).
- The competency of both the parties is essential 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 labour, 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, if any contract is found to be ambiguous it may involve disputes between the two involved parties.
Some provisions which are comprehended 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 primarily be categorized into two types:
- Latent Ambiguity
- Patent Ambiguity
Such ambiguities occurs when the words of the contract may seem clear however, when applied to a particular question or context, it might result in multiple outcomes. Latent Ambiguity is also termed as 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?
You can resolve the ambiguities of a contract in the following ways:
- Identify and understand the involved parties’ true intentions in getting a contract.
- Interpret the terms used in the contract. It plays a major to recognise the true intentions in a contract.
- While interpreting the terms of the contract, the court shall have a look at the contract as a whole along with the provisions written in the contract. These are considered as the ‘intrinsic tools of interpretation’.
As an interpretation rule, Courts do not refer to materials external to the contracts when determining the intention of parties.
In case, the contract is found to have latent ambiguities, a deviation could be seen in this rule.
Extrinsic proofs are acceptable in case of latent ambiguity to decipher the meaning of words used in contract and to decide the objects on which they will be enforced.
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 favourable to the party that did not draft the contract shall be preferred by the Court.
The comprehension behind this approach is that, usually it is found that the parties to a contract are not at par. One party may draft the contract whereas, the other party would be obliged to sign without the power alter, amend or change the mentioned provisions in the contract.
This type of is common amongst government lenders, where one of the requirements is that the bidder do 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
Given the contracts play a central role in an agreement between two parties, it is critical to make sure that the contract drafted addresses all key elements of the deal while also providing accurate solutions for concerns that the involved parties might encounter 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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