Whether Contractual Clauses can disentitle a person – Position of Law

It is pertinent to refer to Section 23 of the Indian Contract Act 1872 before analysing the subject topic:

?Section 23. What considerations and objects are lawful, and whatnot.

The consideration or object of an agreement is lawful, unless- It is forbidden by law, or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void."

In 2010, a Single Judge of the Delhi High Court dealt with the issue of whether contractual clauses can disentitle a person from claiming damages, which he is otherwise entitled to claim under law i.e. whether parties can contract out of Section 73 of the Contract Act.

Simplex Concrete Piles (India) Limited v. Union of India ILR (2010) II Delhi 699

In this case, the court considered a clause in a government construction contract, which barred a claim for compensation by the contractor from being admitted, where works were delayed and time for completion was extended on account of certain specific instances beyond the control of the contractor.

The court was faced with two conflicting decisions of the Supreme Court, which interpreted the same clause. In the first decision, the Supreme Court held that the clause in question would bar the contractor’s entitlement to damages, in addition to the extension of time for completion, on account of delay. (Ramnath International Construction (P) Limited v. Union of India (2007) 2 SCC 453)

In the other, the Supreme Court held that the clause only prevented the department (relevant authority of the employer) from granting damages, but would not prevent an arbitrator from awarding damages, which were otherwise payable by the employer on account of its breach of contract. (Asian Techs Limited v. Union of India (2009) 10 SCC 354)

The Delhi High Court held as follows:

1.????Clauses which bar and disentitle a contractor from claiming damages, which it is entitled to claim by virtue of Sections 55 and 73 of the Contract Act, are void by virtue of Section 23 of the Contract Act.

2.????A law, which is made for individual benefit, can be waived by an individual, but when such law includes a public interest/public policy element, such rights arising from the law cannot be waived because the same becomes a matter of public policy/public interest.

3.????Provisions pertaining to breach of contract (including Sections 55 and 73 of the Contract Act) are the very heart, foundation, and basis of the existence of the Contract Act. According to precedence to the sanctity and binding nature of contracts over the entitlement of a party to breach the contract by virtue of clauses with no remedy to the aggrieved party, is a matter of public policy.

4.????To permit a clause that has the object of defeating the contract itself is a matter of grave public interest and defeats the very basis of the existence of the contract.

5.????Clauses such as the one in the present case would be void under Section 23 of the Contract Act, as they are violative of public interest and public policy.