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Relational Contracts: Time For Legal Recognition In India

Manish Gopal Singh Lakhawat
3 May 2021 7:07 AM GMT
Relational Contracts: Time For Legal Recognition In India
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With the invention of wheel, mankind accelerated its growth against time. To further accelerate the growth of mankind, it is important to give pace to the wheels.

Development of Infrastructure is the bedrock of India's economic growth and plays a pivotal role in accelerating the growth of India's overall social, political and economic development. The Infrastructure sector covers wide range of sub-groups namely roads, ports, power, railways, telecommunications etc. In order to develop, maintain and operate the infrastructure, lately the policies of the Government. of India (GoI) have seen an inclination towards PPP model where the Government enters into a contract with the private players for the enhancement of Infrastructure.

These contracts are generally in the forms of Concession, DBFOT, HAM, EPC etc. One common feature among these kind of contracts is that these contracts are for a long term ranging from 15 to 40 years. This long-term nature of these kind of contracts differentiates them from normal transactional contracts which conclude at the completion of the transaction. During this long-term, the parties are not only expected to abide by the express terms of these contracts but certain other implied terms and duties which are not expressly provided in these contracts. These kind of contracts are termed as Relational Contracts.

Definition of Relational Contract

As defined by Mr. Manoj K. Singh in his book, Infrastructure Arbitration: A Perspective, "A Relational Contract is a special category of contract where parties enter into contract for mutual benefit and that may involve expectations of loyalty, a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and parties are subject to duties of good faith, fair dealing, transparency, trust and absolute confidence even if it is not mentioned expressly in the agreement which is necessary to achieve the objective of the contract which parties had intended at the time of entering into contract. In such type of contract there will be an implied obligation on the parties to not to do anything to frustrate the purpose of the contract."

Evolution of Relational Contracts

The concept of Relational Contracts has already been developed in the west through various judgments. Recently, this concept was summarized and settled by the High Court of Justice Queens Bench Division in Alan Bates & Ors. Vs Post Office Ltd.[i] wherein the Hon'ble Court has concluded that the duty of good faith is implied in those contracts. Transparency, co-operation, trust and confidence are implicit in the implied duty of good faith. The duty goes beyond an obligation to act honestly and requires the parties to refrain from conduct that would be regarded as commercially unacceptable by reasonable and honest people. The court held that the following list of characteristics are the features of the Relational Contract:

  • There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.
  • The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
  • The parties must intend that their respective roles be performed with integrity, and with fidelity to their bargain.
  • The parties will be committed to collaborating with one another in the performance of the contract.
  • The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
  • They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
  • The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
  • There may be a degree of significant investment by one party (or both) in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.
  • Exclusivity of the relationship may also be present.

Position in India

Though, Indian Courts have taken note of certain aspects of contracts such as reasonableness, business efficacy, penta test etc. but they are yet to recognize the concept of relational contracts formally. In the current day and age, the making of contracts is a matter of high technical expertise with legal brains from all sides involved in the process of drafting a contract. In 2017, the Hon'ble Supreme Court of India, in the case of Nabha Power Ltd. vs Punjab State Power Corporation Ltd.[ii] has held that it should certainly not be an endeavor of commercial courts to look into implied terms of contract. Thus, normally a contract should be read as it reads, as per its express terms.

Conclusion

I believe that the time has come to take note of the distinctive character of the infrastructure contracts, where there are several stake-holders with competing interests, involve several agencies and sub-contractors for various aspects, making the entire project execution activity a complex affair, have a long-term which may at times result in conflicts between the employer/owner and the contractor.

Further, we have reached a situation where virtually no project concludes without disputes and now it seems that disputes are inevitable in infrastructure contracts. The employer/owner in most of these projects is government or a public sector authority and enjoys a much more exalted stature as compared to the contractor resulting in inequities in the execution as well as operation of the contract. It is not possible to envisage all possibilities at the time of execution of a contract which in any case are slightly tilted towards the Government and the contractors having much less say.

This necessitates that we formally recognize these infrastructure contracts as relational contracts and include (and imply) a general duty of good faith, fair dealing, transparency, trust, maintenance of business efficacy and confidence in these contracts. This would not only increase the confidence of private players in the infrastructure regime but would also inculcate a sense of responsibility in the government agencies. Time has now come to recognize the concept of relational contracts to build the nation further.

Manish Gopal Singh Lakhawat is Partner at Singh & Associates. Views are personal.


[i] Alan Bates & Ors. Vs. Post Office Ltd. [2019] EWHC 606 (QB)

[ii] Nabha Power Ltd. vs. Punjab State Power Corporation Ltd., (2018) 11 SCC 508


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