What Indian Contract Act Says?
- Free Consent (Section 13): “two or more persons are said to be consented when they agree upon the same thing in the same sense (Consensus-ad-idem).”
- Fraud (Section 17): “Fraud” means and includes any act or concealment of material fact or misrepresentation made knowingly by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract.”
- Misrepresentation (Section 18): ” causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement”.
- Mistake of fact (Section 20): “Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void”.
A Made-up Story:
The Senior Management team of an Information Technology (IT) company presented a statement of work (SOW) contract proposal to an existing client whom they are serving for last 10 years. This new statement of work contract is for the upcoming multimillion dollar project which is very critical to the client. The project scope of work involves testing the newly developed software applications.
The statement of work contract contained the following,
- Overview and audience
- Quality Improvements
- Connectivity and infrastructure
- Information security
- Personnel Plan
The SOW also documented service level agreements (SLA) to be met as part of this contract. To highlight a few (not limited to), software testing efficiency to be maintained at 99%, and software defect leakage rate to be most 5%. The contract also specified that, if at all there is a SLA not being met, there will be a penalty of 50% of that corresponding project cost.
The client signed the contract and chose this IT company to test all the applications being developed in-house.
After a few applications been tested, the client requested the IT company to present the SLA metrics for the completed applications. IT team then noted that their SLA metrics are way out of the what is promised in the SOW contract. IT company then fudged the SLA metrics meet up with the number as promised in the SOW contract. IT company calculated the SLA metrics by normalized value of all projects and showed the numbers in line with what has promised in the SOW.
The client found out that, the data has been fudged. The client also found out that, calculating SLA with individual project, SLA metrics are way out of the what is promised in the SOW contract. Client consider this as Fraud and Misrepresentation of data and considers that the contract should be voided and a penalty of 50% of project cost for not meeting the SLA and 50% of project cost for the loss of free consent in the contract. Client also decided not to provide any new future project contract to that IT company.
During arbitration, the IT company argued that, it has not specified the way it will calculate the SLA in the SOW contract. It further argued that, this is mere innocence of Misrepresentation from both the party which cannot make this contract void.
The client replied that, it is a deliberate mistake of the fact from the IT company and as per the Indian contract act, this agreement stays void. This makes IT company to lose multimillion dollar contract and its reputation in the market.
Business managers should have a fair knowledge on legal background of running a business. Especially in this article, if business manages were aware on how to write contracts with complete information, a lot of hardships faced due to the implication of business activity can be avoided. Especially, in this article, the IT company has lost a 10-years loyal client, and most importantly its reputation in the market.
When Business manages have the functional knowledge on the legal system (irrespective of whether an organization has dedicated legal team or not), the person would have spotted this problem mentioned in the article upfront and mitigated the same during the contract designing stage. Also, the business manager would have discussed about calculation methods of SLA, upfront with the client during Statement of Work contract presentation. But here in this article, the IT company were doing more of damage control rather than delivering the quality project.
Disclaimer: This is a pure fictional (Made-up) article to highlight the importance of a Business Manager awareness towards Legal aspects of running/managing a business/organization. The views and opinions expressed in this article are those of the author’s imaginations and do not necessarily reflect any real time events/business/persons/activities.
Non-Copyrighted Images / Pictures Used in this Article Courtesy (Reference):
- Featured Image: https://management-forum.co.uk/product/details/2227/contract-law-2016
- Contract Image: http://blog.ipleaders.in/wp-content/uploads/2016/06/Cantract-Law.jpg
- Void Contract (Hand Shake Break) Image: https://scoirl.files.wordpress.com/2015/03/breach-of-contract.jpg