The Indian Contract Act, 1872 deals with the laws governing the contracts in India. It has played a pivotal role in the development of contract laws throughout the years, making it an act of crucial importance. The Contract Act is mainly based on the principles of English Common Law. It is enforceable in all the states of India.
Laws prior to ICA:
During the ancient and medieval periods in India, there was no single act or a general code to govern the contracts. Principles were thus derived from numerous references- the sources of Hindu law, namely the Vedas, the Dharmashastras, Smritis, and the Shrutis give a vivid description of the law similar to contracts in those times. The laws administering the contracts form a portion of the law called Vyavaharmayukha. While focusing on the climax of the medieval age, the law of contracts was majorly being governed by two factors; the moral factor and the economic factor. Activities such as consignment of property, execution of services etc. required rules for agreements and promises, which engulfed not just business and commercial transactions, but also personal relationships in all phases of life. Further, the next source, i.e. the Arthashastra by Kautilya, which is contemplated to be the sole existing secular treatise on politics and governments. The significant components of the contracts were free consent and consensus, inclusive of all the terms and conditions involved.
During the British reign in India, there were two religions who had their own personal laws, namely Hindus and Muslims. The idea of a contractual relation and obligation was distinct for both the religions and the law pertaining to the possible breach of a contract were different as well.
(A) Islamic Law
Mahomedans (Followers of Muhammad – The Islamic Prophet) followed Islamic laws which are considered to be holy and the declarations of their beloved god/Allah. According to the Islamic Law, every aspect of their civil law revolves around the theory of contracts, like the contract for marriage or regarding their contract for inheritance of property. The source of Islamic Contract is Surah Al-Maidah, Ayah.
The word ‘contract’ in Arabic is Aqd which denotes the conjunction of the proposal (ijab) and acceptance (qabul). The basic principle of the law was the necessity of the presence of both the parties where one makes an offer and the other accepts it and both of them agree to the same thing in the sense while the object of the contract should fulfil the condition of legality.
It also supplied rules to govern specific contracts to commercial, mercantile and proprietary nature like agency (vakalat), guarantee and indemnity (zamaanat and tamin), partnership (shirkat), one person’s money and another’s work (muzarabat), bailment (kafalat).
The formation of a contract according to the Islamic Law does not hold the requirement of any sort of formality. The only necessity is mutual consent of both the parties to enter into the contract.
(B) Hindu Law
Hindu law could be termed as the result of the compendium of several customs and works of Smritikaras. who used the interpretation of Vedas as a source for developing the various facets of Hindu Law. The Hindu Law dealt with contract law in the form of titles.
Manusmriti in relation to the contract law dealt with incompetence to enter the contract. The renowned Indian teacher, philosopher, jurist, economist and royal advisor Kautilya added to the list of disqualified persons who are not allowed to enter into the contract, and it included a contract between spouses, parental relations, sibling relationships or between slaves and hired labour.
Manu also dealt with the fraudulent aspect of contracts and it stated that any contract dealing with mortgage, sale, fraudulent gift or any contract which is motivated with fraudulent aspect shall be declared null and void. Also, he held that any consent given for any transaction under the pressure or threat of coercion shall also be declared void.
The ancient priest Katyanana propounded a principle which still holds good is that when a contract has been entered and earnest money has been taken in that respect and when such a person is unable to execute that contract then the King is supposed to make the other party pay double the earnest money as a form of punishment. The purpose of it being that the person should suffer some loss for not fulfilling or executing his obligations as per the contract.
This leads to the fundamental aspect of the contract which is same for both the Muslim law and Hindu law and the same principle is there in contract act is that when any agreement takes place or is entered into which is contradictory to the law then it shall hold no legal standing.
Britishers arrived in India around 1600 and they further began governing India via different charters and regulations.
Regulating Act of 1773 –
The Supreme Court of Judicature was founded in Calcutta as a replacement to the Mayor’s court and it served as the highest court of British India from 1774 to 1862 until the time the High Court of Calcutta got officially established under Indian High Courts Act, 1861.
Prior to the Advent of the ICA –
Prior to the advent of the Indian Contract Act, the English Law was applied in the Presidency Towns of Madras, Bombay and Calcutta under the Charter of 1726 issued by King George I.
Further, with the indiscriminate application of English Law in governing the contracts formed as per their personal laws, it led to quite a bit of inconvenience to govern the jural relationships. So, for the purpose of removing the legal hindrance, the Settlement Act of 1781 was passed by the Britishers provided that matters concerning the inheritance, succession and contracts between the parties and as for Hindus and Muslims, their personal laws were to be abided by.
Although, in the case of both the parties belonging to either religions, like one being a Hindu whilst the other being a Muslim, then in that case, the law of the defendant is to be used. This was mainly complied with in the presidency towns whilst outside the presidency towns, the basic principles of justice, equity and good conscience were applied.
In the year 1862, the establishment of the High Courts took place in the town of Bombay, Calcutta and Madras and the charter of these High Courts also contained the same provision as previous law for the High Courts to apply the personal laws of the respective religions before rendering any judgements in respect to contract cases.
Advent of the ICA:
The Indian Contract Act was initially drafted by the third Law Commission in the year 1861 in England. The main purpose of the act was to attempt and define the laws pertaining to contracts, sale of movable properties, Bailment, Guarantee, Indemnity, Agency and Partnership.
The bill was not a complete binder of contract laws but the bill could suffice the need of the hour at that time for a reasonable period of time, during which the judges of the courts used the English Law as a reference when they failed to arrive at judgements.
The drafters of the bill smartly penned it since they were aware of the religious customary value in India and hence, the provisions were made so that the special customs of the personal laws governing any aspect of the contractual relationship would not be affected by the new law, unless they are not contrary with the new ones.
Conclusively, the act came into effect in 1872 but soon afterwards amendments were made in that regard, which repealed section 76 to 123 dealing with Sale of Goods Act and separate legislations were made called Sale of Goods Act, 1930 to govern that area. Also, Section 239 to 266 dealing with partnership was repealed and new legislation was enacted called the Indian Partnership Act, 1932.
Amendments in the ICA:
Section 28 of the Indian Contract Act, 1872 states:
" Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights, is void to that extent. "
The Legislature (Parliament) approved an amendment to Section 28 of the Indian Contract Act, 1872 which formally struck down provisions of a contract obliterating the right to execute or effectuate after a pre-decided period. It led to the following exception:
“This section shall not render illegal a contract in writing by which any bank or financial institution stipulate a term in a guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of such party from the said liability.”
The amendments to Section 28 inferred a reasonable difference in the law that even where an agreement smothers the rights or dispatches the liability of any party to an agreement, so as to curb such party from enforcing his rights on the expiry of a specified period, such agreement would become void to that extent.
The Supreme Court held that the amendments made in the year 1997 were not declaratory but were substantive changes to the law and therefore applied only prospectively and not retrospectively.
The Indian Contract Act, 1872 made it easier for the people to follow a ubiquitous law rather than pursuing the personal laws which were distinct for the religious communities. The act also holds a significant place in the commercial law since it would have been arduous to carry on trade or any other business activity in the employment sector. The main objective of the act is to ensure availability of legal remedies to those who are affected. The parties to a contract frame the laws for themselves while arriving at a consensus which can be legally enforceable. Further, the law recognizes or takes cognizance of their decision unless prohibited by law.
(A) Mohiribibi v. Dharmodas Ghose
The plaintiff made a mortgage sale of his property for the defendant who was professionally a moneylender. Further, the plaintiff brought an action against the defendant claiming his age as an issue since he was a minor when the mortgage was executed by him. However, the defendant pleaded for the backing of Section 64 of the Indian Contract Act, 1872 which dealt with voidable contracts. Although, the Court held that the contract with a minor was held to be void-ab-initio and not voidable. Therefore, the minor was not liable to pay any sort of money given to him in the course of the agreement.
(B) Lalman Shukla v. Gauri Dutt
The defendant sent out all his servants to look for his nephew who was absconded from the house. In the meantime, the defendant proposed a reward of Rs. 501 to anyone who found the child. Fortunately, the servant found the child but failed to know about the reward in the course of time. The servant later claimed for the reward, but he was refused for the same since there must be a valid acceptance of the offer.
The Contract Law was analysed through the religious personal laws proceeding to the legalities during the British Regime and concluded through our present-day Indian Contract Act. Throughout the years, the means of punishment or technicality may have varied but the underlying principle remained the same. Conclusively, throughout the different time periods, the contract law has been amended but the general principles remain unchanged.
SVKM’s Pravin Gandhi College of Law