What Is Contract? Is Indian Contract Act An Exhaustive Law Relating To Contract?

What is a Contract?

An agreement enforceable by law is termed as a “contract” and is governed by the Indian Contract Act, 1872 (hereinafter referred as “ICA”). An agreement is a contract, only if it is entered with the free consent of the parties (absence of coercion, undue influence, misrepresentation, and mistake), having the capacity to enter into the contract (who are of sound mind and persons who are not disqualified by law), for a lawful consideration and lawful object (not forbidden by law, does not defeat any provision of any law or is not fraudulent or does not involve injury to person or property or is not violative of public health, morality, peace and order). All the legally enforced agreements are usually written and registered.

In addition to the above requirements, an agreement becomes a contract, only when, it gives rise to a legal obligation. Earlier, English Courts in Carlill v. Carbolic Smoke ball Co. [1 QB 256 (CA)] held, that, merely because the promisor contends that there was no intention to create legal obligations would not exempt from liability arising from any contract. In this case, a company advertised that taking the medicine continuously, three times for two weeks, will prevent cold. In the same advertisement, they guaranteed to offer a reward to anyone, who catches a cold after taking medicine as prescribed. To show their sincerity, they deposited some amount in Bank. However, Lilli Carlill the plaintiff caught the flu after taking medicine and therefore, claimed the reward which was later refused by the company.

Later, in Balfour vs. Balfour [1919] 2 KB 571, where, Mr. Balfour promised to pay his wife 30 pounds per month as she stayed in England for medical reasons. When he failed to pay, Mrs. Balfour sued him. Her action failed because there was no intention to create a legally binding agreement between Mr. and Mrs. Balfour. This is because a contract cannot be enforced without proper indication about the legal rights and obligations of the parties to the contract. In another case of Jones v. Padavatton (1969) 2 ALL ER 616, the daughter acting on her mother’s promise left her service and gone to another country for education. The mother undertook to pay for the expenses.

For the next five years, the daughter could not complete her education and difference arose between them. Thereby, the mother stopped the payments. Court held that engagement did not result in a contract, as there was no legal obligation to pay for education, also it is a social/family agreement not intended for legal consequences. The creation of legal obligation through an agreement is the most important aspect to make contracting parties responsible for remedies on breach or in other conditions.

For any agreement to be termed as a contract enforceable before the law, it must not be vague or uncertain. There are certain contracts that are restrained by law and cannot be entered. The agreements without consideration are void except when, it is written and registered, or is a promise to compensate for something is done or is a promise to pay a debt barred by limitation law. Agreements in restraint of marriage, restraint of trade, restraint of legal proceedings, void for uncertainty, by way of wager, on an impossible event, to do an impossible act. The agreements are void which are based on any of the subjects mentioned above. There is no liability for not enforcing the contract and thus, the conditions of the contract are not binding upon any of the parties.

The contracts can be divided into

1. Adhesion contracts (contain the obligation of either opt for it or leave it),

2. Aleatory contracts (involves mutual agreement depending upon the occurrence of an unexpected event, for example, fire or car insurance),

3. Bilateral and unilateral contracts (two-sided contracts as they involve two-way promises and contracts which involves promise made only by one party respectively),

4. Express contracts (terms of contracts are explained clearly),

5. Implied contracts (contracts are assumed owing to facts of parties),

6. Void and voidable contracts (illegal contracts/ invalid under the law and where only one party is bound by the contract and unbound party is capable of terminating it),

7. Executed contracts (where both the parties have completed their share of obligations),

8. Executory contracts (when either of the parties has to perform their share of obligation),

9. Illegal/unlawful contracts (an agreement contrary to law) and

10. Quasi-contracts (unlike a real contract depends upon the operation of the contract).

Contracts formation involves a procedure which includes

1. Parties (two or more) capable of contracting to form an agreement.

2. Whereby one of the parties signifies to the other the intention/willingness of doing or omitting to do something with an intent to obtain the other’s assent (Offer/Proposal).

3. The person to whom the offer or proposal is made signifies his assent for the same thing in the same sense as proposed by the offeror (Acceptance).

4. If the proposal is accepted it becomes a promise (Promise).

5. For any price against any act or omission (consideration). If after the offer/ proposal made or intimated any changes are made to this offer, a new cross offer/counteroffer is made by the party to which acceptance will be given by the initial offeror. The rest procedure of acceptance for forming a valid contract legally enforceable remains the same.

Therefore, when A promises, for a certain sum paid to him by B, to make good to B the value of his ship if it is wrecked on a certain voyage. Here, A’s promise is the consideration for B’s payment and B’s payment is the consideration for A’s promise and these are lawful considerations.

The agreement must be capable of performance to form a valid contract, that is it should not be for doing an impossible act.

Is Indian Contract Act an exhaustive law relating to the Contract?

Indian Contract Act is an important branch of law, that governs the standard procedure for entering into any contract, contains the general principles and rules governing contracts. It determines the circumstances under which promises made by the contracting parties shall be legally binding on them. It also specifies the conditions under which the remedies are available against a person in a Court of law.

The conditions include when a person fails to perform the contract entered into, or there is a breach of legal obligations made under the contract by him/her. In addition to this, it has provisions for Bailment, Pledge, Agency, Indemnity and Guarantee. Still, the Indian Contract Act is not exhaustive, there are cases that not provided for in the Act, it lacks discussion about particular contracts, also the contracts entered under personal laws such as the Hindu Law of Contract to Hindus, And the Mohammedan Law of Contract to Mohammedans.

The Indian Contract Actas primary legislation to much other secondary legislation, whereby they derive the power of contracting from the Indian Contract Act. They pull the meaning for basics of contract formation, remedies on breach, performance, etc. Nevertheless, the archaic nature of the Indian Contract Act gets reflected by many separate acts that have been passed on special aspects of contractual transactions, such as the Negotiable Instruments Act, 1881, Transfer of Property Act, 1882, Merchant Shipping Act, 1958, Companies Act 2013, etc.

All the other statutes have to be read in conjunction, and not in substitution, with the Indian Contract Act. In addition to the above, parts of the Indian Contract Act itself have been taken out to constitute independent enactments relating to particular contracts, such as the Sale of Goods Act, 1930, the Partnership Act, 1932. Therefore, there are some contracts which are governed by separate Acts.

Today, the Indian Contract Act lacks majorly in accordance to the changing market, where, there is a need of reduction in litigations arising from the narrow clauses mentioned in the Indian Contract Act, parties prefer e-contracts, no scope of analysis of damages beyond liquidated damages and damages as a way of penalty, etc. The other legislations are the result of the archaic nature of the Indian Contract Act. Those enacted recently, match with the dynamic market and have been framed in a way, that they overcome the lacks shown in the Indian Contract Act with special clauses incorporated within. The areas in which the Indian Contract Act continues to lack are highlighted below.

1. No provision supporting E- Contracts

Digitization is the new normal of today’s world and people enter into e-contracts in their day-to-day works by one click. The nature of e-contracts is mentioned in the separate Information and Technology Act, 2000 due to its nature. But the Act still does not delve into the concept but covers the basics of contract formation. As a result, there is some insecurity among people entering into e-contracts. To overcome this lacuna and bring awareness among people there is need of provisions to be included in old the Indian Contract Act governing e-contracts. The provisions regarding the rules of formation of e-contracts, the need to provide for questions around jurisdiction in e-contracts, rights and liabilities of parties and cases of unilateral mistakes by one party. Judiciary has nevertheless bought some light in the concept un the case of PR Transport Agency v. Union of India, AIR 2006 ALL 23. But the Indian Contract Act needs to be overhauled covering the concept of e-contracts completely. Judiciary has confirmed the formation of contracts through emails in the case of Trimex International FZE Limited, Dubai v. Vedanta Aluminium Limited, 2010 (1) SCALE 574.

2. No provision covering unfair terms of Contracts

The Indian Contract Act lacks to mention the “procedural” and “substantive” unfairness while dealing with a contract. The unfairness in nature of unreasonable and unconscionable bargains, in redefining the extent of unlawfulness or illegality as mentioned in the Act for rendering a contract void, absolute nature of barring the jurisdiction of any Court of Law, etc. There are no standard procedures or clauses mentioned in the Indian Contract Act, to deal with any unfair terms within a contract or during the performance of a contract.

3. No provision for protecting the rights of parties through the non-compete for clauses

The Indian Contract Act bars any clause in restraint of trade. Indian Judiciary to supports the idea of barring the non-compete clauses and has termed them as null and void. Whereas legal experts note that provisions like non-compete is ubiquitous in modern international contracts, especially if parties have similar bargaining powers. Therefore, such clauses should be permitted in the Indian Contract Act. This is because of the increase in cross-border trade and an enhanced competitive environment in India, confidentiality, non-compete, and non-solicitation agreements are becoming increasingly common, especially in the IT and technology industries. A large amount of out-sourcing and IT businesses have confidentiality, non-competitive and non-solicitation provisions in agreements with their workers, with terms varying from a few months to several years after the termination of the employment contract. These limitations are necessary to protect their proprietary rights and their privacy.

4. No mention about the remote and indirect loss or damage sustained by reason of the breach

The relevance of the Indian Contract Act has increased in the current business environment with a significant increase in the number of contracts concluded between parties and the resulting disputes. The Indian Contract Act deals with liquidated damages and damages by way of penalty. There is no mention of the remote and indirect damages sustained by parties due to reason of the breach. The law of damages is excessively subjective and lending itself, without uniformity or clarity, to the interplay of unrestrained discretion and factual vagaries.

Hence, after going through the Indian Contract Act one can find only the provisions for initiation of a contract, formation, the performance of a contract, limited remedies as dealt with in the old days (paper contracts). Its archaic model lacks significantly in accordance with today’s markets’ needs of digitization, other losses, balancing terms, etc. Therefore, the necessary amendments should be bought to the Act to make it competitive. The overhaul will make it more user-friendly and competitive globally.


This Article is Authored by Shriya Kesharwani, BBA LLB (Hons.) from GNLU.

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