This article is written by Diksha Ranjan, pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution. In this article, various important aspects of contract law will be dealt with from the comparative perspective of India and UK analytically.

This article has been published by Sneha Mahawar.​​ 

Introduction

In our day-to-day life, we deal with various transactions and negotiations and we are unaware of the fact that we enter into a contract by doing such transactions, agreements, negotiations, etc. The basic essentials, principles and validity of contracts in India are governed by the provisions of the Indian Contract Act, 1872 (hereinafter referred to as ICA, 1872). It deals with various ingredients of contracts in India like proposal, acceptance, consideration, free consent, quasi-contract, breach of contract, damages, etc. In this article, various nuances of contract law will be discussed from the comparative perspective of India and the UK.

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What is a contract

It is pertinent to discuss very briefly what is a contract before discussing the important aspects of contract law from the comparative perspective of India and the UK.

According to Section 2(e) of the ICA, 1872, an agreement is defined as any transaction in which two parties enter into a promise or set of promises forming consideration for each other and this agreement if it is enforceable in the eyes of the law, then it turns out to be a contract as per Section 2(h) of the ICA, 1872. For a contract to be valid and enforceable in India, it must fulfill all the conditions mentioned in Section 10 of ICA, 1872 i.e. the following factors must be met:

  • It must be made with the free consent of the parties.
  • The parties must be competent to enter into the Contract
  • There must be lawful consideration and lawful objective.
  • The contract should not be declared void by any law in force in India. 

However, every country has its own law to govern the contracts in their jurisdiction. Let us analyze how the provisions of contract laws in India differ from the provisions of English Contract law through relevant provisions and case laws.

Capacity to contract with respect to a minor’s agreement

Position in English Law

A minor is a person who has not completed the age of 18 years as per the Births and Deaths Registration Amendment Act (No 1 of 2002). In English Law, a minor’s agreement is considered to be a voidable contract. It is voidable at the option of the minor. A “voidable contract” is a contract that can be unenforceable at the option of one party of the contract and he can rescind the contract as per his discretion 

Position in Indian Law

A minor is a person who has not completed the age of 18 years as per the Indian Majority Act, 1875.

Section 11 of ICA, 1872 provides for the provision of persons who are legally competent to enter into a contract. According to Section 11 of ICA, 1872 only a person who is a major is in a position to enter, negotiate or deal with a contract. The jurisprudential essence behind this provision is that since the parties enter into a legal obligation, the parties must be mature enough to assess the contractual obligation they are entering into. 

There was a controversy in India about whether the minor’s agreement was void or a voidable contract and this controversy was laid to rest by the Privy Council in Mohori Bibee vs. Dharmoda Ghose (1902-1903). The facts of the case are as follows:

  • Brahmodutt, who was a Mahajan, carried out the business of money lending through his agent.
  • Dharmodas Ghose approached the agent of Brahmodutt for money lending. Even though he was a minor, he represented himself to be a major.
  • The agent was aware of the fact that Dharmodas Ghose was a minor and still the loan agreement was made between the Mahajan and the minor through the agent.
  • Mahajan made the part payment of a certain sum of money and the minor mortgaged his two properties. 
  • Since Dharmodas Ghose was a minor, his mother filed a suit for cancellation of the mortgage on the ground of his minority.
  • Mahajan raised the contention that the minor’s agreement is a voidable contract and not a void contract, but the Trial Court held that the agreement is void as it was entered by the plaintiff when he was a minor.
  • Brahmodutt then appealed the same in Calcutta High Court and the High Court upheld the decision of the Trial Court, dismissing the appeal of Brahmodutt.
  • Brahmodutt (the original appellant) had died at the time of appealing to the Privy Council, so he was replaced by his successor, Mohori Bibee. The controversy regarding the minor’s agreement was settled by the Privy Council, stating that “minor’s agreement is void-ab-initio i.e. void from the very beginning”.

Doctrine of Restitution with respect to a minor’s agreement 

Position in English Law

When a minor enters into an agreement with another and receives benefits out of the agreement, then the question arises that will the minor be liable to restore the benefit or not i.e. can there be restitution against the minor? This principle is settled in English law in Leslie (R) Ltd. vs. Sheill (1914). The facts of the case are as follows:

  • In this case, a minor borrowed a certain sum of money and did not return and the creditor filed a suit for return of money. 
  • In this case, the Court made a distinction between repayment of debt and restitution of money.
  • The Court held that if the debt is repaid, it will not be restitution. It will instead amount to enforcement of the contract. Court remarked that ‘restitution stops where repayment begins’. The Court opined the following in the case of restitution against minors:

1. If, in any agreement, the benefit received by the minor is property, then restitution is allowed, provided that the property is traceable by virtue of the equitable doctrine of restitution.

2. The minors cannot be allowed to be liable for contracts in a manner it would become an indirect manner of enforcing the contract. 

Position in Indian Law

The question of restitution in India in the case of a minor’s agreement was first raised in Mohori Bibee’s case. The contention in the case is that if the mortgage deed could not be enforced, the minor should return the benefit he has received under Section 64 and Section 65 of ICA, 1872. The Court held the following:

  1. The Court held that restitution could not be granted under Section 64 of the Act because Section 64 is applicable in cases where the contract is voidable. In the minor’s agreement, the contract is void ab initio.
  2. Court further held regarding Section 65 of the Act that Section 65 is applicable when the contract becomes void. There is no question of ‘contract becoming void’ because, in the first case there is no contract in the case of minor i.e. the contract does not become void; it is an agreement that is void ab initio. 

Privity of consideration

According to Section 10 of ICA, 1872, one of the essential elements of enforceability of agreements is ‘lawful consideration’. In Currie vs. Misa (1875), the Court held that a valuable consideration in the eyes of the law must consist of some right, interest, profit or benefit in favour of one party or some forbearance, detriment or loss suffered by the other party. The doctrine of privity of consideration provides that the consideration must move from the parties to the contract only. 

Position in English Law 

Under English Law, the consideration must move from the promisee only. If the consideration is furnished by any other person, then the promisee becomes a stranger to consideration and, therefore, cannot enforce the promise.

For example, If ‘X’ and ‘Y’ enter into a contract wherein ‘X’ agrees to pay a certain sum of money for a work to be done by ‘Z’. In this case, Y has no privity of consideration. If ‘Y’ sues for non-performance of promise, he will not be allowed to do so.

Position in Indian Law

Consideration is governed under Section 2(d) of the ICA, 1872. Section 2(d) of ICA, 1872 uses the phrase “promisee or any other person”. This clearly indicates that under Indian law, the consideration can either move from promisee or any stranger to consideration. Therefore, a person may be a party to a contract but he may be a stranger to the consideration. For example, if ‘A’ and ‘B’ enter into a contract wherein ‘A’ agrees to pay a certain sum of money to B for a work to be done by ‘C’. In this case, ‘B’ is a stranger to consideration, whereas C is not a stranger to consideration but he is a stranger to contract. 

In English law, a stranger to consideration cannot sue and in Indian law, a stranger to consideration can sue. This principle was settled by the Court in Chinnaya vs. Ramayya (1882) and the brief facts of the case are as follows:

  • In this case, an old woman, by gift deed, gave certain properties to her daughter.
  • It was provided in the gift deed that an annuity of Rs. 653 was to be paid to the plaintiff, who was the sister of the old woman.
  • The defendant executed an agreement in favour of the plaintiff, promising to give effect to the stipulation in the deed, but the annuity was not paid.
  • The contentions of the daughter were that the plaintiff was a stranger to the consideration. Hence she cannot sue.
  • It was held by the Court that strangers to the consideration can sue.

Doctrine of frustration

The doctrine of impossibility of performance of contract connotes that when the performance of the contract becomes impossible due to some unforeseeable event, the contract is said to be frustrated. Impossibility can be of two kinds; initial and subsequent. Initial impossibility means that at the time of agreement formation, the act was impossible i.e. impossible from the very beginning. Subsequent impossibility means that at the time of the formation of the contract, the act was possible to perform but due to the occurrence of certain events after the formation of the contract the act subsequently became impossible. 

Position in English Law 

In England, the ‘absolute contract theory’ was laid down in Paradine vs. Jane (1647), which stipulated that once a contract has been made, it must be performed and the subsequent change in circumstances should not affect the contract already made. Subsequently, this rule was changed in Taylor vs. Caldwell (1863) and the Court formulated the ‘doctrine of implied term’. This indicates that an implied condition would be read into the contract when the performance of the contract becomes impossible. The brief facts of the case are as follows:

  • In this case, the defendants agreed to let the plaintiffs use their music hall for a concert.
  • The hall was destroyed by fire before the concert could start.
  • It was held by the Court that in every contract there is always an implied term that in case the performance of the contract becomes impossible, the parties shall be excused in this case and will not be held liable for non-performance of the contract.

In Krell vs. Henry (1903), the concept of frustration was not only limited to physical impossibility but also extended in cases where the object which the parties had in mind failed to materialise. The brief facts of the case are as follows:

  • The defendant hired a flat to witness the coronation procession of the king.
  • The procession was cancelled due to the illness of the King.
  • It was held that the real object of the contract, as recognised by both parties failed. Therefore, the object of the contract was frustrated and the plaintiff was not entitled to recover the balance amount of rent from the defendant. 

Position in Indian Law

Section 56 of ICA, 1860 provides for the provision of frustration of contract. Section 56 (The first paragraph talks about initial impossibility) provides that any agreement which the parties enter into, knowing that the act agreed to be performed in the contract is impossible to perform, then such contract is void.

Second 56 (Second Paragraph talks about subsequent impossibility) provides that after the parties have entered into the agreement, and some unforeseen circumstance arises which makes either the performance of the contract impossible or the object of the contract become unlawful which cannot be prevented by the parties, then such contract becomes void.

The word “impossible” used under Section 56 covers both physical and practical impossibility as held by the Supreme Court in Satyabrata Ghose vs. Mugneeram Bangur (1954). It was also held by the Court that the ‘ Doctrine of implied term’ has no application in India because Indian law is governed by Section 56. The ambit of frustration is wider in English Law as it covers implied conditions of contingent situations, which is an aspect covered in Indian Law under Section 32 of ICA, 1872. Section 56 only covers the aspect when a situation has arisen after the formation of the contract, which is by its interference defeating the purpose of the contract only. Therefore there is no applicability of the implied conditions in this scenario.   

Damages

Non-performance of contract which is not excused by law amounts to breach of contract. The party who is injured by a breach of contract may bring an action for damages. ‘Damages’ means compensation in terms of money for the loss suffered by the injured party. If the parties at the time of making the contract agree to the compensation payable in the event of a breach of contract then it is either liquidated damages or penalty. 

Position in English Law

According to English law, the sum prefixed by the parties to be paid in case of breach of contract falls into two categories; liquidated damages and penalty. If the sum agreed upon is the genuine pre-estimate of the prospective damages, it is known as liquidated damages. If the sum is excessive or highly disproportionate to the likely loss, then it is known as a penalty.

In Dunlop Pneumatic Tyre Co. Ltd. vs. New Garage and Motor Co. Ltd. (1915), the House of Lords laid down the following proposition with respect to liquidated damages and penalty:

  • The expression of the parties is not conclusive, and it is the duty of the Court to find out whether the payment stipulated is liquidated damages or penalty.
  • In penalty, the damages is usually a high and unreasonable amount, while in liquidated damages, the sum named is a genuine pre-estimate of the damage. It depends upon the terms and conditions of a contract whether the sum named is penalty or liquidated damages.   
  • If it is liquidated damages, then in such condition, the whole sum is recoverable, but if the sum named is penalty, then the whole sum will not be payable. The Court will grant reasonable compensation in such cases. 

Position in Indian Law

Section 74 ICA, 1872 provides for liquidated damages and penalties. Essential elements of Section 74 of ICA, 1872 are as follows:

  • There must be a breach of contract.
  • A sum must be mentioned in the contract which is payable on breach or any other stipulation by way of penalty.
  • Proof of actual loss is not necessary.
  • The party complaining about the breach is entitled to receive reasonable compensation from the other party.
  • The compensation must not exceed the amount named or the penalty.

Therefore, it is immaterial whether the sum named is liquidated damages or penalty as the distinction between both is abolished in India. Moreover, It is not necessary to prove the actual loss suffered by the party. Section 74 dispenses with the necessity for determining the actual loss suffered by the party.

Indemnity

Position in English Law

The term ‘indemnify’ means to make good the loss of another in certain situations. It is a contract in which one party promises the other party to compensate any loss which arises either by the conduct of the promisor himself or by the conduct of any other person. In English Law, the scope definition of indemnity is wider than indemnity in India. It also covers the cases of loss arising from accidents like fire, natural consequences, etc. Every contract of insurance except life insurance is a contract of indemnity under English Law.  

Position in Indian Law

Section 124 of ICA, 1872 deals with ‘Contract of Indemnity’. A contract of indemnity is a contract between two parties i.e. indemnifier and indemnity holder, wherein the happening of the loss is the contingency on which the liability of the indemnifier is dependent.

Under Indian law, the concept of indemnity is limited only in cases where the loss is caused either by the promisor himself or by any other person. This definition of Indian law under Section 124 of ICA, 1872 does not cover within its ambit loss arising from accidents like fire, natural consequences etc. In Indian law, the loss to claim indemnity must be caused by human intervention only. Therefore, in India, contracts of insurance are covered under the contingent contract and not under a contract of indemnity. Indemnity in English Law is wide enough to cover loss arising from any cause whatsoever. 

Conclusion

Therefore, Indian Contract Law differs on the above-mentioned points from English Contract Law. Indian Contract Law came into force in the year 1872 and with the evolving time, the Indian Contract Act also needs to be re-evaluated and certain provisions should be changed. For example, during Covid-19, the Indian Courts treated the contracts as force majeure and not as a doctrine of frustration. The reason behind this was that there is no such concept of “Doctrine of implied term” in Indian Law. We deal with different kinds of contracts and negotiations on a day-to-day basis. Therefore, with time the law should also evolve to make a smooth process for the parties entering into a contract.

References

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