This article has been written by Manjula K S pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

A contract in India is an important piece of legislation that bestows rights, duties and obligations on intending parties entering into it for the completion of their business in today’s world. Indian Contract Act is the most important enactment which created a bridge between the parties entering into contract with multinational companies to conclude their successful business globally. Indian Contract Act has completed more than 150 years of its history. From the inception of the enactment of the Contract Act, 1872, the modifications with regard to the law  were as per Indian conditions and adaptability to the Indian economy. Therefore, to date, the Indian Contract Act, 1872, holds good. With the growth of technology and e-commerce, contract law in India has undergone several changes and has adopted the digital world. The Information Technology Act, 2000, introduced provisions for electronic contracts and recognised them as legally valid. The Indian Contract Act, 1872, was also amended in 1997 to include provisions for electronic contracts.

History of Indian Contract Act, 1872

•  Indian Contract Act, 1872 was first enacted on 25^th April, 1872 which came into existence on 1 September 1872 and it applies to the whole of India.

• Indian Contract Act is the main source of law regulating contracts in Indian law, followed by the old English Common Law, which was subsequently amended due to general principle of codification.
• Earlier in 1872, English common law was in force, which led to many difficulties and inconveniences. To overcome and regulate the contract between parties’ statutes were enacted.
•  Hindus were governed by Hindu law and Muslims were governed by customary law and usages.

Evolution of Contracts during Ancient and Medieval  period:  

There was no code of contract during the ancient and mediaeval period. The moral and legal principles were adopted from sources such as the Vedas, Dharmashastras, Smritis and Shrutis, wherein the agreements and transactions were conducted and followed as per the guidelines enumerated under Dharma and Artha. During the mediaeval period, various kingdoms and dynasties, such as the Mauryas, Cholas, Guptas and Delhi Sultanate, contributed to the legal development by following the legal guideline of dharmashastra in shaping the contractual relationships between two individuals or groups of individuals, where the essential elements for transactions were free consent and open consensus of terms and conditions between them.

Evolution of contract during Islamic period

The Islamic legal system was governed by the rules of the Mohammedan Law of Contract professed under Quranic principles during the Islamic period. The word contract under the Islamic legal system is a conjunction of Ijab, i.e., the proposal and Qubul, i.e., the acceptance.  The legal system during the Islamic period was known as Fatawa Alamgiri, based on the Hanafi School of Islamic Jurisprudence, which was a compilation of legal opinions touching on various aspects like inheritance, marriage, divorce and succession. The contractual matters were addressed by Islamic law and the judges, known as Qadis, were responsible for resolving the disputes and abiding by the principles of fairness, honesty and contractual obligations.

Evolution of contract during Roman period

During the Roman period, contracts played a crucial role in facilitating and identifying various contractual transactions and legal agreements in the form of promises according to their requirements, which needed to be fulfilled in order to make them enforceable. Some of them are:

Types of contracts 

Stipulatio (Stipulation): In ancient Rome, it was the most common verbal form of agreement where one party made a promise and the other accepted it, covering a wide range of transactions from sales to loans.

Mancipatio (Symbolic): It was a formal procedure consisting of symbolic gestures and the presence of witnesses involving the transfer of ownership through the symbolic act of the buyer holding copper and scales indicating the weighing of the purchase price.

• Legal formalities: Contracts involving free individuals were made through simple verbal agreements with the symbolic transfer of ownership, where a third party would act as an arbiter, and the transfer would be complete when the arbiter declared it.
• Enforceability: Roman contracts were generally binding, and breach of a contract could lead to legal consequences. The Roman legal system provided remedies for the non-performance of contracts, including monetary compensation or specific performance by way of redress in cases of dispute.
• Evolution over time: As society evolved, the Roman legal system adapted to new economic and social realities, leading to changes in contract practices.
• Contractual elements: Contracts in ancient Rome included essential elements such as offer, acceptance and consideration. Some contracts required specific formalities, while others were more informal, depending on the nature of the agreement.

Evolution of contract during Hindu period

During the Hindu period, contracts were influenced by Manusmriti, a well known Dharmashastra, an outlined principle for contracts, emphasising the ancient legal and ethical texts that provided fairness and ethical conduct for righteous living. Elements of contracts are based on mutual consent (Samanvaya) between the parties. Essential elements included an offer (Agraha), acceptance (Pratigraha), and a lawful object (Artha). Fulfilling contractual obligations was considered essential. Failure to perform could lead to legal consequences. The legal system during this period often relied on community and religious authorities for dispute resolution. The social and religious dimensions with regard to legal transactions were guided by the dharmic principles, which adhered to the ethical standards of the contract. Some concepts from the Hindu period, such as emphasis on fairness and mutual consent, continue to influence modern contract law in India.

Evolution of contract during the British Period

During the British colonial period, contracts played a crucial role in shaping economic and social relations. Contract law was primarily governed by the English common law, which was transplanted to the colonies and the judiciary applied the principles to local circumstances. Various types of contracts were prevalent, including sales contracts, lease agreements, employment contracts and trade agreements, and were instrumental in facilitating trade, commerce and the functioning of the colonial economy. In order to enforce contracts based on fair business practices and maintain order, the British colonial authorities established a legal mechanism to resolve contractual disputes through courts or appointed officials. During the colonial period, land contracts played a pivotal role in the acquisition and transfer of land, which led to many disputes leading to legal battles and tension between settlers and indigenous populations. The legal framework and the concept of contracts established during the British period continued to influence the legal system and have adapted the legal structures to suit their evolving needs.

Theory of contracts

The theory of contract helps to understand how people and organisations construct and develop legal agreements. The theory of contracts in India is primarily governed by the Indian Contract Act, 1872. The legislation outlines the essential elements of a valid contract, the rights and obligations of the parties involved and the remedies available in case of a breach.

A contract is defined as an agreement enforceable under law, where an agreement is a promise or set of promises forming consideration for each other. The parties to the contract are referred to as “promisor” and “promisee.”.

Essential elements of a valid contract

• Offer or Proposal and Acceptance: When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such an act or abstinence, it is said to be a proposal. There must be a lawful offer by one party and a lawful acceptance by the other party.
• Intention to create legal relations: The parties must intend to create a legal relationship and the agreement should not be of a social or domestic nature.
• Lawful consideration: As part of the agreement, something of value must be exchanged between the parties.
• Capacity of parties: The parties to the contract must be competent to enter into a contract, i.e., they should be of sound mind, major and not disqualified by law.
• Free consent: The consent of the parties to the contract must be free, and not be induced by fraud, coercion, undue influence, misrepresentation or mistake.

Types of contracts

Valid contract: A contract is one that meets all the essential elements and is enforceable by law.

Void contract: A contract that lacks one or more essential elements and is not enforceable by law.

Voidable contract:  A contract that is valid but can be voided at the option of one of the parties due to factors like coercion, undue influence, fraud, etc.

Parties are required to perform their contractual obligations as per the terms agreed upon and contracts can be discharged through their performance, mutual agreement, impossibility of performance, breach or operation of law.

The remedial measure for breach of contract is damages by way of compensation awarded to the innocent party for the loss suffered due to the breach. The court can even order specific performance of the agreement, requiring the defaulting party to fulfil the contractual obligation.

Landmark cases on contract law in India

Contract law is a complex and ever-evolving field, and India has a rich history of landmark cases that have helped shape the development of the law.

Hadley vs. Baxendale (1854)

Hadley v. Baxendale (1854) is a landmark case in the field of contract law that established the principle of “foreseeability.” The case involved a contract between a plaintiff, Hadley, a miller, and a defendant, Baxendale, a carrier, for the delivery of a crankshaft. Due to a delay in the delivery of the crankshaft, Hadley suffered losses caused by the subsequent delay in the operation of his mill.

The crucial issue in the case was the extent of the carrier’s liability for the losses faced by the miller. The court held that the carrier was only liable for losses that were reasonably foreseeable at the time the contract was entered into. The court reasoned that the carrier could not be held responsible for losses that were beyond the scope of what could have been reasonably anticipated based on the information available at the time of the contract formation.

This principle of foreseeability has since become a fundamental aspect of contract law, guiding the assessment of liability for breach of contract. It requires that the parties to a contract consider the potential consequences of their actions and take reasonable steps to mitigate any foreseeable losses.

The Hadley v. Baxendale case set a precedent for determining the appropriate measure of damages in contract disputes. It established that the plaintiff can only recover damages that are directly and naturally resulting from the breach of contract, as long as they were reasonably foreseeable at the time the contract was formed.

The principle of foreseeability has practical implications in various areas of contract law. For instance, in cases involving late delivery of goods, the courts will consider whether the buyer made the seller aware of any special circumstances that would make the delay particularly damaging. The foreseeability principle also comes into play in cases related to consequential losses, lost profits, and mitigation of damages.

The Hadley v. Baxendale case continues to hold significant relevance in contract law, ensuring that liability is proportionate to the foreseeability of losses and that parties are encouraged to consider potential consequences when entering into contractual agreements.

Mohori Bibee  vs. Dharmodas Ghose (1903)

The landmark case of Mohori Bibee  vs. Dharmodas Ghose (1903) set a precedent in contract law by establishing the principle of “minority,” which safeguards minors from entering into legally binding contracts. The plaintiff, Mohori Bibee, was a minor when she entered into a contract to sell her property to Dharmodas Ghose. The court meticulously examined the validity of the contract and ultimately ruled that it was null and void.

This pivotal decision was based on the recognition that minors lack the legal capacity to enter into binding agreements. The court reasoned that minors are often inexperienced and impressionable, making them susceptible to exploitation and undue influence. To protect vulnerable minors from the potential consequences of ill-advised contracts, the court established the principle that contracts entered into by minors are generally void.

The court’s decision in Mohori Bibee vs. Dharmodas Ghose has had a lasting impact on contract law. It has served as a cornerstone for subsequent legal developments and continues to be cited as a precedent in cases involving minors’ contractual capacity. The principle of “minority” has been codified in various jurisdictions, ensuring that minors are afforded legal protections when it comes to entering into contracts.

The case also highlights the importance of contractual capacity, which refers to the legal ability of individuals to enter into and be bound by contracts. Contractual capacity is influenced by factors such as age, mental capacity, and legal status. By establishing the principle of “minority,” the court acknowledged that minors lack the requisite contractual capacity to enter into binding agreements, thereby safeguarding their interests and promoting fairness in contractual relationships.

Shankarrao vs. State of Maharashtra

Background

The case of Shankarrao vs. State of Maharashtra, decided by the Supreme Court of India in 2006, is a landmark case that established the principle of “frustration” in Indian contract law. The principle of frustration provides that a contract may be discharged or terminated if an unforeseen event occurs, making it impossible or impracticable to perform the contract.

Facts of the case

In this case, the plaintiff, Shankarrao, was a farmer who entered into a contract with the State of Maharashtra to supply 1500 metric tonnes of sugarcane to a sugar factory. The contract specified that the sugarcane was to be supplied between November 1997 and March 1998. However, due to a severe drought in the region, Shankarrao was unable to cultivate enough sugarcane to fulfil the contract. As a result, he could only supply 600 metric tonnes of sugarcane to the sugar factory.

Court’s decision

The Supreme Court held that the contract between Shankarrao and the State of Maharashtra was frustrated due to the drought. The court noted that the drought was an unforeseen event that made it impossible for Shankarrao to perform his contractual obligations. The court further held that Shankarrao was not liable for breach of contract and was not required to pay damages to the State of Maharashtra.

Significance of the case

The Shankarrao case is significant because it established the principle of frustration in Indian contract law. This principle provides a way for parties to a contract to be excused from their contractual obligations when unforeseen events make it impossible or impracticable to perform the contract. The principle of frustration has been applied in a number of subsequent cases, and it is now a well-established part of Indian contract law.

Implications of the case

The Shankarrao case has several implications for businesses and individuals who enter into contracts.

• First, it highlights the importance of including a force majeure clause in contracts. A force majeure clause is a clause that excuses the parties from performing their contractual obligations in the event of an unforeseen event. By including a force majeure clause in a contract, the parties can protect themselves from being held liable for breach of contract in the event of an unforeseen event.
• Second, the Shankarrao case emphasises the need for parties to a contract to act in good faith. If a party to a contract knows or should know that an unforeseen event has made it impossible or impracticable to perform the contract, that party must notify the other party as soon as possible. Failure to do so may result in the party being held liable for breach of contract.
• Third, the Shankarrao case provides a way for parties to a contract to resolve disputes amicably. If a dispute arises over whether a contract has been frustrated, the parties can attempt to resolve the dispute through negotiation or mediation. If negotiation and mediation are unsuccessful, the parties can resort to litigation.

Important provisions of Indian Contract Act, 1872

The Indian Contract Act, 1872, is comprehensive legislation that governs the formation, interpretation, and enforcement of contracts in India. Enacted during the British Raj, the Act has been influential in shaping the legal framework for commercial transactions in the country. Here are some of its key provisions:

1. Offer and acceptance: The Act defines an offer as a proposal made by one party (the offeror) to another party (the offeree), with the intent to create a legally binding agreement. Acceptance is the unconditional assent to the terms of the offer by the offeree. A valid contract is formed when the offer is accepted without any modifications or counter-offers.
2. Consideration: Consideration is the price paid or promised for the performance of an act or the promise of an act. It is an essential element of a contract, as it creates a legal obligation for both parties. Consideration can be anything of value, such as money, goods, services, or a promise to do or refrain from doing something.
3. Capacity to contract: The Act specifies the legal capacity of individuals and entities to enter into contracts. Minors (persons under the age of 18), persons of unsound mind, and persons disqualified by law are generally considered to lack the capacity to contract.
4. Free consent: A contract is voidable if it is entered into under the influence of coercion, undue influence, fraud, misrepresentation, or mistake. The law protects parties from entering into contracts under duress or when they are not fully aware of the terms and conditions of the agreement.
5. Legality of object: A contract is illegal and void if its object is unlawful, immoral, or opposed to public policy. For example, contracts involving the sale of illegal drugs, gambling, or prostitution are not enforceable under the Indian Contract Act.
6. Performance of contracts: The Act imposes a duty on both parties to perform their contractual obligations in good faith. It provides for the remedies available to parties in case of breach of contract, such as damages, specific performance, and injunctions.
7. Discharge of contracts: A contract may be discharged by performance, mutual agreement, breach, frustration, or operation of law. Discharge by performance occurs when both parties have fulfilled their respective obligations under the contract. Discharge by mutual agreement takes place when the parties agree to terminate the contract before its completion.

The Indian Contract Act, 1872, is a foundational piece of legislation that has stood the test of time. Its provisions have been interpreted and applied by courts in numerous cases, shaping the legal landscape of India’s commercial and business environment.

Conclusion

By analysing the development of contracts from the ancient periods, from the Roman to the Muslim period to the Hindu period, it can be concluded that contracts were deeply rooted in ethical and moral principles, with an emphasis on fairness and mutual consent. These contracts played a crucial role in shaping economic and social relationships within the community, though the technicality and modes and means of punishment may vary, the vital principle among all the laws remained the same. It is further concluded that ancient contract law shares similarities with modern contract law, particularly in terms of cultural context and legal formalities, which provides insight into the legal and economic structure. The Indian Contract Act, 1872, is the backbone of contract law in India, with a with a rapidly changing technical landscape that is constantly evolving to keep pace with new challenges and opportunities in the emerging digital world.

References

• https://www.legalserviceindia.com/legal/article
• https://www.slideshare.net/patelmitul772/sajan-67292162
• https://lexpeeps.in/the-chronicle-of-islamic-laws-in-india
• https://www.noam.ch/history-of-contract-law-in-india/
• Book – Law of Contract by Avatar Singh.