This article has been written by Sakshi Keshri pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho.

This article has been edited and published by Shashwat Kaushik. 

Introduction

The law of contracts governs contracts in India. From formation to enforcement, everything under the contract is governed by the Indian Contract Act, 1872. The Indian Contract Act, 1872, defines each aspect of a contract very precisely. From the basis of a contract to enforcement, jurisdiction, void and voidable contracts, communication, and acceptance, everything is defined in the Indian Contract Act, 1872. The Indian Contract Act, 1872, is based on the principles of English Common Law. In recent years, various theories about the purpose of contract law have been discussed. Some say it enforces legal obligations and protects the rights of the parties. The guidelines governing the law of contract can be traced back to ancient times. It upholds the same fundamentals and values as traditional law, which is largely based on ethical principles and moral guidelines. The law of contract affects everybody, that is, trade, commerce, and industry. People usually trade to fulfil the lack of resources others have. The term contract is defined under Section 2(h) of the Indian Contract Act, 1872, as ‘’An agreement enforceable by law’’. The modern law of contract is a complex and dynamic field.

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Essential to a valid contract

Offer and acceptance

For a contract to be legally valid, there must be an offer and an acceptance. The offer is made by one party to the contract and is accepted by the other. The offer must be clear and complete in all senses. Both parties should communicate to ensure there is no lapse in the contract act. Both the offer and acceptance must be “consensus ad idem,” meaning, both parties must comply with the same thing.

Intention to create a legal relationship

Both parties should have the intention of creating a legal relationship that results in an agreement. Agreements of a social or household nature are not contracts because the parties do not intend to build legal relationships.

Legal obligations

One of the key or essential elements of a valid offer is that both parties to the contract must be clear with the intention of creating a legal relationship. This also means that agreements that are not enforceable by law, like agreements between relatives, are not enforceable in court. This is a perfect example of this. The contract should be entered into to fulfil the legal obligations arising out of it.

Consideration

Consideration forms an important part of the contract. Consideration means the value given for the performance of the promise. One of the essentials of a valid consideration is that it should not be adequate, but should carry some value.

 Legal capacity and competency

The Parties to the contract should be legally competent to enter into the contract. They should be of legal age and should not be declared insolvent by the government. They should not be insane.

These are the essential elements of a valid contract that need to be fulfilled before entering into any agreement.  

Modern law of contract

The law of contract has undergone various changes to fit into the current legal system. Modernization has helped improve the overall efficiency of the legal system. Today, all transactions in the business world are governed by contracts. Everything in big business organisations revolves around contracts. Various companies enter into contracts with each other on a daily basis and they hire competent personnel to review and negotiate the contracts. All the clauses are read and understood in the true sense before signing the contract so that no problem occurs in the future. Both parties understand the contract in its true sense and communicate with each other to avoid any irregularities in the future. If any of the terms of the contract are breached by either party, the other party is liable to pay damages or compensation to the other party for the breach of contract. The damages can be paid in various ways. If a contract is breached by either of the parties, then the breach amount is already specified in the contract, which the breaching party needs to pay. An actual breach of contract occurs when the party fails to perform their obligations as specified in the contract at the time performance is due. Examples of actual breaches of contract include non-payment, incomplete performance. In the case of R. Venkataraman vs. Hindustan Petroleum Corporation Ltd. (1998), the court found that there was an actual breach when the defendant failed to provide a petroleum dealership to the plaintiff.

Traditionally, if someone breaks the contract, the harmed party could ask for money to make up for the promise being broken. But now they are arguing to shift the focus from what has been broken to what the party relied on. If someone breaches a contract, there are several ways to fix it from asking the party for damages for breaching the contract to asking the party to do something specific (delivering what was promised). These two work fine together because the money is supposed to match what the promised thing is worth. The breach of contract allows the aggrieved party to either accept the breach and terminate the contract or affirm the contract and continue with its performance. This type of breach typically occurs when one party refuses or is unable to perform its contractual obligations. In the case of Indian Oil Corporation Ltd. vs. Amritsar Gas Service (1991), the court ruled that the defendant’s refusal to pay outstanding dues constituted a repudiatory breach, allowing the plaintiff to terminate the contract.

Now, if we start saying that the money that you get as damages for the breach of a contract is much less than what was promised, people might always want the specific thing to be done instead. This could cause a problem, especially if someone gets a good deal in the first place. Now, the problem is that if we go the way of giving someone the right to demand exactly what was promised (specific performance), then we are going back to the old way of protecting expectations. Then it would lead to getting one party to a contract, a very good deal, even if it is tough for the other party to fulfil it. Also, sometimes asking for promised things isn’t practical; maybe it’s hard for the person who broke the promise. In those cases, the law lets you ask for the money instead. But if we change the rule to only focus on what the party to the contract relied on, then it would create a mess.

One way to solve this mess is to get rid of the option to ask for the promised thing and stick to only asking for money based on reliance. But nobody is suggesting this and most people seem to prefer expanding options rather than limiting them. Contract law is a vast area and it includes various legal obligations to be fulfilled for breach of a contract in modern times. And one of them is quantum meruit. This allows a party to claim a reasonable amount for the work done or services provided before the breach occurred, even if the contract is not completed. Another way is rescission: which means cancelling the contract and treating it as if it never existed. After rescission, both parties are typically required to return any benefits they received under the contract.

Anticipatory breach

Section 39 of the Contract Act specifically addresses anticipatory breach, which is a form of repudiation. It states that if one party to the contract refuses to perform their obligations or makes it impossible to perform, the other party may consider the contract void and claim damages for any loss suffered. In the case of S.B.P. & Co. vs. Patel Engineering Ltd. (2005), the Supreme Court of India held that repudiation must be in clear and unambiguous terms, indicating an intention to not fulfil the contract. The Court also held that repudiation may be inferred from the breaching party’s conduct if it demonstrates a clear intention to not fulfil their obligation. In Maula Bux vs. Union of India (1969), the Court has specifically held that it is true that in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree and the Court is competent to award reasonable compensation in a case of breach even if no actual damage is proved to have been suffered in consequence of the breach of contract. The Court has also specifically held that in cases of breach of a contract, it may be impossible for the Court to assess compensation arising from the breach.

Various types of contracts

Over time, specific types of contracts gained prominence due to societal changes and economic advancement. Some of these specific contractual forms include. Partnership contracts, employment contracts, sale and commercial contracts, and government contracts. With the rise of trade and commerce, partnerships emerged as a crucial business structure among people. The Partnership Act, 1932 provides a comprehensive legal framework for the formation, dissolution, rights and liabilities of the parties. Over time, the employment contract has also been popular, as it helps both employer and employee negotiate better and understand each other’s rights, responsibilities, and liabilities. This leads to a significant development in employer and employee relationship. Today, every business, trade, or commercial activity needs a contract to draft the clauses and terms related to it; specifically, without a contract, a big business organisation or any other type of business will find it difficult to do its business or enter into any trade. Countries enter into contracts with each other before carrying out any trade business, or investment work. The international contract covers a wide range of areas, including trade, technology transfer, employment, finance, commerce, etc. International contracts also require compliance with international laws and regulations, such as those set forth by the World Trade Organisation (WTO) and the United Nations (UN). The international contract has always been a complex topic when it comes to its proper drafting and its jurisdiction.

Principles of interpretation

Plain meaning rule

  • Courts interpret contracts based on the plain meaning of the language used in the contract.
  • The ordinary and usual meaning of the words is given effect.
  • This rule is based on the assumption that the parties to a contract are rational actors who understand the meaning of the words they use.
  • If the language of a contract is clear and unambiguous, the court will not consider extrinsic evidence to interpret the contract.

Contra proferentem rule:

  • Ambiguities in a contract are interpreted against the party who drafted the contract.
  • The drafter is presumed to have had a greater opportunity to clarify the ambiguous terms.
  • This rule is based on the idea that the drafter of a contract is in a better position to understand the meaning of the contract and should bear the risk of any ambiguities.
  • The contra proferentem rule is often used to interpret adhesion contracts, which are contracts that are presented on a take-it-or-leave-it basis.

Parol evidence rule:

  • Parol evidence, such as prior negotiations or oral statements, is generally not admissible to contradict or vary the terms of a written contract.
  • This rule is based on the idea that a written contract is the final and complete expression of the parties’ agreement.
  • The parol evidence rule prevents parties from introducing extrinsic evidence to change the terms of a written contract.
  • There are a few exceptions to the parol evidence rule, such as when the extrinsic evidence is offered to show that the contract was entered into under duress, fraud, or mistake.

Remedies for breach of contract

Compensatory damages:

  • Definition: Compensatory damages are a type of monetary award designed to restore the non-breaching party to the financial position they would have been in if the contract had been performed as agreed.
  • Calculation: Damages are calculated based on the actual losses suffered as a direct result of the breach. This can include out-of-pocket expenses, loss of profits, and other quantifiable losses.
  • Objective: The goal of compensatory damages is to make the non-breaching party whole and to compensate them for the harm caused by the breach, but not to punish the breaching party.

Examples:

  • A contractor breaches a contract to build a house, causing the owner to incur additional costs to complete the project. The owner may be awarded compensatory damages to cover the extra expenses incurred.
  • A supplier fails to deliver goods on time, causing a manufacturer to lose a significant sale. The manufacturer may be entitled to compensatory damages to cover the lost profits.

Specific performance:

  • Definition: Specific performance is a court order that requires the breaching party to fulfil their contractual obligations as agreed.
  • Application: It is typically granted when compensatory damages are inadequate or impractical, or when the subject matter of the contract is unique or has sentimental value.
  • Factors Considered: Courts consider various factors in determining whether to grant specific performance, including the nature of the contract, the feasibility of enforcing the order, and the potential hardship it may cause to either party.

Examples:

  • A seller breaches a contract to sell a rare work of art to a collector. The collector may seek specific performance to compel the seller to deliver the artwork.
  • A landlord breaches a lease agreement by refusing to allow a tenant to occupy the premises. The tenant may be granted specific performance to gain access to the property.

3. Rescission:

  • Definition: Rescission is the cancellation of a contract and the restoration of the parties to their pre-contractual positions.
  • Grounds for Rescission: It is typically granted when the breach is material, meaning it goes to the heart of the contract, or when the contract is voidable due to fraud, misrepresentation, mistake, or undue influence.
  • Effects of Rescission: Upon rescission, all rights and obligations under the contract are extinguished, and the parties are required to return any benefits received under the contract.

Examples:

  • A buyer discovers that a car they purchased has a major mechanical defect that was not disclosed by the seller. The buyer may be entitled to rescission of the contract and a refund of the purchase price.
  • A party enters into a contract under duress or undue influence. The party may be able to rescind the contract and be relieved of their obligations.

Impact of technology on contract formation and execution

Electronic contracts

The advent of modern technology has revolutionised the way contracts are formed and executed. Electronic contracts, such as e-signatures and electronic records, have gained widespread acceptance and have the same legal effect as traditional paper contracts. This has significantly streamlined the contracting process, reducing the need for physical signatures and the exchange of paper documents.

  • E-signatures: E-signatures are electronic signatures that are legally binding and have the same validity as handwritten signatures. They can be used to sign contracts, agreements, and other legal documents electronically, eliminating the need for physical signatures.
  • Electronic records: Electronic records are digital versions of paper documents and are considered legally valid and admissible as evidence in court. This has facilitated the creation, storage, and management of contracts and related documents in electronic format, making it easier to access and retrieve information.

Smart contracts

Smart contracts are innovative digital contracts that use blockchain technology to automate the execution of terms and conditions. They are self-executing contracts stored on a decentralised blockchain network, which ensures their security and immutability.

  • Automated Execution: Smart contracts automatically execute the terms of the contract when certain pre-defined conditions are met, eliminating the need for intermediaries, manual intervention, and enforcement mechanisms.
  • Transparency and Security: Smart contracts are transparent and secure, as the terms of the contract are recorded on the blockchain and can be verified by all participants. The decentralised nature of blockchain technology makes it resistant to manipulation and fraud.

Online dispute resolution

Technology has also transformed the way contract disputes are resolved. Online dispute resolution platforms provide efficient and cost-effective mechanisms for resolving contract disputes without the need for litigation.

  • Online platforms: Online dispute resolution platforms offer a streamlined and user-friendly process for resolving disputes. They provide a secure online environment where parties can negotiate, mediate, and reach settlements without the need for physical meetings or court appearances.
  • Benefits: Online dispute resolution offers several benefits, including reduced costs, faster resolution times, and increased flexibility. It is particularly suitable for cross-border disputes and cases where parties are located in different jurisdictions.

Conclusion

So, contract law itself is a complex term and it has become a very prominent part of the business world. Modern contract law evolves to address new challenges and technologies. Contract laws reflect societal values of equity, justice and fair conscience. Legal advice may be necessary depending on certain complex and specific situations. Over time, there have been specific amendments to contract law according to the need and recent developments.

References

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