History of the Indian Contract Act 1872

Introduction

The Indian Contract Act brings within its ambit the contractual rights that have been granted to the citizens of India. It endows rights, duties and obligations on the contracting parties to help them to successfully conclude business- from everyday life transactions to evidencing the businesses of multi-national companies. The Indian Contract Act, 1872 was enacted on 25th April, 1872 [Act 9 of 1872] and subsequently came into force on the first day of September 1872. The essence of the India Contract Act has been modelled on that of the English Common Law. [1]

The extent of modifications made in the Act as per the Indian conditions and its adaptability to the Indian economy is an important area of research. In this regard it is pertinent to note that since the enactment of the Act there have been no amendments and thus the Law that was made in 1872 still stands good. However, these are questions of interpretation that not only depend on the text of the Act, but also on the English authorities that framed the law and before it, the subsequent development of law. [2]

The history of the Act brings to light the very origin of the economic processes and in this regard, the importance of contracting in order to conduct one’s business in everyday life. The prevalent system in the ancient times was barter and it was based on the mutual principle of give and take. This was confined to commodities as there was no medium of exchange as is seen in the form of money today and this system can be traced back in time to the Indus Valley Civilization (the earliest human civilization). The system still finds relevance in the contemporary world, where it can be found in commercially and economically underdeveloped areas.

However, the relevancy of such a system in modern times is questioned as the complexity in the nature of the economic systems as well as the increasing demand and supply systems due to the change in the wants and needs of the human beings came to the fore. Also, money had evolved as the medium of exchange such that the value of every commodity could now be quantified. Thus, in such an era of greater economic transaction one finds the existence of Contract Laws and with it, their relevance.

The Indian Contract Act codifies the way we enter into a contract, execute a contract and implement provisions of a contract and effects of breach of a contract. The contractual capacity is restricted in certain situations otherwise it is the prerogative of the individual to contract. There are specific areas which deal with property, movable gods and specific performance such as the Transfer of Property Act, The Sale of Goods Act and The Specific Relief Act. Some of these acts, were originally a part of the Indian Contract Act enacted in 1872 but were later codified as separate laws. Moreover the Act is not retrospective in nature. Hence a contract entered into prior to 1st September 1872, even though to be performed after passing of this Act is not hit by this Act. [3] Hence, we arrive of the conclusion that the basic framework of contracting is covered in the Indian Contract Act and it is an important area of law, with roots deep in the history of civilization- and thus forms the subject matter of this project of this course of Legal History.

1.1 RESEARCH METHODOLOGY

For this project titled, ‘History of the Indian Contract Act, 1872’ the doctrinal method was judged to be most appropriate. Primary resources referred to in the course of research include books, journals, law reports and cases, most of them accessed from the NALSAR law library. Other sources like articles, and the like were accessed online through the use of online databases. All direct quotations have been properly footnoted.

1.2 RESEARCH SCHEME

1.2.1 AIM AND OBJECTIVES

The aim of the project is to trace the history of the Indian Contract Act, 1872 and analyse the developments that led to its enactment in 1872. The project also ventures to seek the history of ‘Law of Contracts’ in general and present a brief view on the changing notions about the contract law.

1.2.2 SCOPE AND LIMITATIONS

The project covers the development of the ‘Law of Contracts’ right from the early stages of human civilization, making its way through Roman and English notions that eventually led to the formation of the Indian Contract Act. The project also shows the relevance of such legislation, codifying the principles of contract making.

The research is limited to the resources available at the NALSAR Library. Books related to the topic are available at the library. Also, the sources available on the internet helped a considerable deal. Suggestions from the course-instructor and fellow students have been incorporated wherever necessary.

2. EARLY LAW OF CONTRACT: INDIA

2.1 VEDIC AND MEDEIVAL PERIOD

During the entire ancient and medieval periods of human history in India, there was no general code covering contracts. Principles were thus derived from numerous references- the sources of Hindu law, namely the Vedas, the Dhramshatras, Smritis, and the Shrutis give a vivid description of the law similar to contracts in those times. The rules governing contracts form a part of the law called Vyavaharmayukha. [4]

Studies of the smritis reveal that the concept of contract originated in the Vedic period itself. Topics, as we know them today like debt deposit and pledges sale without ownership, mortgage and gifts, which are all contracts in nature, are mentioned therein. [5] The general rules of contract bear a striking resemblance to the modern law of contract. For e.g. as mentioned in the Manusmriti, the first and the foremost requirement for a contract process to start is the competence of the persons who are willing to enter into a contract. This norm laid down for competence corresponds with the provisions of the present law (Section 11, Indian Contract Act), namely, dependents, minors, sanyasis, persons devoid of limbs, those addicted to vices were incompetent to contract. [6] The Narad smriti categorizes competent persons into three; the king, the Vedic teacher and the head of the household. [7]

The concept of liability in contract law finds its birth in the Vedic period too. Spiritual debts were referred as ‘wrin’ and it was constantly reinforced by the srmitis that failure to pay back the debts meant re-birth as a slave, servant, woman or beast in the house of creditor. [8] So, the son was liable to pay of his father’s debts even if he did not inherit any property from him.

Towards the end of the medieval age, the law of contracts was pretty much being governed by two factors; the moral factor and the economic factor. Activities like transfer of property, performance of services etc. required rules for agreements and promises, which covered not just business and commercial transactions, but also personal relationships in all walks of life. This takes us to the next source, i.e. the Arthashastra by Kautilya, which is considered to be the only existing secular treatise on politics and governments.

During Chandragupta’s reign, contract existed in the form of “bilateral transactions” between two individuals of group of individuals. The essential elements of these transactions were free consent and consensus on all the terms and conditions involved. It was an open contract openly arrived at. It was laid down that the following contracts were void:

• Contracts formed during the night.
• Contracts entered into the interior compartment of the house.
• Contracts made in a forest
• Contracts made in any other secret place [9] .
• There were certain exceptions to clandestine contracts such as:
• Contracts made to ward off violence, attack and affray
• Contracts made in celebration of marriage
• Contracts made under orders of government
• Contracts made by traders, hunters, spies and others who would roam in the forest frequently.

The contract would be rendered void if there was any undue influence or if the contract was entered into a fit of anger or under influence of intoxication etc. [10] In general, women could not make contracts binding on their husbands or against family properties. It was possible for a competent person to authorise a dependent to enter into transactions. [11] The dependents in such case included a son whose father was living, a father whose son managed the affairs, a woman whose husband was alive, a slave or hired servant. [12]

It has to be noted that money lending was seen as an occupation. Usury was a sin only when the usurer cheated the debtor, for e.g., when he lent goods of a lower quality, but received goods of a higher quality in return or if he extracted fourfold or eightfold return from a distressed debtor. The interest would be fixed with reference to the article pledged or surety given. Although, all commentaries are not in agreement with the amount of interest to be charged, they all agree that it was sinful to take exorbitant interest and such interest would not be enforceable in court. The Yajnavalkya smriti provided that in case of cattle being loaned, their progeny was to be taken as profit. [13]

Also, the rights and duties (of a Bailee) in a Bailment, as we know it today in the form of sections 151 and 152 of the Indian Contract Act, 1872, has its root to the Katyaynasmriti containing a special provision called the ‘silpinyasa’ dealing with the deposit of raw materials with an artisan- talking about the degree of care attached. The text laid down that “if an artisan does not return the things deposited with him during the stipulated time, he should be made to pay its price even in the cases, where the loss is due to acts of God or King. The artisan, however, is not responsible for the loss of an article which was defective at the very time of bailment, unless the loss is due to his own fault.” [14]

It is also interesting to note that there was no ‘limitation’ for bringing a suit for money lent. This was because of the rule of ‘damdupat’ which laid down that ‘the amount of principle and interest recoverable at one time in a lump sum cannot be more than double the money lent.’ It took into consideration the fact that debts were not necessarily recoverable from a man himself, his descendents were also liable. Thus there was no concept of a ‘limitation period’ for filing a suit. [15] The rule of ‘damdupat’ is still prevalent in Calcutta and Bombay as it has been upheld to be a valid custom and thus enjoys enforceability under the savings clause, Section 1. [16]

2.2 ISLAMIC LAW

During the Muslim rule in India, all matters relating to contract were governed under the Mohammedan Law of Contract. The word contract in Arabic is Aqd meaning a conjunction. It connotes conjunction of proposal (Ijab) and acceptance which is Qabul. A contract requires that there should be two parties to it one party should make a proposal and the other accept it, the minds of both must agree that is there declaration must relate to the same matter and the object of contract must be to produce a legal result [17] .

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). All transactions were treated as secular contracts and rules were provided for settlement of all types of disputes even relating to property and succession.

Another thing to be noted is that under Islamic Law even marriages (Nikah) were treated as contracts and till date the situation remains the same. Either of the parties to the marriage makes a proposal to the other party and if the other party accepts, it becomes a contract and the husband either at the time of marriage or after it has to pay an amount to the wife as a symbol of respect known as Mahr. Also the Mahommedans were the firsts to recognize the concept of divorce. This way, a party to marriage could absolve itself of the contractual obligations under marriage. Muslim marriages are thus considered contracts for these reasons.

3. EARLY LAW OF CONTRACT: ROME

In early Rome, the law of contracts developed with the recognition of a number of categories of promises to be enforced rather than creation of any general criteria for enforcing promises. Thus, the notion that promise itself may give rise to an enforceable duty was an achievement of Roman law. [18] A promise might be morally binding but it was not legally enforceable until it fell within the specified categories viz. “stipulation”, “real” contracts and “consensual” contracts.

STIPULATION: (stipulatio) It put into force formalities and dates from a very early time in Roman law. A party could make a binding promise called “stipulation” in which the party observed a prescribed form of question and answer. Though the participation of both parties was required, only one party was bound. [19]

REAL CONTRACTS: These were those that suited to executory exchange of promises. For example, the contract of loan, in which the recipient’s promise to restore the subject matter was binding. [20]

CONSENSUAL CONTRACTS: These were more flexible and did not hold a legal basis for enforcing purely executory exchanges of promises. They deviated from the formalities in “stipulation” and in agreement alone, without delivery, sufficed to make the promises binding. Although they were limited to four important types of contracts- sale, hire, partnership and mandate.

These three categories of enforceable promises met the Roman needs through the classical period (500 BC – 300 BC). Later on a fourth category of enforceable promise was recognized as “innominate” contracts.

INNOMINATE CONTRACTS: These were agreements under which one party was promised to give or do something in exchange for a similar promise by the other party. Unlike both real and consensual contracts they were not limited to specified classes of transactions and were therefore called “innominate”. The enforceability of the promise required some performance given in exchange and was called quid pro quo (i.e. the modern concept of ‘consideration’ of the contract). But these contracts were limited because they were binding only when one of the parties had completed performance and until that happened either party could escape liability.

Roman law always had the tendency of primitive societies to view each type of transaction as a distinct complex of rights and it never fully rid itself of this proclivity. [21] Thus the development of a general theory of contracts was left to the modern legal systems that arose in Europe during the Middle Ages, the common law system that arose in England and the civil law systems of the European continent.

3.1 RELEVANCE OF ROMAN CONTRACT NOTIONS IN INDIAN LAW

Though Roman notions of contract law have not been directly included under the Indian law of contracts. However, the framers of the Indian Contract Act, the English, were aware of the developments in the field of law of contracts in Rome. Thus, Roman Contract notions have helped in the development of English law, thus affecting the Indian Contract Act. The introduction to the next chapter deals with the same discussion.

4. EARLY LAW OF CONTRACT: ENGLAND

As stated earlier, the Roman law notions of contract were known to the English but their influence faded with the break-up of the Roman political system. English Courts therefore, had to reconstruct law in the Middle Ages. The courts succeeded in a remarkable way keeping in the view the fact that when they started, the English law of contracts was little more advanced than that of many primitive societies. [22]

Now, since no system can afford to make all promises enforceable, the English tried out two assumptions:

One, the assumption that promises are generally enforceable, and then create exceptions for promises considered undesirable to enforce.

Secondly the assumption that promises are generally unenforceable, and then create exceptions for promises thought desirable to enforce.

The common law Courts chose the latter assumption, the same as Roman law i.e. “mere promise doses not give rise to an action.” This decision accorded well with the procedural niceties of the common law courts, where the plaintiff did not have the recovery until his claim could be fitted with one of the established forms of action. It also suited the status-oriented society of the Middle Ages where no great pressure existed for enforcing promises as contracts were not yet a significant part of the business of the common law courts.

4.1 THE FIFTEENTH AND SIXTEENTH CENTURIES

The challenge faced by the common law Courts in the fifteenth and sixteenth centuries was to develop a general criterion for enforcing promises within the framework of the forms of action. [23] And by the end of the 15th century, two forms of action for enforcing rights, which included some of those which we now call contractual, had taken a fairly definite shape. These were action on ‘debt’ and the action on ‘convenant’.

4.1.1 CONVENANT

The word ‘convenant’ is the nearest medieval equivalent to current definition of ‘contract’. The action of convenant mainly concerned breaches of agreement for services like building or for sales or leases of land. The primary claim was for performance, and in royal courts the action was begun by the praecipe writ ordering the defendant to keep the agreement; but judgements ceased to order specific performance and damages were awarded instead. But the action of convenant soon fell out of use, not because it was ineffective but because the other action of ‘debt’ proved more effective. [24]

4.1.2 DEBT

The action on debt covered the claims for the price of goods sold and delivered. The essential feature of it was that the claim was for money compensation for benefit received. [25] The defendant’s liability in debt was not based on a mere promise but on the debtor’s receipt of what the debtor had asked for, called quid pro quo like the Romans in the form of loan. It was therefore thought to be unjust to allow the debtor to retain it without paying for it. The debtor’s wrong was more in misfeasance than nonfeasance. [26] Following this rationale the courts finally broadened the action of debt to allow recovery by anyone who had conferred a substantial benefit. However, the lacuna in this system was that the defendant might avoid liability by a procedure known as “wager of law”, in which the defendant denied the debt under oath accompanied by a number (usually 11) of oath-helpers, who swore that defendant was telling the truth.

4.2 THE SIXTEENTH CENTURY: DEVELOPMENT OF ‘ASSUMPSIT’

Now, at this point the main question that confronted the courts as that how the common law would break out of this mould of “wager of law”. The courts finally found answer to this question in the law of torts. They had already developed a liability in tort, where if a person undertook to perform a duty and while performing it he caused harm to the obligee; the obligee could sue on the common law action of “trespass on the case” and this principle came to be known as ‘assumpsit’ (from the Latin assumere, meaning that the defendant undertook).

4.2.1 ASSUMPSIT

‘Assumpsit’ was an action for the recovery of damages by reason of the breach or non-performance of a simple contract, either express or implied, and whether made orally or in writing. It was the word always used in pleadings by the plaintiff to set forth the defendant’s undertaking or promise, hence the name of the action. Claims in actions of assumpsit were ordinarily divided into (a) common assumpsit brought usually on an implied promise, and (b) special assumpsit, founded on an express promise. [27]

As an example it was explained that “if a carpenter makes a promise to me to make me a good house and strong and of certain form, and he makes me a house which is weak and bad and of another form; I shall have an action of trespass on my case.” Justice could be done by requiring the promisor to pay compensation to the promisee in an amount sufficient to restore the promisee in the same position as the promise would have been, had the promise never been made. [28]

Also, a case in point is the case of a ferry- man who was sued. He had undertaken to ferry a horse across the Humber, but he mismanaged the whole affair in such a way that the horse was drowned. [29] The defendant knowing that there was no sealed document about the deal argued that the proper action would be ‘convenant’. However, the action was held rightly brought in tort because the plaintiff complained about the killing of the horse and not the failure to transport it. Such claims of ‘misfeasance’ regularly succeeded.

The principle of ‘assumpsit’ was originally limited to cases of ‘misfeasance’ but later on cases of ‘nonfeasance’ were also dealt with under the same principle. Thus the claim for the action of assumpsit lay whenever the defendant had given an undertaking and had either fulfilled it improperly or failed to fulfil it at all. [30]

It was during this period itself that the word ‘consideration’ of a contract, which had earlier been used without technical significance, came to be used as a word of art to express the conditions necessary for an action in assumpsit to lie. It was therefore a tautology that a promise, at least if not under seal, was enforceable only if there was a ‘consideration’.

4.3 THE SEVENTEENTH AND EIGHTEENTH CENTURIES

The seventeenth and eighteenth centuries saw the recognition of the transferability of contract rights as kind of property, the enactment of legislation requiring writing for some kind of contracts [31] , and the shaping of the concept of the dependency of promises. But the movement was slow during this period.

Towards the end of the eighteenth century, things had dramatically changed. A modern legal historian wrote that in America years from 1800-1875 were, “above all else, the years of contract.” Contract expressed, “energetic self-interest,” and the law it governed it expressed “the nature of contract by insisting that men assert their interests, push them, and fight for them, if they were to have the help of the state.” [32] It is also generally supposed that it was during this period that Adam Smith had proclaimed that freedom of contract, freedom to make enforceable bargains would encourage individual entrepreneurial activity. [33] Also from the utilitarian point of view, freedom to contract maximizes the welfare of the parties and therefore works for the good of the society.

5. ENGLISH LAW IN INDIA AND THE SUBSEQUENT ENACTMENT OF THE ACT

The English common and statute law in force at that time came into India by the Charters of the eighteenth century which established the Courts of justice [34] in the three presidency towns of Calcutta, Madras and Bombay, so far it was applicable to Indian circumstances. It is a matter of controversy whether English law was introduced by the Charter of 1726 by which the statutes up to that date would be enforced in India with the same amount of force as in England, or subsequently by the Charters of 1753-74 so as to embrace statutes up to 1774.

Anyways, since there was an indiscriminate application of English law to Hindus and Mahommedans within the jurisdiction of the Supreme Court it led to many inconveniences. To obviate this, the statute of 1781 empowered the Supreme Court at Calcutta and the statute of 1797 empowered the Courts of Madras and Bombay (recorders courts), to determine all actions and suits of contractual nature against the natives of the said towns in the case of Mahommedans by the laws and the usages of the Mahommedans and in the case of Hindus (called ‘Code of Gentoo Laws’ in the Statutes) by the laws and usages of the Hindus, and where only one of the parties was Mahommedan or Hindus, by the laws and the usages of the defendant. The result was that in a suit of contract between Hindus, the Hindu law of contract was applied and in case of Mahommedans the law of Mahommedans applied. And this continued until the enactment of the Indian contract act.

The year 1862 saw the introduction of High Courts in the presidency towns of Calcutta, Madras and Bombay. The courts established under the statutes of 1781 and 1797 were abolished. The charters of these new High courts contained the same provisions about the law to be applied i.e. the High Court continued to administer the personal law of contracts to Hindus and Mahommedans in the same manner. But this was made subject to the legislative powers of the ‘Governor General in Council’ under clause 44 of Charter of 1865. [35]

By this time, the Indian legislature had got the power to alter the provisions of clause 19 of the Charter of 1865. The Indian Contract Act was enacted in the exercise of this power by the Indian legislature to govern matters of contract. Still subject to any law made by the Governor General in Council, the High Courts were still bound, in the exercise of ordinary civil jurisdiction, to apply the personal laws of contract to Hindus and Mohammedans as being comprised in the expression ‘law and equity’ in clause 19.

The Bengal Regulation 3 of 1793 (Section 21) and Madras Regulation 2 of 1802 (Section 17) directed the judges in the zilla (district) and city courts to act according to justice, equity and good conscience in cases where no specific rule existed. These regulations were repealed, but the direction to act in the absence of any specific rule according to justice, equity and good conscience found place in the Bengal Civil Courts Act 1887 (Section 37) and the Madras Civil Courts Act 1873 (Section 16) . The Bombay Regulation 4 of 1827 (Section 26), which is still in force, provided that the law to be observed in the trial of suits be the Acts of Parliament and regulations of government applicable to the case, and in the absence of such acts and regulations; the usage of the country in which suit arose; and if none such appeared-the law of the defendant, and in the absence of specific law and usage, equity and good conscience. [36]

The expression ‘justice, equity and good conscience’ was interpreted to mean the rules of English law so far as applicable to the Indian society and circumstances. [37] It has been observed that in practice, the application of English law did not raise difficulty because on many points there were no differences between the English and the personal law, and there was no rule of personal law in many cases, moreover because many Indian businessmen acquired experience from their relations with Britons. [38] The law of England, so far as consistent with the principles of equity and good conscience, generally prevailed in the country unless it came in conflict with Hindu or Mahommedan law.