INCOME TAX NOTES

Chapter (1) Purpose, Evolution and Scope of Law of Contracts


Define the purpose, evolution and scope of law of contract.

Definition of Contract

Section 2(h) of the Indian Contract Act provides that, “An Agreement enforceable by law is a contract”. Therefore in a contract there must be (1) an agreement and (2) the agreement must be enforceable by law.

An agreement comes into existence whenever one or more persons promise to one or others, to do or not to do something, “Every promise and every set of promises, forming the consideration for each other, is an agreement. Some agreements cannot be enforced thought he courts of law, e.g., an agreement to play cards or go to a cinema. An agreement, which can be enforced through the courts of law, is called contract.

Purpose of law of contract

The Indian Contract Act occupies the most important place in the Commercial Law. Without contract Act, it would have been difficult to carry on trade or any other business activity and in employment law. It is not only the business community which is concerned with the Contract Act, but it affects everybody. The objective of the Contract Act is to ensure that the rights and obligations arising out of a contract are honored and that legal remedies are made available to those who are affected. According to Indian Contract Act, 1872 Section 1, this Act may be called the Indian Contract Act, 1872.
Scope

The Law of Contract deals with agreements which can be enforced through courts of law.

The Law of Contract is the most important part of commercial law because every commercial transaction starts from an agreement between two or more persons.

According to Salmond a contract is an “agreement creating and defining obligations between the parties.” According to Sir William Anson, “A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of the other or others.

The object of the Law of Contract is to introduce definiteness in commercial and other transactions. How this is done can be illustrated by an example. X enters into a contract to deliver 10 tons of coal of Y on a certain date. Since such a contract is enforceable by the courts, Y can plan his activities on the basis of getting the coal on the fixed date. If the contract is broken, Y will get damages from the court and will not suffer any loss.

Sir William Anson observes as follows: “As the law relating to property had its origin in the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract is intended to ensure that what a man has been led to expect shall come to pass; and that what has been promised to him shall be performed.”

The Contract Act does not affect nay usage or custom of trade, or any incident of any contract not inconsistent with the provisions of the Act.

Evolution of law of contract

The law relating to contracts in India is contained in Indian Contract Act, 1872. The Act was passed by British India and is based on the principles of English Common Law. It is applicable to all the states of India except the state of Jammu and Kashmir. It determines the circumstances in which promises made by the parties to a contract shall be legally binding on them. All of us enter into a number of contracts everyday knowingly or unknowingly. Each contract creates some rights and duties on the contracting parties. Hence this legislation, Indian Contract Act of 1872, being of skeletal nature, deals with the enforcement of these rights and duties on the parties in India.
The Indian Contract Act, 1872, primarily drafted by the Third Law Commission of India, is primarily a codification of English Law subject to certain changes. The Act also heavily drew from the draft Civil Code of New York (drafting attributed to David Dudley Field), although Pollock, the renowned commentator on the Indian Contract Act, was of the opinion that the said Civil Code was “about the worst piece of codification ever produced". [Sir Fredrick Pollock & Sir Dinshaw Fardunji Mulla, The Indian Contract Act, p. vii (1909)].
The Third Law Commission of India is said to have produced the first draft of the Contract Act. The said draft was circulated to all the local governments, judges and practitioners for their comments. The draft was discussed at least before three committees of the Legislative Council of the Governor-General of India. The Legislative Council conducted a minute study of the Act and differed with the Law Commission primarily on two issues: (1) Treatment of all penalties as Liquidated Damages, and (2) Acquisition of ownership in goods by a buyer in good faith.

Due to the differences between the Law Commission and the Legislative Council, two members of the Law Commission resigned and the work on the Indian Contract Bill was given to Sir James Stephen. [BK Acharyya, Tagore Law Lectures 1912: Codification in British India]. The Bill was finally passed in 1872. Considering the British origins of our contract law system, questions have arisen before the courts as to whether it is correct to rely on the English Law for answers to questions. For obvious reasons, English precedents are not binding in India. That much is clear and uncontroversial.

The second point is that there are certain departures in the Indian Contract Act, 1872 from the then existing English Law. 

In Satyabrata Ghose v Mugneeram Bangur AIR 1954 SC 44, the Supreme Court held:
"It must be held also that to the extent that the Indian Contract Act deals with a particular subject, it is exhaustive upon the same and it is not permissible to import the principles of English law dehors these statutory provisions. The decisions of the English courts possess only a persuasive value and may be helpful in showing how the courts in England have decided cases under circumstances similar to those which have come before our courts."

In Krishnan Murgai AIR 1980 SC 1717, the Supreme Court went further and stated that even if a provision in the Act is based on English Law on a particular aspect, the extent and scope of the provision must be governed by the statute itself and not by the English doctrine.

However, in Forosal v ONGC AIR 1984 SC 241, the Supreme Court held that since our contract law is based on English Law, it would do good to rely on English decisions for aiding the courts decide such issues where there was no Indian decision on the point. Thus, according to the court, when a statute (such as the Negotiable Instruments Act, Indian Evidence Act etc) is based on English law, it would do good to refer to the English Law for assistance provided such a question has not been previously decided by an Indian Court and is binding.

Reliance on English law may not be problematic in such cases, but wholly disregarding the Indian law does not bode well for the legal system. The Supreme Court held in Cotton Corporation of India v United Industrial Bank AIR 1983 SC 1272:

"[I]gnoring all the relevant considerations, one cannot bodily import English decisions in our system to develop a hybrid legal system and one cannot be so hypnotised by English decisions to overlook legislative changes introduced in Indian Law."

The court provided indications of when reliance of an English decision would be apt. Following are the aspects that must be taken into consideration while taking aid of an English decision:

Similar provisions in the English and the Indian statutes

Absence of material difference in conditions prevailing in India and in UK
Consistency with Indian jurisprudence
Consistency with Indian social conditions.

An unwarranted practice of Indian Courts is to cite English decisions even without citing past Indian decisions on the same point. See, for example, Trimex v Vedanta, where the Supreme Court did not cite even a single Indian decision related to the case when there were at least three to four Indian decisions relating to the issue. Such practices make us wonder if there is any “Indian jurisprudence” of contract law, barring the deviations from English law that were made in the 19th Century.