History and Development of Contract Law in India: From Ancient Obligation to the Indian Contract Act, 1872 and Its Later Amendments

The Indian Contract Act, 1872 did not arrive on empty ground. Obligations arising from promise were recognised and enforced in India long before the British courts, and the immediate cause of the Act was not the absence of contract law but the presence of too much of it, applied inconsistently in different parts of the country. The history divides into four phases: the indigenous law of the ancient and medieval periods, the colonial confusion created by the charters and the mofussil practice, the drafting and enactment of the 1872 statute, and the gradual dismantling and supplementing of that statute over the following century and a half.

1. The Ancient and Medieval Foundations

1.1 Hindu law

The Dharmashastra literature treated the enforcement of promises as one of the recognised titles of litigation. The Manusmriti, the Yajnavalkya Smriti and the Narada Smriti all deal with rina, or debt, as a binding obligation, and with its recovery, transmission and discharge. Narada in particular states conditions of validity which are recognisably contractual in character: the person promising must be of sound mind and of full age, the agreement must be voluntary, and agreements made by an intoxicated person, by one under duress, by an infant or by a dependant were not binding.

Several rules were developed with some sophistication. The damdupat rule limited the interest recoverable on a loan so that it could not at any one time exceed the principal. Adhi, or pledge, and suretyship were separately treated, with a distinction drawn between the surety for appearance, the surety for honesty and the surety for payment. The obligation to discharge an ancestor's debt, the doctrine of pious obligation, gave the law of debt a place in the law of joint family property that it retained until the Hindu Succession (Amendment) Act, 2005 abolished it prospectively.

1.2 Muslim law

Under Islamic law an agreement was constituted by ijab, the proposal, and qubul, the acceptance, which had to correspond exactly and be made at the same meeting. The Hanafi texts dealt in detail with bai (sale), ijara (hire), kafala (suretyship), hawala (assignment of debt) and wakalat (agency). Consideration in the form of iwaz was generally required, and contracts involving riba (usury) or gharar (excessive uncertainty) were forbidden. Much of the structure of the modern law of guarantee and agency was therefore already familiar to Indian merchants when the Act was drafted.

2. The Colonial Position Before 1872

The difficulty that made codification necessary was territorial. The law that applied to a contract depended on where the dispute was heard and who the parties were.

The consequence was not merely academic. A merchant could not know whether a particular clause would be upheld, and a judge in the mofussil without access to an English law library could not reliably ascertain the rule he was supposed to apply. Uniformity and accessibility were the twin objects of codification.

3. The Drafting and Enactment of the Act

3.1 The Third Indian Law Commission

The first draft of the Act was prepared not in India but in London. The Third Indian Law Commission was appointed in England in 1864 under the chairmanship of Lord Romilly, Master of the Rolls. Its members included Sir William James, Sir Edward Ryan, a former Chief Justice of Bengal, Robert Lowe, J. M. Macleod of the Indian Civil Service and John Henderson. The Commission sat in London and submitted its draft on the law of contracts in July 1866, accompanied by a report describing the unsatisfactory state of the existing law.

3.2 The delay and the loss of specific performance

The draft did not become law for six years. The principal obstacle was the opposition of Sir Henry Maine, then Law Member of the Governor-General's Council, to the Commission's proposals on specific performance. The draft underwent substantial revision at the hands of Maine and later Sir James Fitzjames Stephen, and the specific performance provisions were removed altogether. They were eventually enacted separately as the Specific Relief Act, 1877, prepared under Lord Hobhouse. The Commissioners, dissatisfied with the alterations made to their drafts in India, resigned in 1870.

One further change of lasting importance was made on the Commission's own recommendation: the Statute of Frauds, 1677, so far as it applied in India, was abrogated by the 1872 Act. Indian law consequently has no general requirement that a contract be in writing, and the elaborate English learning on memoranda and part performance that grew around that statute never took root here.

3.3 Enactment

The Bill as revised was passed as Act 9 of 1872 and received assent on 25 April 1872. It came into force on 1 September 1872. As enacted it contained 266 sections arranged in a Preliminary part and eleven chapters, and it covered not only the general principles and the four special contracts now found in it, but also sale of goods and partnership.

4. The Dismantling of the Original Act

Within sixty years the statute lost two of its eleven chapters, in each case because commercial practice had outgrown the brief treatment the Act gave the subject.

5. Law Commission Review of the Act

The Act has been examined by the Law Commission of India on several occasions, and the recurring theme of those reports is that a statute drafted for a nineteenth-century mercantile economy has not kept pace with the conditions in which contracts are now made.

1. Thirteenth Report (1958), Contract Act, 1872. Submitted under the chairmanship of M. C. Setalvad, this was the first comprehensive review. It recorded that dependence on English common law to supply the gaps in an Indian statute does not add to the certainty or the simplicity of the law, and recommended that supplementary principles, particularly in the field of quasi-contract and restitution, be codified.
2. Ninety-seventh Report (1984), Section 28: Prescriptive Clauses in Contracts. Taken up by the Commission on its own motion, it identified the device of drafting a clause to extinguish the right rather than to bar the remedy, and recommended the amendment that became the Indian Contract (Amendment) Act, 1996.
3. One Hundred and Third Report (1984), Unfair Terms in Contract. Proposed the insertion of a new Section 67A conferring on courts a power to refuse to enforce an unconscionable term.
4. One Hundred and Ninety-ninth Report (2006), Unfair (Procedural and Substantive) Terms in Contract. Recommended free-standing legislation on unfair terms, distinguishing procedural unfairness in the making of the contract from substantive unfairness in its content. No such legislation has been enacted, though the Consumer Protection Act, 2019 now addresses part of the ground for consumer contracts.

6. Judicial Development After 1872

The most significant development of the law has come from the courts rather than the legislature. Two decisions illustrate the two directions that development has taken: the insistence that the Act's own language governs even where it departs from English law, and the reading of constitutional values into the general standards the Act employs.

7. The Position Stated Shortly

1. Obligation founded on promise was recognised in both the Dharmashastra and Islamic legal traditions well before codification, with developed rules on capacity, suretyship, pledge and interest.
2. Codification was driven by territorial inconsistency: English law in the Presidency towns, justice, equity and good conscience in the mofussil, personal law in defined matters.
3. The first draft was prepared by the Third Indian Law Commission in London under Lord Romilly and submitted in July 1866.
4. Enactment was delayed by disagreement over specific performance, which was separated out and became the Specific Relief Act, 1877.
5. The Act was passed as Act 9 of 1872 on 25 April 1872 and came into force on 1 September 1872, with 266 sections.
6. Sale of goods and partnership were later removed to separate statutes in 1930 and 1932.
7. Section 28 has been amended twice, in 1996 and in 2012, and Section 1 was amended in 2019.
8. Successive Law Commission reports have recommended codification of supplementary principles and legislation on unfair terms, largely without result.

8. Related Topics and Provisions