Nature and Sources of Contract Law in India: Definitions, Theoretical Basis and the Authorities That Supply the Rules

Two questions are asked at the threshold of the subject. The first concerns nature: what kind of legal obligation is a contractual obligation, and how does it differ from the obligations imposed by tort, by trust or by statute. The second concerns sources: when the Indian Contract Act, 1872 does not answer a question, where does the answer come from. The two are connected, because the Act's incompleteness is a consequence of the view its drafters took of the nature of contractual obligation, and the sources that fill its gaps are the sources that supplied the law before it was enacted.

1. The Nature of Contractual Obligation

1.1 Obligation assumed, not imposed

The defining feature of a contractual obligation is that the party bound has chosen to be bound. In tort the duty is fixed by law and owed to persons generally; in contract the duty is created by the parties and owed only to the promisee. This is why capacity, consent and consideration occupy so much of the Act: each is a test of whether the obligation was genuinely assumed. It is also why the remedy differs. Damages in tort restore the plaintiff to the position before the wrong; damages in contract under Section 73 place the plaintiff so far as money can do it in the position he would have occupied had the promise been performed.

1.2 The classical definitions

• Pollock: every agreement and promise enforceable at law is a contract. The emphasis is on enforceability, and this is the definition Section 2(h) substantially adopts.
• Salmond: an agreement creating and defining obligations between the parties. Salmond added the observation that the law of contract is not the whole law of agreements, nor the whole law of obligations; it is the law of those agreements which create obligations and of those obligations which have their source in agreement.
• Anson: a legally binding agreement made between two or more persons by which rights are acquired by one or more to acts or forbearances on the part of the others.
• Savigny: the union of two or more persons in a declaration of intention whereby their legal relations are determined. The stress on declared intention anticipates the objective approach modern courts take to the formation of contracts.

1.3 Theories of contractual obligation

Four explanations are offered of why a promise should bind, and each leaves a visible mark on the Act.

• Will theory. The obligation arises from the will of the promisor. This is the theory that underlies the freedom of contract tradition and explains the Act's treatment of consent in Sections 13 to 22 as the central question of validity.
• Bargain theory. The law enforces exchanges, not promises. Consideration in Section 2(d) is the doctrinal expression of this theory, and it is why a gratuitous promise is generally unenforceable under Section 25.
• Injurious reliance theory. The obligation arises because the promisee has altered his position in reliance on the promise. The theory has limited direct expression in the Act but surfaces in estoppel, in Section 70, and in the third exception to Section 25.
• Equivalent theory. The promise binds only where something of equivalent value moves in return. Indian law rejects the equivalence requirement: Explanation 2 to Section 25 states that an agreement is not void merely because the consideration is inadequate, though inadequacy may be evidence bearing on free consent.

1.4 Law of contract or law of contracts

Sir John Salmond's question was whether the subject consists of a single body of principle applicable to all agreements, or a collection of rules peculiar to particular transactions. The Indian Act answers both ways, and its structure records the answer. Sections 1 to 75 state a general law of contract applicable to every agreement. Sections 124 to 238 state a law of particular contracts, with rules for indemnity, guarantee, bailment, pledge and agency that apply only to those transactions. The general part is not displaced by the special part; a contract of guarantee must satisfy Section 10 before Sections 126 to 147 are reached.

2. The Sources of Indian Contract Law

Six sources are in play, and they operate in a rough order of priority.

2.1 The Indian Contract Act, 1872 itself

The Act is the primary source and, within its field, the controlling one. Where a section covers the question, the section is the law and no other source may contradict it. This is the principle applied in Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44, where the Supreme Court held that frustration in India rests on Section 56 as a positive rule of law and not on the English theories of implied term or of a disappearing foundation.

2.2 Other Indian statutes

A large part of modern contract law is found outside the 1872 Act. These statutes are not subordinate sources; within their subject matter they are primary, and the Contract Act supplies the general principles they presuppose.

2.3 English common law and equity

English law is not a source of authority in India, but it remains a source of reasoning. Before 1872 it applied directly in the Presidency towns and indirectly in the mofussil under the formula of justice, equity and good conscience. After 1872 it continues to fill gaps where the Act is silent, for example in much of the law of indemnity, where Sections 124 and 125 have been held not to state the whole law. The limits on this use of English authority are firm.

2.4 Judicial precedent

Decisions of the Supreme Court are binding on all courts under Article 141 of the Constitution, and decisions of a High Court bind the courts subordinate to it. Precedent is the means by which the open-textured expressions of the Act acquire content. Terms such as public policy in Section 23, reasonableness in Section 27, undue influence in Section 16 and impossibility in Section 56 mean what the decided cases have said they mean.

2.5 Custom and usage of trade

The saving clause in Section 1 preserves any usage or custom of trade not inconsistent with the Act. A party relying on a usage must prove that it is certain, reasonable, notorious in the trade concerned and consistent both with the express terms of the contract and with the statute. Mercantile usage is particularly important in banking, shipping and commodity transactions, where standard trade terms carry settled meanings that the Act does not define.

2.6 Justice, equity and good conscience

The residual source that governed the mofussil before 1872 has not disappeared. Where the Act is silent and no statute, precedent or usage supplies an answer, courts continue to decide on principles of justice, equity and good conscience, which in practice means principles drawn from comparative common law reasoning and adapted to Indian conditions. Article 372 of the Constitution continued in force the law existing immediately before its commencement, which preserved both the Act and the interpretive tradition surrounding it.

3. The Position Stated Shortly

1. A contractual obligation is assumed by the parties, not imposed by law, and this distinguishes it from obligations in tort, trust and statute.
2. Section 2(h) adopts Pollock's emphasis on enforceability; Section 10 supplies the conditions.
3. The bargain theory is dominant in the Act through the consideration requirement, but Indian law rejects the equivalent theory, since adequacy of consideration is not required.
4. The Act answers Salmond's question both ways: general principles in Sections 1 to 75, special contracts in Sections 124 to 238.
5. The Act is the primary source within its field and cannot be contradicted by English authority.
6. A substantial part of the modern law lies in other statutes, notably the Sale of Goods Act, the Specific Relief Act and the Consumer Protection Act.
7. English law fills genuine gaps only, and is excluded where the Indian provision is deliberately different, as Section 27 is.
8. Custom and usage of trade are expressly saved by Section 1 where not inconsistent with the Act.

4. Related Topics and Provisions