Business Law

Doctrines under Indian Contract Law

By Rohit Kumar Raut

Introduction

Humanity has come far from the days of the Stone Age, and an important factor that was crucial in the furtherance of the evolutionary process of mankind was business. Directly or indirectly trade and business shaped most of the future of mankind; the barter system, inception of currency, globalization all in its own ways helped mankind go beyond just another living species to exist on the face of the planet. And like all aspects of human life and behavior, trade is also one that is governed by appropriate laws and statutes. 

A contract can be defined as a legally enforceable agreement occurring between two or more private parties that further creates mutual responsibilities for each party to the contract. A contract forms the basis of business and trade and while every contract is an agreement, the vice versa isn’t true as only those agreements that satisfy certain requisites can further be legally enforced as a contract. These requisites include mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.

The laws and legislations that govern laws of contract fall under the purview of civil jurisdiction. Contract Law is a codified form of law, unlike the Law of Torts which means they are a set of rules and regulations that have been collected, restated, and written down for the purpose of providing civil order to society. Furthermore, the breach of contract is remedied by the law in the form of monetary damages awarded to the wronged party, which are liquidated in nature i.e., a predetermined amount of money agreed upon by each party of the contract to be payable in the case of breach of contract.

Through the means of this article, the author aims to shed light on the various doctrines included under Contract Law against the backdrop of the Indian Contract Act, 1872 (hereinafter referred to as the “Indian Contract Act”). 

Indian Contract Act

The Indian Contract Act, enacted by the Imperial Legislative Council in the year 1872, forms the foundation of contract law in India. It is the primary law that governs the law of contracts in India and is based on the principles of English Common Law. Originally, it comprised 266 sections but as of now, it contains 190 sections, others being repealed.

A legal doctrine can be defined as a single important rule or a set of rules that is widely followed in a field of law. The Indian Contract Act deals with contracts in a thorough and extensive manner and the same can be seen through the means of its various sections and the various provisions that are included in its purview. Moving further, we shall be taking a look at the various doctrines of Contract Law covered under the Indian Contract Act.

The Doctrine of Consideration

The doctrine of consideration can be found in Section 2(d) of the Indian Contract Act and is one of the most important doctrines of contract law. This doctrine regulates the freedom of an individual to form contracts. For an agreement to become a contract i.e., an agreement that can be enforced by law, consideration forms one of the most important elements. Consideration can be interpreted as “something in exchange,” i.e., quid pro quo which is a crucial aspect in determining the parties’ actual desire to form a legal relationship. Sir Frederic Pollock opines that “Consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.” 

Without a lawful consideration, an agreement cannot be held as valid and hence becomes void, thus not enforceable by the courts of law. An example for consideration can be, X offers to sell his house to Y for a sum of Rs. 26,00,000. Y accepts the offer in its absolute sense. In the context of this contract, the sum of Rs. 26,00,000, is the consideration for the promise of the promisor i.e., X while the house is the consideration for the promise on the promisee’s part i.e., Y.

For consideration to be considered lawful, some essential elements need to be satisfied. The same are as follows:

  1. The consideration must proceed at the desire of the promisor only

An act or an omission carried out must be solely done at the desire of the promisor; Any other voluntary acts or acts done at the wishes of a third party are not acknowledged as consideration and will therefore not be entertained by a court of law.

In the case of Durga Prasad v. Baldeo, Durga Prasad established some shops in a market on the order of the town collector. The shopkeepers who occupied these shops committed to giving Durga Prasad a percentage of their sales as a commission. When Durga Prasad did not receive the commission, he sued the merchants. The commitment was not supported by any consideration, according to the court, because the shops were established on the collector’s command rather than the merchants’ request. As a result, there could be no recuperation.

  1. Consideration may proceed from either the promisee or any other person

This principle states that it is not necessary for the consideration to follow from the promisee alone, instead it can flow from another entity as well. The same was held in Chinaya v. Ramayya.

  1. Consideration can be past, present, or future

A promise for a voluntary act performed in the past to assist the person making the pledge to pay or do something later is known as past consideration. It means that in exchange for an act performed without any assurance from the other party, consideration is promised to be performed later. Previously, past consideration was not acknowledged as a consideration, but it is now a valid consideration.

The consideration is known as present consideration when the promisor receives the consideration concurrently with his promise.

Executory consideration, also known as a future consideration, refers to a promise that will be fulfilled at a later date. In this type of consideration, the promisor makes an offer for a future date and the promisee pledges to accept and execute the contract after that date.

According to law, consideration can fall under any of these three categories.

  1. Consideration doesn’t necessarily have to be adequate in nature

While the presence of consideration is crucial to give rise to a contract, the same doesn’t have to be adequate by any means. Consideration should only hold some value in the eyes of law, adequacy is irrelevant.

  1. Consideration must be real in nature and not impossible or illusory

Real consideration implies that the consideration that forms a part of the contract should neither be legally nor physically impossible in nature. If a promise is made in order to accomplish an impossible act that is not physically possible, such consideration is considered physically impossible in nature. Consideration is also not valid if the promise is made to attain an illegal objective. This is known as a legally impossible consideration. Furthermore, must be absolutely uncertain; uncertain considerations are impossible to carry out and hence invalid.

  1. Consideration must be lawful in nature

The consideration must always be lawful in nature; unlawful considerations lead to the contract becoming void. Section 23 of the Indian Contract Act dictates the following circumstances, where the consideration is not lawful in nature:

  1. When it is made of an act forbidden by law
  2. When it causes injury to a person or property of another person.
  3. When it is declared as immoral or opposed to public policy.

This doctrine flows from Section 40 of the Indian Contract Act and forms the backbone of any contract. Without an intention to get into a legally binding relationship, parties can never enter into a contract. An agreement can only be legally enforceable if the parties to the agreement wish it to be so and fulfill other requisites of a contract and therefore this doctrine forms an important aspect of Contract Law.

The Doctrine of Privity of Contract

The doctrine of privity of contract, though not explicitly laid down by the Indian Contract Act; is implied throughout the same and hence forms a crucial aspect of Contract Law. This doctrine establishes that only parties to a contract can be permitted to sue the other parties in case a breach of contract arises and therefore only the parties to a contract can legally have their rights and liabilities enforced in the court of law. Furthermore, in the same sense, a stranger to a contract doesn’t have the right to enforce his rights nor can he be held liable for a breach of contract. This doctrine also forms the core of Contract Law being a right in personam i.e., a right that is available only against a specific person. 

In M.C. Chacko v. State Bank of Travancore, the apex court, by its decision upheld the doctrine of privity of contract. In a far-reaching attempt of clearing the ambiguities in the application of the Doctrine of Privity held that a person not a party to a contract cannot subject to certain well-recognized exceptions, enforce the terms of the contract. 

However, there are also certain exceptions to this doctrine wherein, a deviation from the same can be allowed without inviting a breach of contract. The same are as follows:

  1. An individual is a beneficiary under a contract

Under this exception, if a contract is entered into between the individuals for the benefit of a certain another individual not a party to the contract, then in case of failure of either party to uphold their promise, the beneficiary can enforce his right against the other party. 

  1. Family settlement

If a contract is made in the context of a family arrangement to benefit a stranger (a person who is not a party to the transaction), the stranger can sue as a beneficiary of the contract in his own right. This is an extension of the exception of the beneficiary to a contract. 

  1. Acknowledgment or Estoppel

If a contract requires a party to pay a particular sum to another party and the party recognizes the contract, the party is bound to pay the third party. It’s also possible for the acknowledgment to be implied. This is based on the law of estoppel.

  1. A contract entered through an agent

In a situation wherein an agent enters into a contract with another entity on behalf of the principal, the principal cannot escape liability resorting to the doctrine of privity contract as the principal was represented by the agent and therefore this is an exception to the doctrine.

The Doctrine of Promissory Estoppel

The doctrine of Promissory Estoppel flows from the values of equity, justice, fairness, and morality. It states that when one party of a contract makes a clear and explicit promise to another party with the intention of forming a legal relationship and the latter party acts in furtherance of the same, the promise then becomes an obligation and the former party cannot back out of the contract as it would be in contradiction to the values of equity and fairness.

The Doctrine of Absolute Acceptance

This doctrine is laid down by Section 7 of the Indian Contract Act which states that for a proposal to be converted into a legally enforceable promise, the acceptance provided must be absolute and unqualified in nature. Further, the acceptance must be communicated in a usual and reasonable manner unless the proposal specifies the manner in which the communication of the acceptance is to be made. In case, a manner for communication is specified and the communication is not made in the prescribed manner, the promisor within a reasonable duration of time after communication of the acceptance can insist that the proposal be made in a specified manner. However, in case of failure of doing so, the acceptance is taken to be accepted.

The Doctrine of Implied Contracts

This doctrine is laid down by Section 9 of the Indian Contract Act. It distinguishes between express and implied forms of proposal and acceptance of a contract wherein the former is communicated in the form of words while the latter is made through a medium that does not employ words. Both implied and express forms of contract are equally binding on parties.

The Doctrine of Frustration of Contract

The doctrine of frustration can be found in Section 56 of the Indian Contract Act. It lays down the various factors and circumstances wherein a contract may become unlawful or impossible to complete. In such a case, the contract becomes void. Furthermore, if in a contract, an individual had previously known, or by means of due diligence, might have known that the object of a contract is unlawful or impossible, in such a case the individual has to compensate for the loss suffered by the non-performance of the act to the other party.

The Doctrine of Necessity

This doctrine, laid down by Section 68 of the Indian Contract Act states that in the situation wherein an individual is incapable of entering into a contract or where anyone who is legally bound to be supported by the individual is provided by necessary supplies and essentials for the endurance of life, the person who has supplied such supplies is bound to be compensated from the property of such an incapable person.

The Doctrine of Ratification of Contract

The doctrine of ratification, established by Section 196 of the Indian Contract states that when an act is done on behalf of an entity without his knowledge or authority, the same can further be either ratified or disowned by the entity. If the act is ratified, the same effects will follow as if the act had been performed by the authority of the individual. 

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