ABSTRACT
The Indian Contract Act 1872, a colonial rule has been governing all contractual obligations ever since. This colonial legislation has completed 151 years since its introduction and has seldom faced any need for amendments. This Act is derived from the English Common Law and has been governing all contractual obligations, day to day business transactions and the operation of businesses and MNCs in India. In fact this is one of the most important legislation that has been introduced by the British government in India and laid the foundation of business operations and contractual regulations.
The Act has covered various aspects of contract like the lawful consideration, promise, contract of guarantee etc.
Ever since the framing of the Act, a tectonic change has been witnessed in India especially in the field of technology. This Act requires review as there are lacunas in this colonial act. There are emerging concepts in this modern era like block chain technology, smart contracts, contract of surrogacy in the medical sector. It also needs a relook into Section 11, Section 27, and Section 73 and 74, Section 124 and 125 of the Indian Contract Act of 1872.
Thus the Indian Contract Act 1872 has various loopholes that need review and appropriate measures need to be taken to fill these lacunas.
This research paper aims to analyse the loopholes in the Indian Contract Act 1872 and also aims to provide suggestions to cater to these flaws.
KEY WORDS
Indian Contract Act 1872, Doctrine of Privity of Contract, E Contract, Section 74
INTRODUCTION
Before the enactment of this Act, contractual obligations were based on the rulings of personal laws belonging to different religious communities.
The Indian Contract Act of 1872 was first enacted on the 25th of April and was implemented on the first of September 1872.
Section 2(h) of the Contract Act defines a contract as “an agreement enforceable by law is a contract.”
The act has its roots steeped in the English Common Law. An important legislation enacted by the British government, the Indian Contract Act of 1872 has acted as a catalyst in enabling crucial business operations notably in the post independent era. A colonial act which was framed nearly 151 years ago still governs contractual obligations and regulations with seldom amendments.
Ever since the enactment of the act in 1872, India has undergone major changes including attaining independence and yet the Act still forms the legislation for running business around India to engage in multitude of contracts.
However, the Act has certain flaws and loopholes that need to be looked into. Some part of the Indian Contract Act that needs to be re looked into are:
- Doctrine of Privity
- Recognition of non compete restrictions
- Section 73 and 74
- Inclusion of e Contracts.
- Surrogacy Contracts
RESEARCH METHODOLOGY
This paper is of descriptive nature and the research is based on secondary sources for the deep analysis of the loopholes in the Indian Contract Act of 1872.
Secondary sources of information like newspapers, journals and websites are used for research.
REVIEW OF LITERATURE
The Thirteenth Law Commission Report stated that ever since the introduction of the Indian Contract Act in the year 1872, India has witnessed massive developments in the area of law, trade activities, technology etc which were to be covered under the Contract Act.
The Indian Contract Act has its origin from the English Common Law and under this law, land was considered to be the most valuable property in earlier times and thus most contracts were of land related disputes.
It was thus quoted by the Law Commission “they looked for certainty and gave justice a second place1.”
The Indian Contract Act became rigid in such scenarios and the right to contract in the 19th century became the torch bearer of the Law of Contract. Thus the Indian Contract Act needed to be expanded into a wider ambit inorder to cater to the changes taking place in the society as well as in the legal world.
Thus in order to call the act “up to date” the act needs some re looking and reconsiderations in certain areas.
The areas that need a relook are:
DOCTRINE OF PRIVITY
Doctrine of Privity essentially means stranger to contract. This doctrine is a well established principle under the English Law which means that a person who is not a party to a contract is not entitled or bound by the terms of contract. In simpler words it can be understood that the doctrine of privity states that the rights or obligations can be imposed only by a party to contract. It does not permit a third party to have any rights regarding the enforcement of contract and the contractual remedies are applicable only for the parties to contract.
This doctrine was well established in the case of Tweddle v. Atkinson2.
The doctrine is not specifically laid down in the Indian Contract Act but has been established through various judgements.
This concept was broadly framed in India in the case of Jamna Das v. Ram Autar3 where it was held that a person who is not a party to contract cannot recoup money owed by a party to agreement.
However this doctrine has some exception, such as:
- Case of Trust
- Contract made by an Agent
- Contract involving a family arrangement
- Contract of Insurance
- Benefit to a minor under the Partnership Act
1 Contract Act 1872, M.C. Setalvad
2 (1861) 1 Best and Smith 393; 121 ER 762; [1861] EWHC QB J57.
3 (1916) ILR 38 All 209
The doctrine of privity of contract allows the rights of a third party to rest. Apart from this it is ambiguous and it lacks clarity. It has faced severe criticism from jurists and legal scholars as it curtails the right of third parties to enforce the contractual provisions made for their benefit.
Not just India, but world wide the existence of the doctrine of privity of contract has been widely questioned as many nations like Australia, Canada, England, New Zealand, Singapore etc have already abolished this legislation.
This doctrine prevents the 3rd party from enjoying his benefits which were bound by a contract. Even when the contractual obligations are not fulfilled, the 3rd party will not have the right to sue as he is a stranger to the contract and hence will not meet his reasonable expectation to obtain the benefit under the contract.
It also fails to meet the intentions of the parties to the contract as they intended to provide some benefit to the third party. In the case of the third party suffering any damages he will not be in a position to sue and claim the compensation due to this privity rule.
It also faces the irony that in cases of suffering damages, the third party who suffers actual loss does not have the right to sue but the promisee who has not suffered the loss can sue and claim compensation.
This doctrine is ambiguous, lacks clarity and is rigid in nature. Even though exceptions to the doctrine have been included with advancing times and modernity, the need for adding more exceptions to doctrine arises. This poses a huge question mark on the relevance of Doctrine of Privity of contract. The growing deficiencies and widening gap in the doctrine raises the question of amendments and abrogation.
RECOGNITION OF NON COMPETE RESTRICTIONS
Section 27 of the Indian Contract Act stipulates non compete restrictions. It states that “every agreement by which any one is restrained from exercising a lawful profession, trade, or business of any kind, to that extent void.”4
Under this non compete clause, one party will be the employer and the other party will be the employee. As per Section 27 of the Contract Act, the employee agrees with his employer’s terms that he will not compete with his employer in the same
4 Section 27, Indian Contract Act
THE NEED TO RELOOK
In the cascading years, India witnessed severe changes in the social, legal.corporate and technological field, which demanded confidentiality and agreement to protect the same. In the era of trade secrets, growing technological advancements and an ever expanding corporate sector, companies find it difficult to maintain their confidentiality and protect their individuality. In the era of moonlighting companies face the threat of leaking their company’s inside information and trade secrets. Also with an increase in cross border trade and an extremely competitive business environment in the country, confidential, non compete, and non solicitation agreements are also becoming growingly common. The corporates are of the view that some legislation is needed to put a curb or limit this to protect their inside information, property rights and trade secrets.
Keeping this in mind the courts have also taken a stand on this. In the case Niranjan Shankar Golikari v. Century Spinning and Manufacturing Company Ltd, the Hon’ble Supreme Court held that “restraints or negative agreements can be true in appointment or contracts are valid if they are fair.”6 In another case VFS Global Services Pvt Ltd v. Mr. Suprit Roy, the Court observed that restriction can be imposed on the use of trade secrets during the course of employment or after termination of service does not constitute a “trade restraint”
5 (1882) ILR 8 Cal 343
6 1967 AIR 1098, 1967 SCR (2) 378
RELOOKING INTO SECTION 74
According to Section 74 of the Indian Contract Act, “When a contract has been broken, if sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the thereby is entitled to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for breach, whether or not actual damages have occurred.”
In the event that the contract contains a clause by way of a penalty or an assured sum, Section 74 talks about providing for adequate compensation.
In numerous instances, the court had to draw a distinction between liquidated penalty clause and the damages clause (LDC). When the sum set by all parties in the Liquidated Damages Clause (LDC). Contracts are reasonable for a loss caused by a potential breach.It’s been decided upon each party that the breach settlement is equitable and reasonable.
While a penalty clause is used when the sum agreed upon by the parties is unjustified or employed to coerce the performing party into fulfilling the commitment.
The Liquidated Damages Clause and Penalty Clause are not clearly distinguished under Indian law.
Whether or not the actual harm or loss is demonstrated to have been caused by the breach, the aggrieved party is entitled to seek compensation from the party that violated the contract, according to the Supreme Court’s ruling in Fateh Chand v. Balkishan Das. The freedom to interpret Section 74 has not been granted to multinational corporations. This proves to be detrimental for startups and new market entrants as they would be deluged with compensation claims regardless of whether losses or damages have really happened.
INCLUSION OF E CONTRACTS
In a traditional business setting where products and services are transferred for a defined consideration, e Contracts have a similar meaning. E contracts, often E-contracts now fall under the normal Contract Act guidelines. Block chain is the foundation of smart contracts. Block chains are a type of shared, immutable ledger that makes it easier to track assets and record transactions in a corporate network. The first corporations to take tiny steps towards blockchain technology are Indian firms like Bajaj Finserv and Tech Mahindra.
This technology has the benefit of being quick, effective, and versatile. These contracts are stored in a blockchain technology, which then automatically executes them in accordance with predetermined criteria and conditional code. These contracts are carried out in accordance with other factors, such as external activities. This can reduce the requirement for liaisons and other third parties during the creation and implementation of contracts. Additionally, it saves the parties money on corporate litigation and contract preparation.
Smart contracts offer MNCs a profitable incentive to sign more contracts, and by encouraging more people to join the Indian sector, they can improve the economic pipeline.
In a culture where risk is prevalent, the regular triggers in a smart contract that execute auto debit or auto credit operations aid in preserving stability and lowering risk. The E contracts, which are controlled by the IT Act 2000 and the Indian Contract Act 1872, include smart contracts as a subset because they are a relatively new development in the field of contract design. In accordance with Section 10 of the Indian Contract Act of 1872, these are therefore considered as legal.
However, the implementation of such contracts is difficult since the requirements for a valid contract operate differently from smart contracts and are inherently self-explanatory.
A smart contract’s two agreed parties may find it challenging to reach a consensus because they lack the necessary programming skills to reach consensus ad idem.
SURROGACY CONTRACTS.
Surrogacy was given a green flag in the landmark case of Baby Manji Yamada v. UoI7 . The Indian Contract Act of 1872 governs it. However, the Contract Act creates a gap in its application. This gap occurs because contractual remedies are not always applicable when such surrogacy contracts are broken.
Another flaw is the human infant’s seeming commercialization and damages claims made because the youngster was born lacking in some capacity. If such a situation occurs or in the event that the surrogate mother is dishonest, it becomes difficult for her to recompense the other partner.
Such a situation occurred in the case of Re P (Surrogacy: Residence)21, where the mother broke the terms of the agreement by fraudulently reporting a miscarriage.
It was later found out that she was raising the kids on her own and had deceived the original intended parents.
Finally, the question of free consent in surrogacy agreements comes up since it happens frequently that women change their minds about giving the kid away. Surrogacy contracts are not covered by the Indian Contract Act in the way that it should be. The surrogacy contract forces the surrogate mother to deliver the kid at the end rather than allowing her to do so freely.
According to the Indian Law Commission study, additional rules were required to ensure the mother’s assent in these circumstances.
SUGGESTIONS
It is possible to argue that the doctrine of privity of contract should be dropped because a third party ought to be permitted to bring a lawsuit against a contract that was made with their interests in mind. The Thirteenth Law Commission recommended creating a clear definition, a statutory provision, or new legislation giving third parties the authority to litigate a contract in certain situations.
7 WRIT PETITION (C) NO. 369 OF 2008
Regarding damages in a government contract and the notion of not showing actual loss or damages after a breach of contract, Section 74 should be changed. Additionally, the sentence must clearly distinguish between Liquidated Damages and Penalty . It’s important to include the inconvenience of dealing with liquidated damages in the 1872 Indian Contract Act.
Smart contracts can be governed by a distinct provision. It should cater to the questions regarding the parties’ rights and responsibilities, as well as the court’s jurisdiction.
CONCLUSION
It is evident that the Indian Contract Act is in dire need of reform. Most legal experts
believe that the Indian Contract Act is well-drafted law, but some amendments will help bring it up-to-date with the current global market practices.
REFERENCES
1. Contract Act 1872, M.C. Setalvad https://cdnbbsr.s3waas.gov.in/s3ca0daec69b5adc880fb464895726dbdf/uploads/2022/08/2022080532. pdf (Last visit August 2023)
2. (1861) 1 Best and Smith 393; 121 ER 762; [1861] EWHC QB J57
3. (1916) ILR 38 All 209
https://indiankanoon.org/doc/1129356/
4. India Code, Section 27
https://www.indiacode.nic.in/show-data?actid=AC_CEN_3_20_00035_187209_1523268996428&or derno=28
5. (1882) ILR 8 Cal 343