The Contemporary Relevance of the Law of Contract

A useful way to put it in an answer: the Contract Act is the floor of Indian commercial law, and the special statutes are rooms built on it. If the floor fails, so does the room. A contract of sale made by a person of unsound mind is no better for being a contract of sale.

The Act says this about itself in section 1's saving clause, which preserves other statutes not expressly repealed, so the special Acts and the general Act operate together rather than displacing one another.

Where the Act's assumptions have failed, and what replaced them

The Act assumes two things that are frequently untrue today: that the parties negotiate the terms, and that they are physically or textually present to each other. Neither survives modern commerce, and the response has been to add law from outside rather than to rewrite the Act.

The parties do not negotiate: standard form contracts

An insurance policy, a bank account, a mobile connection and a flat purchase agreement are all offered on the company's printed terms, take it or leave it. The Act's machinery is intact, in the sense that there is an offer and an acceptance, but its premise is gone: the consent is real only in the thinnest sense, because there was nothing to consent to except the whole document.

The responses have come from three directions, and none of them is an amendment to the Act:

1. The courts, through the doctrine that an unconscionable term in a contract between parties of grossly unequal bargaining power may be struck down as opposed to public policy under section 23. This is worked in [Standard Form Agreements].
2. The Consumer Protection Act 2019, which for the first time in Indian statute defines an unfair contract and gives consumer commissions power to declare such terms void, and which also created a Central Consumer Protection Authority.
3. Sector regulators, such as the insurance and telecom regulators, which prescribe the terms of the standard documents in their sectors.

The parties are not present to each other: electronic contracting

Section 4's rules were written for the post. They work well for letters and, as the courts have held, not at all for instantaneous communication. When contracting moved onto networks the Act had no answer to three questions: whether an electronic record satisfies a requirement of writing, whether an electronic signature satisfies a requirement of signature, and whether a contract formed by electronic means is valid at all.

None of those was answered by amending the Contract Act. They were answered by the Information Technology Act 2000, and MU's syllabus makes that Act part of this paper for exactly that reason:

• Section 4 gives legal recognition to electronic records where law requires writing.
• Section 5 gives legal recognition to electronic signatures where law requires signature.
• Section 10A provides that a contract formed through electronic means shall not be deemed unenforceable merely on that ground. It was not in the Act as enacted in 2000; it was inserted by the amendment of 2008. See [Section 10A: the Validity of Contracts Formed Through Electronic Means].
• Section 13 fixes the time and place of despatch and receipt of an electronic record, which is section 4's job done again for a new medium.

That is the cleanest illustration of the topic: the Act's principles were kept and its mechanics were replaced. Offer, acceptance and consideration still decide whether there is a contract; when and where it was made is now answered by another statute.

The gaps that remain

An answer that only praises the Act is incomplete. Three gaps are regularly identified and are worth naming:

1. No general doctrine of good faith. The Act imposes no duty to negotiate or to perform in good faith. Indian courts have read fairness into particular sections, especially section 23's public policy, but there is no general provision comparable to those in civil law systems.
2. No general rule against unfair terms in commercial contracts. The Consumer Protection Act reaches consumers. Two businesses of very unequal size are left to section 23 and the courts.
3. Privity remains a common law doctrine, not a statutory one. England legislated in 1999 to allow third parties to enforce contracts made for their benefit. India has not, and the exceptions here are judge made. See [Privity of Contract and Privity of Consideration].

The 13th Report of the Law Commission of India, on the Indian Contract Act 1872, recommended a number of changes to the Act. Very few have been enacted, which is itself a fact about the Act's contemporary position: it has survived largely by not being amended.

What HAS changed in the Act

The Act is not entirely frozen, and two changes are recent enough to be worth knowing, both to section 28, agreements in restraint of legal proceedings:

• Section 28 was substituted by Act 1 of 1997, with effect from 8 January 1997, adding a limb that strikes at a clause which extinguishes a party's rights on the expiry of a period, and not merely one that bars the remedy. The change was made because clauses drafted to extinguish rather than to bar had been escaping the section.
• Exception 3 was inserted by Act 4 of 2013, with effect from 18 January 2013, saving a guarantee agreement of a bank or a financial institution.

Both are worked in [Agreements in Restraint of Legal Proceedings]. They are useful in this topic as evidence that Parliament amends the Act when a commercial need is demonstrated, and otherwise leaves it alone.

A worked example: one transaction, four statutes

Priya buys a washing machine on a retailer's website. She clicks "I agree" to terms she has not read, pays by card, and the machine is delivered damaged.

• Indian Contract Act 1872. Was there an offer and an acceptance? The website's listing is ordinarily an invitation to treat and Priya's order is the offer, accepted by the retailer's confirmation. Sections 2(a), 2(b) and 10 decide whether there is a contract at all.
• Information Technology Act 2000. Is the contract bad because it was formed by clicking? No: section 10A. Was the record a valid one? Sections 4 and 13.
• Sale of Goods Act 1930. Do the goods answer their description and are they of merchantable quality? Conditions and warranties.
• Consumer Protection Act 2019. Is the clause excluding all liability an unfair contract term, and can she complain to a consumer commission rather than sue?

Four statutes, one transaction, and only the first of them tells you whether a contract exists. That is the contemporary relevance of the Contract Act stated as a fact rather than as praise.

What it does NOT mean

"The Act is outdated." The claim is too broad to be worth marks. The Act's mechanics for distance contracting were outdated and have been supplemented; its general principles have not been replaced by anything. Say which part, and name what replaced it.

"The Information Technology Act amended the Contract Act." It did not. It is a separate statute that supplies rules the Contract Act does not contain. The Contract Act's sections are untouched by it.

"Consumer law has replaced contract law." It has not. A consumer complaint still depends on there being a contract, and the Consumer Protection Act adds remedies and controls rather than displacing the general law.

Quick revision

• Three points: general law for all commercial statutes; adaptable principles; assumptions of equality and presence that have failed.
• The Act is the floor; Sale of Goods, Partnership, Negotiable Instruments and Arbitration are built on it.
• Standard form contracts answered by the courts (unconscionability under section 23), the Consumer Protection Act 2019 (unfair contract), and sector regulators.
• Electronic contracting answered by the Information Technology Act 2000, sections 4, 5, 10A and 13, not by amending the Contract Act.
• Gaps: no general good faith duty, no general control of unfair terms between businesses, privity still judge made.
• Amendments that did happen: section 28 substituted by Act 1 of 1997 (w.e.f. 8 January 1997); Exception 3 inserted by Act 4 of 2013 (w.e.f. 18 January 2013).

Test yourself

1. Name three ways the law has responded to standard form contracts. Judicial control of unconscionable terms under section 23; the statutory concept of an unfair contract in the Consumer Protection Act 2019; regulation of terms by sector regulators.

2. Which statute made electronic contracts enforceable, and by which section? The Information Technology Act 2000, section 10A, which was inserted by the 2008 amendment and provides that a contract formed through electronic means shall not be deemed unenforceable merely on that ground.

3. Why is the Contract Act called the general law of contract? Because the specialised commercial statutes presuppose it and do not repeat it: they regulate particular transactions but leave offer, acceptance, consideration, capacity and free consent to be decided under this Act.

4. Give one gap in the Act that is regularly criticised. The absence of any general duty of good faith in negotiation or performance.

5. Has the Act been amended recently? Yes, though sparingly. Section 28 was substituted in 1997 to reach clauses that extinguish rights, and Exception 3 saving bank and financial institution guarantees was inserted with effect from 18 January 2013.