LLM Group 2 Business Law Fundamental Principles of Law of Contract and Allied Laws 2024 Question Paper with Solutions

Sir John Salmond's formulation is the standard opening: a contract is an agreement creating and defining obligations between the parties. Sir Frederick Pollock's is the other: every agreement and promise enforceable at law is a contract. Sir William Anson's adds the element of the State: the law of contract is that branch of the law which determines the circumstances in which a promise shall be legally binding on the person making it.

Section 2(h) of the Indian Contract Act, 1872 adopts Pollock's form: an agreement enforceable by law is a contract. The definition contains two ideas, an agreement under section 2(e) and enforceability, and section 10 supplies the conditions of the second.

Two consequences of this nature should be drawn out. First, because the obligation is self-imposed, the law's primary task is to identify what the parties actually undertook, which is why the Act devotes sections 3 to 9 to offer and acceptance and sections 13 to 22 to the quality of consent. Second, because the obligation is self-imposed, the remedy is to put the promisee where performance would have put him, which is the expectation measure in section 73 and not the restoration of a status quo.

The second object is to allocate risk in advance. Much of contract law is a set of default rules about who bears a loss when something goes wrong, which the parties may vary. Section 56 allocates the risk of supervening impossibility. Section 73, restating Hadley v. Baxendale, (1854) 9 Exchequer 341, allocates the risk of unusual consequential loss to the party who knew of it, which gives a party with unusual exposure a reason to disclose it. Section 74 allocates the risk of quantifying loss by permitting the parties to stipulate a sum, subject to the court's control.

The third object is to protect the weaker party against the misuse of the form. This object was not prominent in 1872 and has grown steadily since. It appears in section 16(3), which shifts the burden of disproving undue influence where a transaction is unconscionable; in the section 23 public policy jurisdiction as used in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156; and, outside the Act, in the whole of consumer protection legislation.

Layer two: the special contracts that remain in the Act. Indemnity and guarantee in sections 124 to 147; bailment and pledge in sections 148 to 181; and agency in sections 182 to 238. These are contracts of particular kinds whose incidents Parliament thought it worth codifying.

Layer three: the contracts carved out of the Act into separate statutes. Sections 76 to 123 on the sale of goods were repealed by the Sale of Goods Act, 1930; sections 239 to 266 on partnership were repealed by the Indian Partnership Act, 1932. Both were repealed from the Contract Act rather than being newly created, which is why the general principles of the Contract Act continue to apply to sales and to partnerships except where the special Act provides otherwise: section 3 of the Sale of Goods Act and section 3 of the Partnership Act both say so expressly.

Layer five: the dispute resolution statutes, which is why this paper is called "and Allied Laws". The Arbitration and Conciliation Act, 1996 takes the enforcement of the contract out of the courts wherever the parties have so agreed, and section 28 of the Contract Act expressly saves an arbitration clause from the rule voiding restraints on legal proceedings. The Legal Services Authorities Act, 1987 supplies the Lok Adalat. The Family Courts Act, 1984 supplies a conciliation-first forum for matrimonial disputes. The Mediation Act, 2023, in a change of the first importance to this subject, substituted sections 61 to 81 of the 1996 Act by its Sixth Schedule, so that every statutory reference to conciliation under that Act is now read as a reference to mediation under the 2023 Act. The Commercial Courts Act, 2015 created a dedicated forum, with pre-institution mediation under its section 12A.

Layer seven: the constitutional dimension, which is the one most often omitted. Where the State is a contracting party, Article 299 prescribes the form: every contract made in the exercise of the executive power of the Union or a State must be expressed to be made by the President or the Governor and executed by an authorised person. Non-compliance makes the contract unenforceable, which is precisely why section 70 of the Contract Act is so often invoked against the State, as in State of West Bengal v. B.K. Mondal and Sons, AIR 1962 SC 779. And the State's freedom to choose with whom it contracts is controlled by Article 14: Ramana Dayaram Shetty v. International Airport Authority of India, (1979) 3 SCC 489, held that the State cannot act arbitrarily in awarding a contract, and Kasturi Lal Lakshmi Reddy v. State of Jammu and Kashmir, (1980) 4 SCC 1, developed the point.

The changing character of the subject

The nineteenth century view was that the law of contract was the law of freely negotiated bargains between equals. Sir Henry Maine's formula in Ancient Law (1861), that the movement of progressive societies has hitherto been a movement from status to contract, is the classical statement, and the 1872 Act was enacted in that intellectual climate.

The objects are to make reasonable expectations enforceable so that credit and forward dealing are possible, to allocate risk in advance through default rules such as sections 56, 73 and 74, to protect against misuse of the contractual form where the parties are unequal, and to reduce transaction costs by supplying terms the parties need not negotiate.

The scope is multi-dimensional in seven layers: the general principles in sections 1 to 75; the special contracts of indemnity, guarantee, bailment, pledge and agency retained in the Act; the sale of goods and partnership carved out into the Acts of 1930 and 1932 while remaining subject to the general principles; the remedial statutes, above all the Specific Relief Act, 1963 as amended in 2018; the dispute resolution statutes that give this paper its title, chiefly the Arbitration and Conciliation Act, 1996 as reshaped by the Mediation Act, 2023; the modern regulatory statutes from the Consumer Protection Act, 2019 to the Insolvency and Bankruptcy Code, 2016; and the constitutional dimension in Article 299 and in the Article 14 control of State contracting. A subject that began as the law of the bargain now reaches every one of those.