The Indian Contract
Act, 1872, legislation governs the contractual relationship between two or more
parties – individuals, companies, governments. The Act deals with multiple
aspects of contract, such as formation, performance, enforceability of
contracts, indemnities and guarantees, bailment and pledge, agency et al.
The Indian Contract
Act’s, a comprehensive piece of legislation, is one of the oldest laws in India.
It has been primarily derived out of the contract
law of United Kingdom Today, good corporate governance demands
well-defined and well-executed contracts, where the Indian Contract Act plays a
vital role. Significant number of
contracts are getting executed every day between various parties often with
ensuing disputes .
The time has come to take a close look at The
Indian Contract Act to bring it in line with the changing business environment
and more so, to make it business friendly & more relevant in the global
context. However, certain provisions of the act needs a closer look and further
amendments . The Section
73 of The Indian Contract Act provides for compensation for loss or damage
caused by breach of contract, arising in the regular course of business.
However, the remote & indirect loss or consequential damages sustained by
reasons of the breach are not well defined.
The Indian Contract
Act provides for liquidated damages and other penalties to the party that
suffers from breach of a contract. Contract laws of many countries restrict
total compensation to the amount of liquidated damages i.e. the amount agreed
upon between both parties during the course of the contract. The restraint
clauses under the Indian Contract Act ; any contract that restrains one from conducting
legitimate profession, trade or business of any kind, is considered void as per
Indian contract law. But, there are no provisions for apportionment of losses
in the contracts which are considered void.
Further, unlike the laws of many other countries any
contract without ‘consideration’ is void subject to certain exceptions (out of
love and affection, repayment of past deed etc.) as provided in Section 25 of
the Act. The British law however, recognises contracts without consideration in
certain cases. The contract law in the United States, although evolved from the
English common law is more of a state subject. There is no federal contract law
in the United States and each state has its own contract law. In Europe –
Germany and France – follow a different system of law known as the civil law
system where the contract law is more detailed and exhaustive.
Many legal experts
feel that there are three primary areas where Indian contract laws need to get updated
The Indian Contract law should recognise non-compete
restrictions where parties are agreeable to enter into such provisions, as
prevalent most international contracts.Normally , post-termination of a contract any
non-compete clause in the contract is void as they are treated as
“restraint of trade” under Section 27 of the Indian Contract Act, 1872.
Further parties should have the freedom to enter into contracts which also contain the
dispute settlement mechanism, and such contracts should not be treated as
“contracts in restraint of legal proceedings” under Section 28, says
many legal experts.
With the growing number of transactions undertaken
online, there is well felt need to include the provisions for digital contracts. Although e-contracts are considered legal in terms of the
Information Technology Act but there is some uncertainty while dealing and
executing e-contracts online. Here is a need for a specific chapter
to govern all electronic contracts.
The Indian contract law does not provide clear restrictions
against including unfair terms in a contract. Evolving such general
principles for regulating unfairness in contracts will have widespread consequences
in a range of contracts that includes; lending agreements, builder-developer
agreements, debt instruments, landlord-tenancy agreements, government
contracts, arbitration agreements and others The Indian Contract Act is a well-drafted
legislation however, certain amendments would enable it to keep it up to date
with current international business practices. This would in turn provide
business confidence for foreign entities in their intent to conduct business in