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Class Brief - Class 1: Introduction to Law of Contracts

Normative Principles Behind the Law of Contract

Sources:
1. Stephen Smith, Atiyah's Introduction to the Law of Contract (Clarendon Press).
2. Adrian Briggs and Andrew Burrows, The Law of Contract In Myanmar (Oxford University Press) (Commentary on a
copy of The Indian Contract Act in force in Myanmar).

• As people engage in transactions and build relations, they make representations to each other. A binding
representation is an obligation. The Law of Contract is concerned with obligations made by parties in a
transaction or a relation.

• An obligation flows from a promise.

• The Law of Contract falls within the domain of private law and not public law. Unlike criminal law (public
law) where breach of duty is an act against society, a breach of contractual duty is treated as injustice to
the other contracting party. A duty is enforceable only by the party to whom it is owed.

• Public bodies are subject to the Law of Contract, since they are permitted to enter into contracts.

• Obligations may be self-imposed, for instance, an obligation arising from an agreement. The Law of
Contract deals with self-imposed obligations. Law dealing with externally imposed obligations, is primarily,
the Law of Torts. An example of an externally imposed obligation is a duty not to interfere with another’s
property. The example falls within the purview of the Law of Torts.

• In certain circumstances, the Law of Contract recognises externally imposed obligations. For example,
unjust enrichment. In unjust enrichment, one party benefits at the expense of the other. Say, Party A
agrees to perform magic tricks at a show organised for Party B. Party B agrees to pay ₹ 100.00 for the
performance. They enter into a contract. Party A performs the magic tricks. They were performed well.
Party B refuses to pay ₹ 100.00. Party B is said to unjustly enrich themselves. The Law of Contract
recognises unjust enrichment within its ambit and may award an equitable remedy. It may require Party
B to pay ₹ 100.00 as restitution for Party A’s performance. Restitution is a legal remedy under Law of
Contract. It is reparation for the loss of ₹ 100.00 by Party B and the unjust gain of ₹ 100.00 by Party A (by
refusing to pay ₹ 100.00 and unjustly gaining the amount).

• There are two justifications for a ‘Law of Contract’. First, an Economic perspective and second, an
Individualist or ‘moral’ view.

• The Economic perspective justifies the Law of Contract as the basis of promoting social welfare and
wealth through mutually beneficial exchanges. Where two parties are free to trade, Party A sells a cake
for ₹ 10.00 and Party B purchases the cake for the given sum. As per the Economic perspective, Party A
sells the goods on the belief, they will receive money and Party B purchases the cake as a desire to
consume it. Party B readily parts with ₹ 10.00 for the cake to meet the desire or preference for cake.
Through the exchange, both, Party A and Part B are ‘better off’ than they were before. The Economic
perspective encourages ‘Freedom to Contract’. ‘Freedom to Contract’ is a freedom to enter mutual
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agreements that are legally binding without outside interference. Another reason for needing the Law of
Contract is that most exchanges do not occur simultaneously. Certain obligations may be performed in
the future. The Law of Contract is required to facilitate and regulate human behaviour in deferred
exchanges. When parties fail to perform their part of the obligation, the Law of Contract steps in to
provide sanctions (sanction is a type of deterrence).

• The Individualistic or ‘moral’ view focuses on duties and obligations between parties to a contract. It is
premised in the notion that parties to a contract owe obligations to each other. When obligations are
breached, courts may order performance of those obligations. The enforcement is underpinned in ‘duties
owed’ to the aggrieved and not society at large. The primary reason for the Court’s decision is to remedy
the injustice caused to the aggrieved. It is true, the decision of the court promotes future contracting.
However, as per the Individualistic or ‘moral’ view, the outcome of future contracting is akin to an
incidental effect of the court’s decision to enforce a contract. It is not the primary reason to justify the
Law of Contract.

• There are three distinct periods within which the ‘Freedom of Contract’ developed (may still be
developing). The first period is from 1770-1870. It is called the classical period of common law. During
this time, judges discussed natural law and laissez-faire. They were influenced by a normative principle of
natural law. The principle was that individuals had inalienable rights to own property and enter
arrangements with respect to it. The philosophy of laissez-faire supported the idea that law should not
interfere between parties entering and executing contracts. The role of law was to enforce private
arrangements.

• The second period affecting the ‘Freedom of Contract’ is between 1870-1980. The concept of ‘Freedom
of Contract’ declined during this period. Patrick Selim Atiyah, an English academic, attributes two reasons
for the change.

• The first reason is a decline in the idea that ‘free and voluntary’ exchanges contributed to greater
economic wealth. The problem of ‘externalities’ was recognised. An externality is a consequence or an
effect of free exchange which impacts third parties. Third parties are those who have not entered into a
contract but have an interest in it. For example, a developer of land enters into a contract for building
residential accommodations with the owner of a large piece of land for a sum of money. The developer
builds houses but pollutes a nearby river and clogs public drains. Ordinary citizens residing in the vicinity
of the land under development are affected. They are unable to enjoy their life and property. Some
develop illnesses by drinking contaminated water from the river. While, the contract is between the
owner of land and developer, it is an ordinary citizen near the development who is affected. The ordinary
citizen is a third party for the purpose of the contract. An ‘externality’ would be, the government
developing regulations requiring the developer to keep the river clean and ensure drains are not clogged.
An ‘externality’ may also be, a regulation to prevent the monopolisation of the developer in building
houses, that is, if one developer constructed houses for everyone, there was nothing to prevent the
developer from exploiting others. A consequence of decline in the ‘Freedom of Contract’ was
introduction of restrictive practices to encourage competition and prevent cartel formation.

• The second reason for the decline in the idea of ‘Freedom of Contract’ is the belief that ‘free and
voluntary’ contracts did not always yield just and desirable results for the contracting parties. There is no
guarantee that ‘free and voluntary’ had a meaningful impact in contract formation. For instance, Natasha
enters into a contract of employment since she needs to provide for her family. Natasha is a talented
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painter. She could not find employment as a painter. Instead, Natasha entered into a contract for selling
marbles. On the face of it, Natasha entered into a contract for selling marbles on her own free will but in
a meaningful sense, it was not free will. Natasha entered into a contract since, she wanted to provide for
her family and not because selling marbles was her passion. Between 1870 – 1980, the great railway and
the concept of public utilities developed. People increasingly contracted with public bodies for utilities.
Public utilities and transport were fast developing as essentials. People entered into contracts, not
because of a ‘free and voluntary’ will but because they had little choice, if they needed those services.

• The third period from 1980 to the present witnessed a resurgence in the concept of ‘Freedom to Contract’.

• Adrian Briggs and Andrew Burrows state, contracts are meant to be kept. It is based on a historic principle
called pacta sunt servanda. The term is used, more often, for international treaties than private contracts
between two individuals. However, it may be used for large and complex contracts in international
finance. Once the court determines, there was a contract, it also identifies the obligation of the
contracting party to be kept. A contracting party who fails to meet an obligation without lawful excuse,
not only loses the case but, may also, be required to perform the obligation. When the court requires, a
person to perform an obligation, it is called specific performance. However, it is not necessary, the court
will require a person to perform an obligation in every case. The courts recognise an alternate remedy for
failure to perform an obligation. It may require the breaching party to pay compensation (sum of money).

• All contracts create obligations, but not all obligations are created by contracts. An obligation creates a
legally binding relation. There are instances outside the domain of contract law where obligations create
legal ties. For instance, a duty not to harm others through negligence. These extra-contractual obligations
may fall within the domain of Law of Torts.

• Contracts do not need to be written, but courts enforce written contracts according to the writing. The
Indian Contract Act, 1872 does not obligate a contract to be made in writing. Oral contracts can be made.
However, where the parties have reduced their terms in writing, the court will, likely, treat the written
terms as conclusive evidence of the intention between the parties. Further, if an oral agreement between
parties required there was no contract until, the terms were written, there is no binding agreement until
the terms were reduced to writing.

Tension between Privity of Contract and Principles of Contractual Policy

Source: Ewan McKendrick, Contract Law: Texts, Cases, and Materials, 5th Edition (Oxford University Press).

• Classical common law is based on the principle of ‘Privity of Contract’, that is, parties to a contract have
freedom to enter a contact without outside interference. However, the principle, if taken in the absolute
sense, is impractical in application. There are instances, where contracts are unfair and exploit the weak.
For example, under ‘Privity of Contract’, minors (those under the age of 18 years) had freedom to enter
into contracts without outside interference. However, privity did not protect them from unscrupulous
bargains meant to exploit.

• Law of Contract recognised defects in the absolute nature of ‘Privity of Contract’. It fettered ‘Privity of
Contract’ to remove these defects. For instance, only those above the age of eighteen years have the
competence to enter into binding contracts on their own. Generally, courts will not enforce contracts with
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minors. ‘Privity of Contract’ was not permitted to operate where it conflicted with fairness and
protection of the weak. It was also excluded from operating in instances of fraud, unconscionableness
and illegality.

• Policies of fairness and protection of the weak are called “conflicting policies”. They challenge the
absolute nature of ‘Privity of Contract’. These conflicting policies are “Market Individualism” and
“Consumer Welfarism” put forward by two prominent academics, Professor Adams and Brownsword.

Market Individualism

• Market Individualism is a concept which encapsulates two components, the market and the individual.

• The two components are supportive of each other. They can be separated to understand them better and
in greater detail.

• The concept of the “market” seeks to rationalise the purpose or objective of the market, along with, the
rules that must govern it.

• The purpose of the market is to provide a platform for “competitive” exchange. The law does not seek to
impose concepts of fairness and protection of the weak for the purpose of taking away the “competitive”
nature of the market. Rather, it seeks to minimally regulate the market to prevent fraud, mistake,
coercion and the like from seeping into legal relations. Other than these instances, the law will expect
that promises made must be kept.

• For the market, there is a thin line between actionable misrepresentation and non-disclosure. Given, the
competitive nature of transactions, the court recognises that not all transaction-related information is
required to be disclosed to the market.

• There are three observations made with respect to the market:

1) Security offered by a transaction must be protected. For instance, if a party, on an objective assessment,
is found by the court to have a concluded transaction, the courts will protect that assumption. The courts
will require performance of the bargain or may award a monetary sum in damages in favour of the
aggrieved party. However, where the party on a subjective assessment is found by the court to mistakenly
believe, the transaction is concluded, the courts will not protect the assumption.

2) Rules are clear for those who enter the market. Stakeholders in the market are required to be clear about
the rules of the market. Further, the rules of the market should be clear themselves to offer clarity and
predictability to those who transact. For example, the postal acceptance rule clarifies when an offer is
considered legally accepted for a concluded contract.

3) Law accommodates commercial practice. The mechanism to accommodate commercial practice is by

providing certainty of terms and realigning the law. Courts will endeavour to bring certainty to terms of
an agreement, where, upon an objective assessment, it can be concluded that an agreement had been
reached. An example of courts providing certainty to an agreement is the case of Hillas v. Arcos [1932]
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147 LT 503. Courts have also attempted to realign the law to avoid market inconvenience. An example of
realignment of the law, is the case of The Eurymedon.

Case Brief: Hillas v. Arcos [1932] 147 LT 503

Facts: W. N Hillas and Company Limited (‘Hillas’) purchased Russian softwood timber from Arcos Limited (‘Arcos’).
Under the agreement of sale dated 21 May 1930, Hillas purchased 22,000 standards of softwood goods of a fair
specification over the season of 1930. The agreement of sale also contained an option, under clause 9, to purchase
100,000 standards of Russian softwood timber during the year 1931 at a reduction of 5%. In 1931, Arcos refused
to sell Russian softwood timber at the agreed rate and Hillas brought proceedings for breach of contract.

Issue: The dispute in this case was whether there existed a binding agreement between Hillas and Arcos under
the Agreement dated 21 May 1930.

Upon reading the contractual terms, Hillas believed there was a contract, while, Arcos disputed it on two grounds:

1) the term ‘fair specification’ was not clear to identify the goods which were sold;

2) it contemplated a future agreement on essential terms.

Decision: The House of Lords found a valid and binding agreement between Hillas and Arcos for the purchase of
22,000 standards of softwood goods of a fair specification over the season of 1930. Tomlin L.J. rejected both
contentions of Arcos.

On the first issue, Tomlin L.J. gave a purposive construction to the phrase ‘fair specification’, rather than taking a
literal approach. He noted, a bare perusal of contractual terms may provide an impression, the phrase “fair
specification” was not certain and incapable of being certain (emphasis). However, reading the agreement of 21
May 1930, as a whole, and with regard to the evidence before the House of Lords, Tomlin L.J. concluded, “fair
specification” was a phrase which was capable of being given meaning. The term “of fair specification over the
season of 1930” read with “22,000 standard”, meant that 22,000 standards of Russian softwood timber were
being purchased depending on their size, quality and kind in reasonable proportions. The goods would have to
satisfy the size, quality and kind of the Russian softwood timber that make the 22,000 standards having due regard
to their output during the year 1930. Depending on the output in 1930, the Russian softwood timber could be
classified on the basis of size, quality and kind.

With respect to the second issue of whether the contract contemplated a future agreement on essential terms,
Tomlin L.J. considered the disputed clause (clause 9). Arcos argued that use of phrases such as “option of entering
a contract” and “such contract to stipulate” indicated there was no contract till the option was exercised. Tomlin
L.J. rejected this contention and held that clause 9 was an “agreement” to make an agreement. It was not the
case where an agreement was not made till clause 9 was fulfilled.

Case Brief: New Zealand Shipping Co. Ltd. v. A. M. Satterthwaite & Co. Ltd. [1974] 2 WLR 865 or The Eurymedon

Facts: An expensive drilling machine was loaded on a ship called ‘The Eurymedon’ to be shipped from Liverpool
(United Kingdom) to Wellington (New Zealand). Ajax Machine Tool Company Limited (“the Consignor or Shipper”)
was the manufacturer of the drill. It engaged Federal Steam Navigation Co. Limited (“the Carrier”) to carry the
drilling machine and deliver it to A. M. Satterthwaite & Co. Limited of Christchurch, New Zealand (“the
Consignee”). The Carrier and Shipper entered into a contract for carriage and offloading the drilling machine.
Consequently, a Bill of Lading was issued.
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The function of stevedoring (loading and removing the drilling machine from the ship) was performed New
Zealand Shipping Company Limited (“the Stevedore”).

The Stevedore received a Bill of Lading when the drill arrived in Wellington. While unloading the drill, it was
damaged as a result of the Stevedore’s negligence.

A bill of Lading is a document issued by or on behalf of the carrier of goods by sea to a person (usually called the
shipper) with whom the carrier has entered into a contract for carriage of goods. Such a document has three
functions: 1. It is a receipt, that is, it contains evidence that the goods have been received by the carrier for
shipping or carriage 2. It is a contractual document, that is, the Bill of Lading is evidence of a contract of carriage
of goods and contains the mechanism of understanding rights and liabilities of various stakeholders 3. It is a
document of title of goods.

The terms of the Bill of Lading were as follows (Himalaya clause/ Exclusion clause):

“It is hereby expressly agreed that no servant or agent of the Carrier (including every independent contractor from
time to time employed by the Carrier) shall in any circumstances whatsoever be under any liability whatsoever
to the Shipper, Consignee or Owner of the goods or to any holder of this Bill of Lading for any loss or damage or
delay of whatsoever kind arising or resulting directly or indirectly from any act neglect or default on his part while
acting in the course of or in connection with his employment…”

Further, the Bill of Lading incorporated the application of the Carriage of Goods by Sea Act, 1924, of Great Britain
(no longer in force today, repealed) which discharged the Carrier and the ship from any liability unless the suit
was brought within one year from delivery.

A suit was brought by the Consignee against the Stevedore after more than 1 year of the drilling machine being
delivered. The Consignee claimed the cost of repairing the drilling machine caused by the negligence of the
Stevedore.

Issue: The issue before the Privy Council was whether the Stevedore could take advantage of the time limitation
provision under the Carriage of Goods by Sea Act, 1924.

Decision (provided by Lord Wilberforce for the majority):

There were 5 judges on the bench. Three judges, as the majority held, the Stevedore was entitled to rely on the
one-year time bar to defeat the claim of negligence. In this case, Lord Wilberforce adopted a broad approach in
finding an existence of a contract between the Stevedore and the Shipper which entitled the Stevedore to the
one-year time bar.

Lord Wilberforce interpreted the Himalaya clause to mean that the Shipper agreed to exempt the Carrier, its
independent contractors and agents from any liability through the entire process of carriage and discharge of
goods. The clause exempted from liability or provided immunity to the performer, irrespective, of who performs
the contract.

Lord Wilberforce stated: “Thus, if the carriage, including the discharge, is wholly carried out by the carrier, he is
exempt. If part is carried out by him, and part by his servants, he and they are exempt. If part is carried out by him
and part by an independent contractor, he and the independent contractor are exempt. The exemption is designed
to cover the whole carriage from loading to discharge, by whomsoever it is performed: the performance attracts
the exemption or immunity in favour of whoever the performer turns out to be.”
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In this case, the Carries assumed an obligation to transport the drilling machine and discharge it at the port of
arrival. The goods were to be carried and discharged. This made the transaction, inherently, contractual. A part of
the contract was performed by independent contractors also agents of the Carrier, the Stevedore. The Bill of
Lading provided, if the carriage or, in this instance, discharge was carried out by the Stevedore, it was exempt
from any liability, if action was brought after a period of one year.

• The case of The Eurymedon demonstrated a realignment of the law. The Privy Council was willing to
overcome the challenges posed by privity of contract to extend the benefits of contractual clauses to
entities not a party to the contract. In The Eurymedon, a contract for carriage and discharge of goods was
entered between the Shipper and the Carrier. The Stevedore was not a party to this contract. Yet, the
Privy Council was prepared to provide the Stevedore a benefit of immunity flowing from the contract
between the Shipper and Carrier. It seemed the Privy Council was willing to consider the commercial
realities of the shipping business. The Privy Council did not seek to reduce the efficacy of a clause which
had become a widespread tool for regulating the rights and liabilities of stakeholders engaged in shipping
transactions.

The Individualism Theory

• Under the Individualism theory, courts should not intervene in the choices made by parties to the
contract, thereby, offering them freedom to contract.

• The Individualism theory upholds the concept of privity of contract, both, in terms of partner-freedom or
freedom to choose who to contract with and term-freedom or freedom to choose the terms to govern
the contract. However, where the terms of the contract have been set, the courts would require the
parties to hold their end of the bargain. The rationale for doing so is to provide security of a contract.

Consumer Welfarism

• Consumer Welfarism is a concept for protecting consumers and is premised in principles of fairness and
reasonableness of a contract.

• There are 11 principles under consumer welfarism, namely, the principle of constancy, bad faith, no man
should profit from his own mistake, unjust enrichment, better loss-bearer principle, principle of
exploitation, principle of a fair deal for consumers, principle of informal advantage, principle of
responsibility for fault and the paternalistic principle.

• Consumer-welfarism suffers from pluralism. Where multiple principles apply to a dispute, it is difficult
to say how much weight a principle must have in the resolution process. The decision rests entirely on
the discretion of the judge. In the absence of a hierarchy of principles, the outcome would be inconsistent
as different judges would give different weightage to the different principles.

Historical Context of The Indian Contract Act, 1872.

Sources:
1. Nilima Bhadbhade, Pollock & Mulla Indian Contract and Specific Relief Acts, 14th Edition (Lexis Nexis Butterworths
Wadhwa).
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2. Bernard S. Cohn, ‘Law and the Colonial State in India’ in June Starr, Jane F. Collier (Ed.), History and Power in the
Study of Law (Cornell University Press, 1989).

• Law of Contract in India can be divided into two parts – Common Law and Statute Law.

• The establishment of the Courts of Justice in the three presidency towns of Calcutta, Madras and Bombay
in the eighteenth century introduced India to the common law. The indiscriminate application of English
law in British India led to inconveniences. The statutes of 1781 and 1797 addressed the inconvenience by
empowering the courts at Calcutta, Madras and Bombay to determine all disputes except (exceptions)
succession and inheritance in matters of land, rent, goods and all matters of contract.

• In the exceptions carved, Hindus and Muslims were governed by their personal laws (Hindu law for Hindus
and Muslim law for Muslims). Where parties to a suit were Hindu and Muslim, the personal law of the
defendant applied. In effect, the statutes of 1781 and 1797 permitted the application of personal law in
contractual suits.

• The Third Indian Law Commission was entrusted with the task of drafting The Indian Contract Act, 1872.
The first draft of the Act was a “simplified statement” of common law with modifications suitable for India.
Due to differences between the Indian legislature and the Third Indian Law Commission, the entire
Commission resigned. The Indian legislative department took it upon themselves to prepare further
drafts. Some provisions were borrowed from the draft New York Code of 1862.

• In the case of Madhub Chunder v. Rajcoomar Doss [1874] 14 BLR 76, the High Court of Calcutta removed
any distinction on application of The Indian Contract Act, 1872 based on personal faith of the parties. The
dispute was over an agreement in restraint of trade. The agreement was not void under Hindu law of
contract. The plaintiff contended, Hindu law governed the dispute, since, the Statute of 1781 permitted
personal law to apply to contractual arrangements. The Statute of 1781 was not expressly repealed by the
enactment of The Indian Contract Act, 1872. Richard Couch C.J. rejected this contention upholding the
general application of The Indian Contract Act, 1872 irrespective of personal faith. In short, the Indian
Contract Act, 1872 applied to everyone, Hindus and Muslims.

• After independence, The Indian Contract Act, 1872 continued to apply through Art. 372(1) of the
Constitution of India, subject to provisions of the Indian Constitution. In case of any inconsistency between
the Indian Constitution and The Indian Contract Act, 1872, the Indian Constitution prevailed and the
inconsistent provision of The Indian Contract Act, 1872 was void pursuant to Art. 13 of the Indian
Constitution.

• At present, the subject of ‘Contract’ (except contracts in relation to agricultural land) is on the Concurrent
List (List III of the Seventh Schedule of the Indian Constitution). Both the Union and State government
have power to make laws with respect to it.

Interaction Between Common law and The Indian Contract Act, 1872
Sources:
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1. Nilima Bhadbhade, Pollock & Mulla Indian Contract and Specific Relief Acts, 14th Edition (Lexis Nexis Butterworths
Wadhwa).
2. Ewan McKendrick, Contract Law: Texts, Cases, and Materials, 5th Edition (Oxford University Press).

• Common law is a part of English law flowing from custom and judicial decisions in the United Kingdom. It
has persuasive value in India and are not binding on Indian courts. Pollock & Mulla argue, it is not
permissible to blindly import principles from English law, if the principles have been covered by The Indian
Contract Act, 1872. In the sense, common law cannot be used as an instrument to replace The Indian
Contract Act, 1872. There are two exceptions to the rule: 1. Common law can be imported into India if
The Indian Contract Act, 1872 cannot be understood without its aid and 2. Common law can be imported,
if a matter is not covered by the provisions of The Indian Contract Act, 1872.

• A Statue is written law enacted by an authority given the power to legislate (make laws). In India and the
United Kingdom, the Parliament has been given the power to enact laws. An example of a statute is The
Indian Contract Act, 1872 enacted by the Indian legislature (pre-independence) which governs the broad
domain of contracts in India.

• Indian contract law is distinguished from its counterpart in the United Kingdom, on the ground, that it is
codified. Codification is a process of arranging legal principles, rules and laws according to a definite plan.
In India, codification occurs by enacting a statute by the legislature. Pollock & Mulla state, The Indian
Contract Act, 1872 is the principle law on the general framework of contracts. It is an example, of the
codification process.

• On the other hand, McKendrick provides, the Parliament in the United Kingdom has not codified the law
of contracts as applicable to a broad and general category of contracts. Rather, principles governing
contracts are embedded in decisions made by judges.

• While, the United Kingdom does not have a statute enacted by the Parliament to regulate the larger
domain of contracts, there are statutes which govern and regulate specific type of contracts. For example,
the Sale of Goods Act 1979 (U.K.) regulates goods purchased and sold; the Law of Property Act 1925 (U.K.)
deals with transfer of freehold and leasehold property under a deed; and the Insurance Act 2015 (U.K.)
which makes new provision about insurance contracts. India, also has specific statutes that regulate
insurance, sale of goods and transfer of property.

• Given, there is no equivalent to The Indian Contract Act, 1872 in the United Kingdom, one questions
whether the lack of a statute makes English law any less uniform or uncertain. McKendrick answers in the
negative. Even though, the United Kingdom lacks an equivalent to The India Contract Act, 1872, decisions
handed by bodies with judicial functions over a period of centuries have made principles governing
contracts, certain, uniform and clear.

• McKendrick states, the law of contract in the United Kingdom did not evolve from any underlying legal
theory of contract but from law of action called ‘law of assumpsit’, that is, law was the decision handed
by a judge to address the cause of action in contract or a dispute between parties. Around 1852, the
practice of writing treatise increased in the United Kingdom. Authors, largely comprising of scholars,
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academics and legal practitioners began to draw principles from the large pool of case law which could be
applied as “rules” to later cases. The purpose was to provide a rational basis for consistently applying a
concept in contract. As a result of treatise writing, common law was cogently put in context through
commentaries by renowned scholars such as Sir Frederick Pollock and Sir William Anson.

• There are similarities and differences between The Indian Contract Act, 1872 and the common law flowing
from the United Kingdom. One similarity, for instance, is the understanding of ‘what is a contract’. The
Indian Contract Act, 1872 defines a contract under section 2(h) as ‘An agreement enforceable by law is a
contract’. A similar understanding of a contract has been teased out in the United Kingdom by Treitel on
The Law of Contract, ‘a contract is an arrangement giving rise to an obligation which is enforced or
recognised by law’. However, it must be noted, the United Kingdom does not have a universally agreed
definition of a contract.

• The factor which distinguishes contractual from other legal obligations is, they are based on an agreement
between contracting parties. McKendrick provides, contracts are subject to three qualifications.

• First, the court will look at objective intent of the parties and not actual fact, of agreement. This is true
for India. India takes this principle from the common law as mapped in commentaries and digests of
international authors, since, it is not expressly stated in The Indian Contract Act, 1872.

In K.K. Modi v. K.N. Modi (1998) 3 SCC 573, a Memorandum of Understanding (MOU) was reached
between disputing family members for division of control in a number of public listed companies and
other assets. Clause 9 of the MOU stipulated, all dispute and clarifications with respect to implementing
the MOU would be referred to the Chairman, IFCI (previously, Industrial Finance Corporation of India) or
the Chairman’s nominees. The decision of the Chairman or the Chairman’s nominees would be final and
binding on the disputing parties. The question before the Supreme Court of India was whether clause 9,
constituted an arbitration agreement. In order to understand the intent of the parties, the Supreme Court
relied on legal commentaries which stated: “Many cases have been fought over whether a contract's
chosen form of dispute resolution is expert determination or arbitration. This is a matter of construction
of the contract, which involves an objective enquiry into the intentions of the parties.” Applying the
objective enquiry test, the Supreme Court of India determined, clause 9 of the MOU did not constitute an
arbitration agreement. Despite, the use of the word ‘arbitration’ in correspondences exchanged between
the disputing parties and the Chairman of ICFI, evidence showed that the Chairman or the Chairman’s
nominees were not required to rely on material placed before them in the dispute resolution process.
However, in typical arbitration proceedings the arbitrator would have to rely on the material before it.
Rather, the Chairman or the Chairman’s nominees were permitted to make their own enquiries. This made
them independent experts.

• Second, while, parties have freedom to contract, certain terms of the contract are implied by law to
standardise behaviour. These terms are not left to the discretion of contracting parties. For instance,
section 12(2)(a) of the Sale of Goods Act 1979 (U.K.) implies a term in the contract of sale of goods that
goods would be free from any charge or encumbrance not disclosed or known to the buyer during the
sale of goods. A similar provision is found under section 14(c) of the Indian The Sale of Goods Act, 1930
which ‘implies a warranty that goods would be free from any charge or encumbrance in favour of a third
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party unless previously declared or known to the buyer’. The rationale of implied terms is to protect the
vulnerable party from adverse consequences.

• Third, judges in recent years have qualified the scope of the principles of contract to protect the weaker
party in a contract.

Purpose and Scope of Law of Contract – I

Sources:
1. Nilima Bhadbhade, Pollock & Mulla Indian Contract and Specific Relief Acts, 14th Edition (Lexis Nexis Butterworths
Wadhwa).
2. Ewan McKendrick, Contract Law: Texts, Cases, and Materials, 5th Edition (Oxford University Press).

• The scope of Law of Contract – I is:

a) to provide a general understanding and application of the principles of contract. The understanding
and application of principles is not restricted to a select category of contracts, say, for example
insurance contracts, but is applicable to all. In India and the United Kingdom, there are certain laws
which govern specific contracts. The course does not provide detailed rules in relation to specific
contracts.

b) to provide an imprint on the law of contract along with changes it has undergone over time. In the
United Kingdom, changes to the law of contract have been slow and incremental, rather than
revolutionary. Judges in India are required to make decisions within the framework of The Indian
Contract Act, 1872. The statute was enacted in colonial times and has not seen frequent changes.

Questions for Students to Consider:

1. Should the United Kingdom codify contract law like India?

2. Given a tension between Privity of Contract and Conflicting Policies such as consumer welfarism and
market individualism, should the law intervene to limit the freedom provided by Privity of Contract?

3. Do you agree with the decisions of the House of Lords in Hillas v. Arcos [1932] 147 LT 503 and the
Privy Council in The Eurymedon? Discuss in light of the market-individualism theory.

4. Should there be a hierarchy of principles in consumer-welfarism? Why?

References:

1. Ewan McKendrick, Contract Law: Texts, Cases, and Materials, 5th Edition (Oxford University Press).
2. Adrian Briggs and Andrew Burrows, The Law of Contract In Myanmar (Oxford University Press)
(Commentary on a copy of The Indian Contract Act in force in Myanmar).
3. Bernard S. Cohn, ‘Law and the Colonial State in India’ in June Starr, Jane F. Collier (Ed.), History and Power
in the Study of Law (Cornell University Press, 1989).
4. Stephen Smith, Atiyah's Introduction to the Law of Contract (Clarendon Press).
5. Nilima Bhadbhade, Pollock & Mulla Indian Contract and Specific Relief Acts, 14th Edition (Lexis Nexis
Butterworths Wadhwa).
FOR EDUCATIONAL USE Page 12 of 12

Important:
- The ‘Class Brief’ is not a substitute for class reading.
- It is to supplement, a student’s understanding of various contractual concepts.
- The scope of the subject, Law of Contract - I is contained in the ‘Course Manual’.
- Assessments and Examinations will be based on content within the ‘Course Manual’.
- The ‘Reading List’ and the ‘Class Brief’ have been designed to facilitate the process of learning contractual
concepts and not replace the broad expanse of the Course Manual.
- Students should not restrict themselves to the ‘Reading List’ and ‘Class Brief’ in preparing their own notes and
material to the understand concepts in Law of Contract – I.
- Reading literature outside the ‘Class Brief’ and ‘Reading List’ is encouraged.
- The ‘Class Brief’ does not cover the entire content of the ‘Reading List’.
- Sole reliance on the ‘Class Brief’ for assessment or examination preparation is discouraged.