History and Background of Law of Contracts

1) Introduction

The Indian Contract Act1 incorporates the contractual rights that have been bestowed upon
the people of India within its scope of application. In order to facilitate the effective
conclusion of business transactions, it bestows rights, responsibilities, and liabilities onto the
parties to the contract. These may range from transactions that occur in daily life to the
documentation of the operations of multinational corporations. On the 25th of April in the
year 1872, the Indian Contract Act was passed into law, and it was not until the first day of
September in the same year that it became operational.

The fundamental principles that underpin the India Contract Act have been essentially
derived from the English Common Law. Due to the fact that it is one of the most significant
pieces of law that has ever been created by British citizens, the principles that have been
implemented within it are nothing more than the codification of the basic concept that
governs transactional relationships. As a result, it has been subject to very few revisions.

Previously, the contractual connection was controlled by the personal laws of various
religious groups, such as distinct rules for Hindus and Muslims. This was the case until the
act was created. Now, in order to comprehend the contract act in its current configuration, it
is necessary to undergo an examination of the historical development of contract law, taking
into consideration the practices that were widespread before to the introduction of the
instrument.

2) Definition

Section 2(h)2 of the Indian Contract Act states- “An agreement enforceable by law is a
contract.”

The definition of a contract in the Indian Contract Act, 1872 has two main elements:

 Agreement: Defined in Section 2(e) as “every promise and every set of promises
forming the consideration for each other”3

1
Indian Contract Act, No. 9, Acts of the Governor-General of India, 1872 (India)
2
Indian Contract Act, No. 9, § 2(h), Acts of the Governor-General of India, 1872 (India)
3
Indian Contract Act, No. 9, § 2(e), Acts of the Governor-General of India, 1872 (India)
  Enforceable by law: The agreement must be enforceable by the law of the land.
3) Evolution

Vedic and Medieval Era

In the ancient and medieval eras of Indian history, there was no comprehensive code
governing contracts. Principles were extracted from several references, including the sources
of Hindu law: the Vedas, the Dharmashastras, Smritis, and Shrutis, which offered
comprehensive accounts of contract-like rules of that era. The regulations pertaining to
contracts were integral to the legal framework known as Vyavaharmayukha.

During Chandragupta's reign, contracts functioned as "bilateral transactions" between people

or organizations. These transactions required voluntary agreement and mutual understanding
of all terms and circumstances, and were executed transparently. Nevertheless, some
contracts were deemed invalid, including those executed at night, those entered into inside
the interior of homes, those forged in woods, and those established in any other clandestine
locations. Exceptions to these restrictions on clandestine contracts included those established
to prevent violence, assault, and disturbance; contracts executed in commemoration of
marriage; contracts mandated by governmental authority; and contracts entered into by
merchants, hunters, spies, and others who often traversed forests.

The contemporary notion of bailment, as articulated in sections 151 4 and 1525 of the Indian
Contract Act, 1872, is derived from the Katyaynasmriti, which had a specific clause termed
silpinyasa about the deposit of raw materials with craftsmen. This document stipulates that if
an artisan does not return deposited objects within the designated timeframe, they must
compensate for the item's value, even in instances when the loss resulted from acts of God or
the King. Artisans were not liable for losses of items that were substandard at the time of
bailment, save where the loss resulted from their own negligence.

Significantly, there was no statute of limitations for initiating lawsuits about money loaned,
according to the principle of 'damdupat'. This regulation mandated that the cumulative sum
of principle and interest receivable at any one moment may not surpass twice the amount of
money loaned. This concept recognized that loans were not just recoverable from the
4
Indian Contract Act, No. 9, § 151, Acts of the Governor-General of India, 1872 (India)
5
Indian Contract Act, No. 9, § 152, Acts of the Governor-General of India, 1872 (India)
 borrower, but their descendants were also accountable. The principle of 'damdupat' remains
in effect in Calcutta and Bombay, having been affirmed as a legitimate custom under the
savings clause, Section 1.6

Roman Era

Early Roman contract law evolved by acknowledging several types of actionable promises
instead than formulating universal standards for promise enforcement. The concept that a
promise alone might establish an enforceable obligation was a notable advancement of
Roman law. Various forms of contracts developed throughout this time.

Stipulation (stipulatio) was a primitive contract that required certain procedures. In this
system, a party might establish a binding commitment by a specified format of inquiry and
response. Although both parties were required to engage, only one side was obligated under
the agreement.

Real Contracts were appropriate for the executory exchange of promises, such as loans,
where the recipient's obligation to return the subject matter was enforceable. Consensual
contracts shown more flexibility, departing from rigid procedures and allowing the mere
consent to make promises enforceable. Nevertheless, they were confined to four categories:
sale, hiring, collaboration, and mandate.

Innominate Contracts pertain to agreements in which parties commit to provide or perform

actions in return for analogous commitments. These contracts were not confined to certain
transaction categories but required a type of performance (quid pro quo) for enforceability,
akin to contemporary consideration. Nevertheless, they became binding only once one side
fulfilled their obligations.

Numerous specialized contracts were in existence during this time. Dotis dictio regulated
dowry arrangements between the families of the bride and groom, while it lacked official
punitive measures for violations. Lex Mancipi resembled contemporary property transfer
agreements, but Fiducia functioned as a supplementary contract to Lex Mancipi.
Uadimonium mirrored contemporary guarantee contracts.

Islamic Era
6
Gainik Sanyal, A Brief History of the Law of Contracts in India, 4 INDIAN J.L. & LEGAL RSCH. (2023).
 Under Muslim governance in India, contractual issues were governed by Mohammedan Law
of Contract. The Arabic term for contract, Aqd, signifies conjunction and pertains to the
union of proposition (Ijab) and acceptance (Qabul). Contract creation requires two parties,
one proposing and the other accepting the proposition. Both parties' consent was required on
the same issue, and the contract's subject must yield a lawful outcome.

Islamic law delineates many categories of illicit conduct. Riba Al-Fadl refers to contracts that
yield illicit surplus in the exchange of equivalent values in simultaneous transactions. Riba
Al-Nasi'a refers to agreements that provide illicit profit without the fulfillment of reciprocal
exchanges. Riba Al-Jahilya, or pre-Islamic usury, occurred when lenders inquired whether
borrowers would repay or augment their debt. Gambling, contingent agreements, and
wagering contracts were all forbidden.

The establishment of an Islamic contract requires no formality beyond the explicit permission
of both parties, with the proposal and acceptance relating to the same subject in the same
context. Contracts were categorized based on certain characteristics, including the alienation
of property (with or without exchange) and the alienation of usufruct (both with and without
property exchange).

The statute delineated two methods for annulling contracts: unilateral rescission without legal
justification and termination owing to frustration. Contracts may be terminated by mutual
consent, cancellation due to death or destruction of the subject matter, unilateral termination,
or formal dissolution.

Islamic Law has always regarded weddings (Nikah) as contractual agreements, a tradition
that persists to this day. Marriage contracts necessitate a proposal and acceptance, with the
husband required to provide Mahr to the woman. Islamic law was the first to acknowledge
divorce, allowing parties to release themselves from marriage contractual responsibilities. 7

Hindu Era

The jurisprudential basis of Hindu law significantly varies from that of English law, since it
is based on many practices and the readings of the Vedas by Smritikaras. The Manusmriti
largely addressed contract law via competence criteria. It developed rules, subsequently
7
Ibid.
 included in the Indian Contract Act, concerning the invalidity of contracts formed by
juveniles, drunken adults, the old, or the crippled.

The Narada Smriti delineates infancy as the period from embryonic development to 8 years,
followed by boyhood from 8 to 16 years. The age of contractual ability was established at 16
years, two years prior to the standard set by the Indian Contract Act.

British Era

Prior to the Indian Contract Act, English Law regulated the Presidency Towns of Madras,
Bombay, and Calcutta according to King George's 1726 Charter granted to the East India
Company. The English legal system adopted two methodologies: one positing that promises
are typically enforceable with exceptions for unwanted commitments, and the other asserting
that promises are generally unenforceable with exceptions for good ones.

In instances involving parties of disparate faiths, the defendant's religious law was applicable
in presidential towns, whilst other cities adhered to principles of justice, fairness, and good
conscience. This persisted until the enactment of the Indian Contract Act. The formation of
High Courts in Bombay, Calcutta, and Madras in 1862 upheld the regulations concerning
religion personal laws in contractual matters.8

The Introduction of the Indian Contract Act

The Indian Contract Act was first formulated by the third Indian Law Commission in 1861 in
England. The Act sought to delineate legal provisions concerning Contracts, Sale of
moveable assets, Indemnity, Guarantee, Agency, Partnership, and Bailment. Although not
comprehensive, it was crafted to address the nation's requirements over a lengthy duration,
with judges augmenting it with principles of English law as needed.

The Act acknowledged the difficulty of enforcing consistent regulations across communities
adhering to various personal laws. Consequently, it permitted the continuation of certain
traditions regulating contractual relationships, provided they did not conflict with the new
regulations. Following its enactment in 1872, the Act had many changes. Sections 76-123

8
Srishti Choudharya, History of the Indian Contract Act, JUS CORPUS L.J. (2022), available at
https://www.juscorpus.com/wp-content/uploads/2023/01/117.-Srishti-Choudhary.pdf
 concerning the sale of goods were abrogated and substituted by the Sale of Goods Act 1930 9,
and sections 239-266 pertaining to partnership were replaced by the Indian Partnership Act
1932.10

4) Structure of Indian Contract act

The Indian Contract Act of 1872 is divided into two primary sections, which are as follows:
There are two types of contracts: general principles of contract law and special kinds of
contracts. The Act is broken up into parts that each address a different area of contractual
law, including the following:

 Generally accepted principles, sections 1–75

 There are guidelines for selling products, assets, and commodities that may be found
in sections 76–126.
 Special criteria for guarantees, indemnities, and bails are outlined in Sections 127-
238.
 The relationship between partners and the ideals that they need to adhere to is
discussed in Sections 239–266.
5) Case laws
A. Carlill v. Carbolic Smoke Ball Company (1893)11

This landmark case included the Carbolic Smoke Ball Company's advertisement
promising £100 to anybody who developed influenza after using their smoke ball as
instructed for two weeks. They placed £1000 in a bank to demonstrate their seriousness.
The pertinent rule in contract law stipulates that a valid contract requires an offer,
acceptance, consideration, and the purpose to establish legal relations. Upon applying
these criteria to the circumstances, the court determined that the advertisement
represented a legitimate offer to the whole globe rather than mere promotional rhetoric,
as shown by the company's deposit of £1000, which demonstrated its desire to be bound.
Mrs. Carlill accepted the offer by fulfilling the stipulated requirements (utilizing the ball
as instructed), and thoughtfulness was evident in her use of the product as described and
her change in posture based on the promise. The court determined that Mrs. Carlill was
9
Sale of Goods Act, 1930: Sale of Goods Act, No. 3, Acts of the Governor-General of India, 1930 (India)
10
Indian Partnership Act, 1932: Indian Partnership Act, No. 9, Acts of the Governor-General of India, 1932 (India).
11
Carlill v. Carbolic Smoke Ball Co., [1893] 1 Q.B. 256 (Eng.)
 entitled to the £100 payment, finding that unilateral contracts may be created by
performance without explicit acceptance notice.

B. Mohori Bibee v. Dharmodas Ghose (1903)12

This landmark case involved a child, Dharmodas Ghose, who mortgaged his land to a
moneylender, Brahmo Dutt, represented by his agent, Kedar Nath. Section 11 of the
Indian Contract Act stipulates that only those who have reached the age of majority and
possess sound mind are competent to enter into contracts; nonetheless, Brahmo Dutt
contended that the transaction should be validated since the minor had derived a benefit
from it. The Privy Council determined that Ghose was a minor at the time the mortgage
was executed, and the moneylender's representative was cognizant of this fact.
Notwithstanding the minor's receipt of funds under the mortgage, the Court determined
that a minor's contract is inherently defective from its beginning. This ruling set a crucial
precedent in Indian contract law, asserting that transactions involving minors are illegal
ab initio, and no estoppel may legitimize such agreements, regardless of any benefits
received by the child.

6) Conclusion

Analyzing the evolution of contracts over several historical epochs, including the Roman,
Muslim, and Hindu eras, as well as subsequent legal consequences, reveals that despite the
technicalities, the methods and means of punishment have evolved. The applicability of the
law may differ; however, the fundamental principle remains consistent: minors cannot enter
into contracts, mutual consent must be obtained from both parties in the same manner and
with the same understanding, and certain individuals, such as intoxicated persons and the
elderly, are disqualified from contracting.

It can be further concluded that the British endeavored to codify the law to achieve
uniformity while also attempting to integrate the personal laws of various religious groups,
provided they did not conflict with the primary legislation, as they recognized that the
fundamental principle governing personal law parallels that of contract law.

12
Mohori Bibee v. Dharmodas Ghose, (1903) 30 I.A. 114 (Privy Council)