Business Standard

Does The Indian Contract Act need a re-look?

One of the oldest acts in Indian statute books, The Indian Contact Act, 1872, needs to recognise non-compete restrictions, bring more clarity in provisions for e-contracts, and regulate unfair terms of a contract, say legal experts

Sudipto Dey 

The Indian Contract Act, 1872, is a legislation governing the contractual relationship between two or more parties - individuals, companies, governments. It deals with all aspects of contracts, such as formation, performance, enforceability of contracts, indemnities and guarantees, bailment and pledge and agency, among others.

Although one of the oldest laws in India, legal experts note that The Indian Contract Act's relevance has grown manifold in the current business environment with significant increase in the number of contracts being entered into between various parties, and the resultant disputes. Over the last one year or so there has been an effort to step up corporate governance across boards through new company law provisions, and updating Securities and Exchange Board of India's (Sebi's) listing agreement for companies.

Many legal experts feel that the time has come to take a hard look at The Indian Contract Act to bring it in sync with the changing business environment.

"Good corporate governance demands well-defined and executed contracts, where the Indian Contract Act plays a crucial role," said Ramesh Vaidyanathan, managing partner, Advaya Legal.

Most legal experts say The Indian Contract Act is a relevant and comprehensive piece of legislation. The concepts under the contract law are based on the contract law of the United Kingdom. However, the Act contains certain provisions which are different.

Different strokes
Section 73 of The Indian Contract Act provides for compensation for loss or damage caused by breach of contract, naturally arising in the usual course of things from such breach. However, remote and indirect loss or damage sustained by reason of the breach is not provided under the contract law.

The Indian Contract Act provides for liquidated damages and other penalties to the party that suffers from breach of a contract. But contract laws of many countries restrict total compensation to the amount of liquidated damages.

Any contract that restrains one from exercising lawful profession, trade or business of any kind, is termed void as per Indian contract law. Also, it does not provide for apportionment of losses in contracts which are void. That is not the case in laws of many other countries.

Under The Indian Contract Act, a contract without consideration is void subject to certain exceptions provided in Section 25 of the Act. However, the English law recognises contracts without consideration in some cases.

The contract law in the United States, too, have evolved from the English common law. However, there is no federal contract law in the United States and each state has its own contract law. Continental Europe - Germany and France - follow a different system of law known as the civil law system, said Aakanksha Joshi, associate partner, Economic Laws Practice.

"Their contract law is highly detailed and exhaustive," she added.

Many legal experts feel that there are three primary areas where Indian contract laws need to get an update.

Recognise non-compete restrictions
According to Lalit Kumar, partner, J Sagar Associates, 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, Legal experts note that provisions like non-compete are ubiquitous in modern international contracts, especially if parties have similar bargaining powers. "Indian Contract Act should expressly permit such contracts," said Vaidyanathan. Further parties should be free 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, say many legal experts.

Provisions for digital contracts

Given the growing number of transactions undertaken online, Indian contract law needs to be tweaked for concepts relating to offer and acceptance in digital contracts. Legal experts, like Lalit Kumar of J Sagar Associates, point out that although are legal in terms of the Information Technology Act but there is some insecurity while dealing and executing online.

"There is a need for a specific chapter to govern all electronic contracts. Presently, the general principles of Contract Act is sought to be applied to electronic contracts," says Krishnayan Sen, Partner, VERUS Advocates.

While giving more clarity to rules regarding formation of e-contracts, the Act needs to provide for questions around jurisdiction in e-contracts, rights and liabilities of parties, and cases of unilateral mistakes by one party, he adds.

According to Joshi of Economic Laws Practice clarity is needed for acceptance of the terms and conditions of websites - whether logging on to a website automatically means that the user has accepted the terms and conditions and hence is bound by them.

Regulate unfair terms of a contract
Indian contract laws do not have a law regulating unfair terms of a contract, points out Sen of VERUS Advocates. "It is necessary to evolve general principles regulating unfairness in contracts. This will have wide ramifications in a range of contracts including lending agreements, builder-developer agreements, debt instruments, landlord-tenancy agreements, government contracts, arbitration agreements, among others," he says.

Legal experts say most developed jurisdictions have evolved ways to deal with unfairness in contracts, and recognise the possibility of 'procedural' and 'substantive' unfairness. "Courts should also be vested with the power to raise an issue of unfairness even if the parties have not raised such a plea," says Sen.

Many in legal fraternity point out that even the Law Commission has recommended that a separate legislation should be enacted to grant protection to parties from such unfair terms.

Most legal experts agree that The Indian Contract Act is well-drafted legislation, but certain amendments would help it to keep it up to date with latest global business practices. This can only give more confidence to foreign parties wishing to do business in India.

First Published: Sun, January 11 2015. 22:35 IST