India: Contracting Under Indian Or English Law: Part 1 – The Indian Legal Framework

Last Updated: 1 September 2008
Article by Jonathan Riley


This article is the first in a series of three articles looking at some of the key differences between contracts made under Indian law and those made under English law. The articles assume that the reader is familiar with the principles of English contract law, and so in explaining the differences the focus is on the position under Indian law.

This first article looks at the statutory framework in India to the extent that it is relevant to contracting; the second article highlights a number of key differences between specific contract provisions, and the final article considers some of the issues which arise in relation to technology contracts.

Indian Contract Act, 1872

The Indian law of contract is based on common law contract principles which have been codified in the Indian Contract Act (ICA).

The ICA has borrowed extensively from the provisions of codes governing the law of contracts in other countries, but is mainly based on English law and, indeed, if there are no relevant domestic cases, Indian courts have taken into consideration English common law in the absence of express provisions in this Act. That probably goes some way to explaining why Indian law and English law have remained similar in terms of contract law principles despite the fact that India has had this codified law for nearly 150 years whilst the UK has continued to rely more on its common law principles. However, it should be noted that when the ICA does deal with a specific matter then it is not permissible to draw on English principles of contract law, and you should certainly not fall into the trap of assuming that because a provision in the Act was originally derived from a familiar English law principle that it will now be applied in the same way under both laws.

The ICA functions at a relatively basic level and is not a complete contractual code: it also preserves the provisions of other statutes, regulations, trade customs etc. as long as they are not inconsistent with the provisions of the Act. The ICA lays down the general principles relating to the formation, performance and enforceability of contracts, and the rules relating to special types of contracts like indemnity and guarantee, bailment and pledge, and agency.

The Act is now less comprehensive than in its original form, because provisions relating to certain specific types of contract including partnership, carriage of goods, and sale of goods, have since been removed and covered in separate legislation.

Requirements of Form

The ICA itself does not stipulate any 'requirements of form', in other words procedural requirements for a contract to be valid and enforceable such as being in writing and signed by one or more parties, or executed in a particular manner. However, there are such requirements of form in some other Indian statutes. For example, the Indian Trusts Act requires the creation of a trust to be in writing, and there are similar requirements under intellectual property laws and the Transfer of Property Act.

There are also registration requirements. The relevant statute dealing with registration of documents in India is the Registration Act 1908, which provides that contracts relating to the transfer of property or the assignment of patents, for example, have to be registered.

Sale of Goods Act, 1930

The Sale of Goods Act 1930 (SGA) is complementary to the ICA. As you would expect, the provisions of the ICA, including the basic requirements for a contract (offer, acceptance, consideration, etc.) apply equally to a contract for the sale of goods.

The SGA imposes various duties, and grants certain rights, to both buyer and seller. For example, the seller must deliver the goods and the buyer must accept and pay for them in accordance with the terms of the sale contract. The Act requires that the goods transferred by the seller to the buyer must be ascertained and there should be an intention of the seller to pass such goods to the buyer. However, this is all basic level contract law which is not going to cause any surprises.

What happens if goods are agreed to be sold and the property in the goods passes to the buyer under the contract terms, but the buyer then does not pay for the goods in breach of contract?

  • If the seller is still in possession of the goods then the unpaid seller can exercise both a lien over the goods and the right to withhold delivery (section 46);

  • If the goods are in transit and the buyer is insolvent then the unpaid seller can exercise a right to stop the transit and recover the goods. Note that this right only arises if the buyer is insolvent; OR

  • If the buyer is already in possession of the goods then the unpaid seller's sole remedy is to sue for the price (section 55). The seller does not have a lien and cannot recover the goods from the buyer once both the property has been transferred and the goods have been delivered to the buyer.

Does Indian law recognise transactions carried out electronically?

The Information Technology Act 2000 (ITA) provides legal recognition for transactions carried out by electronic means. The ITA presumes that an electronic contract has been validly concluded by the parties concerned if it has been made with the digital signatures of the parties. The IT Act also provides for a system to authenticate digital signatures, and the licensed certifying authorities are authorised to issue digital signature certificates to applicants.

Electronic records are also admissible in evidence in courts in India if they meet certain conditions.

There was a worldwide spate of legislation between 1999 and 2001 to address issues such as the legal validity of electronic contracts, and the IT Act provides a good example of modern English and Indian legislation adopting a similar approach.

Consumer Protection Act 1986

This series of articles focuses on B2B rather than B2C contracts, but for completeness mention should be made of the Consumer Protection Act 1986 (CP Act). The CP Act aims to regulate the activities of a 'manufacturer' or 'service provider' to ensure that the consumer does not suffer from defective goods or deficient services. An entity which provides goods or services in India is required to avoid any trade practice that may be classified as 'unfair' or 'restrictive', as defined under the Act.

The CP Act also provides for the establishment of consumer councils and other authorities to settle consumer disputes which arise under the provisions of the Act.

Monopolies and Restrictive Trade Practices Act, 1969

The Competition Act 2002 is intended to repeal the Monopolies and Restrictive Trade Practices Act (MRTP Act), but the substantive provisions of the new Act are not yet in force (and indeed that Act was amended by the Competition Amendment Act in 2007) and so the MRTP Act remains the relevant law for what in the UK we would call anti-competitive practices.

The MRTP Act governs the activities and practices of all industrial undertakings which are engaged in the production, storage, supply or distribution of goods. However, industrial undertakings do not include government undertakings. The Act prohibits 'restrictive trade practices', 'unfair trade practices' and 'monopolistic trade practices', and is policed by the Monopolies and Restrictive Trade Practices Commission.

The new Competition Act, which will replace the MRTP Act, seeks to achieve the following objectives:

  • Promote and sustain competition in markets;

  • Protect the interest of consumers;

  • Ensure freedom of trade; and

  • Provide for the establishment of the Competition Commission of India.

So, in terms of the regulation of both anti-competitive practices and unfair trade practices the message at the moment is 'watch this space', but one may expect that the same issues that start the red lights flashing in the UK will also need to be considered in India.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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