This blog post is written by Ms. Ritu Sajnani & Ms. Sarah Rizvi.
Relevance of Common Law doctrines
Contracts are an indispensable part of trade and commerce. In India, the law governing contracts is formulated on the principles of English Common Law and the Indian Contract Act, enacted by the British in 1872. The Indian Contract Act, 1872 (the “Act”) embodies general rules and principles pertinent to all business agreements, transactions, or deals.
In simple words, a doctrine is a principle involved in the interpretation of the policy. There are certain doctrines under the Act which form pillars of the Contract Law in India and have been extensively followed in practice, some of which are elucidated below:
1. Doctrine of Consideration
The doctrine of consideration is the foremost principle codified under the Act. Section 2(d) of the Act states that, “When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”.
Thus, for consideration to be considered lawful, it must proceed at the desire of the promisor only. Furthermore, consideration doesn’t necessarily have to be adequate in nature, although it must be real in nature and not impossible or illusory or unlawful, in the past, present or future.
However, there may be certain circumstances in which it would not be appropriate to apply the principle of consideration to satisfy the basic motives of the law. Section 25 of the Act regulates such situations, and states that, “Agreement without consideration, void, unless it is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law”. Section 25 further details these circumstances to include an agreement made on account of natural love and affection or between near relatives, a binding promise to pay for a past voluntary service, or a time-barred debt, or an agreement for a completed gift.
2. Doctrine of Restitution
The word ‘restitution’ is derived from the Latin term ‘restituere’ which means ‘restore’ or ‘establish again’. It is imperative that when a contract is rendered void, neither party is obligated to execute it. However, the principle of restitution becomes applicable if following a valid contract, one party fails to perform his or her part of the contract or the contract becomes void due to an unanticipated event. Under such circumstances, the party which received a benefit from the other is required to return or restore or compensate the other party for the benefit received.
Section 65 of the Act recognizes the principle of Restitution and defines it as, “When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.”
Furthermore, the doctrine of restitution is not applicable in cases where there is no agreement or contract between the parties, if the agreements are void-ab-initio, or if are entered with persons incompetent to contract.
3. Doctrine of Frustration
Frustration of the contract occurs when the object of the contract is yet to be accomplished, and the contract’s fulfillment is rendered impossible due to external reasons beyond the parties’ control and contemplation. It covers both the impossibility to complete the contract and the impossibility to satisfy the object for which the contract was executed.
Section 56 of the Act embodies the Doctrine of Frustration and states as below:
- An agreement to do an act impossible in itself is void
- A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
The doctrine of frustration is based on the maxim ‘Lex non cogit ad Impossibilia’, which means that ‘Law does not compel the Impossible’. It suspends the rights and liabilities of the parties to the contract, unless one of the parties was aware of or after reasonable diligence, might have known about the impossible or the unlawful. In such instances, the promisor is required to make compensation to such promisee for any loss which such promisee sustains through the nonperformance of the promise.
4. Doctrine of Privity of Contract
In contracts, the terms such as restrictive covenant, non-compete, confidentiality and non-disclosure obligations are frequently used to impose obligations on the contracting parties’ affiliates, agents, relatives, etc.
The Doctrine of Privity is based on the common law principle that the rights and obligations of a contract can only be imposed on the parties to the contract and no third person would be entitled to or bound by the contract to which he is not an original party.
Thus, the three essentials of this Doctrine are:
- The third party cannot enforce the contract if he is not a party to that contract
- The third party cannot be held liable under a contract if he is not a party to that contract
- The third party cannot receive any benefit if he is not a party to that contract
5. Doctrine of Ratification
Ratification and its effect are explained under Section 196 of the Act as “Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effect will follow as if they had been performed by his authority.”
Section 196-200 of the Act establishes this Doctrine, and can be interpreted as the principle which deals with acts performed by an agent on behalf of an unauthorized principal. In short, an adherence occurs whenever an adhering Party expressly accepts liability for unauthorized transactions purportedly carried out on its behalf. There is no obligation not to communicate this intention to third parties or representatives. Explicit ratification is self-explanatory. However, implied approval occurs when either the principal’s actions or circumstances suggest that the principal approves of the agent’s actions.
6. Doctrine of Estoppel
Promissory estoppel is a doctrine in contract law that stops a person from going back on a promise even if a legal contract does not exist.
Fundamental components of promissory estoppel are as below:
- There must be an existence of a lawful relationship or a relationship anticipated to exist between the two parties.
- It must be clearly displayed that a reasonable promise was made between the two parties which ultimately led the aggrieved party to presume that some kind of action needs to be taken.
- Aggrieved party’s reliance on the promise made must be displayed clearly – on account of which, the aggrieved party took some action.
- Damage: The aggrieved party who relied upon the promise so made must suffer some damage or loss.
- It must be clearly demonstrated that it was unjust for the promisor to break the promise.
7. Doctrine of Unjust Enrichment
When a person has been unfairly benefitted at the expense of the other person, it is called ‘unjust enrichment’.
Essentials of this Doctrine:
- The defendant has been enriched by the unjust benefit
- This enrichment has taken place at the expense of the plaintiff
- The enrichment which has been acquired is unjust or unfair
Section 68 of the Act states the remedies to unjust enrichment. Typically, in the cases related to unjust enrichment, the court directs the unfairly benefitted person to give back all the benefits which he/she acquired unfairly or to give compensation. The defendant is obliged by natural justice and equity to pay back.
