The Indian Contract Act, 1872

What it does

The Act answers two questions and leaves most of the rest alone. When is a promise enforceable, and what does the party who suffers a breach get.

On the first, it does not list the kinds of agreement a business signs. It sets the conditions each one has to satisfy: an offer and an acceptance, consideration, capacity, free consent, a lawful object, and terms certain enough to be given effect. An agreement missing one of those is not a weaker contract. Depending on which is missing it is void, voidable at the option of one party, or not a contract at all. Most commercial drafting is an attempt to put those conditions beyond argument before anyone needs to rely on them.

On the second, the measure is compensation for loss that the breach caused in the ordinary course, or loss the parties had in contemplation when they contracted. Remote and indirect loss is excluded by the same section. That is why what the parties wrote down about consequences, notice and known purpose matters so much later: it decides what was in contemplation.

Who it binds

Any person contracting in India, with no threshold of size or turnover. A company contracts under this Act and under the Companies Act, 2013 at the same time: the first says whether the bargain holds, the second says whether the people who made it had authority to and what they owed the company in making it.

What the Act leaves to other statutes

Chapters that were once in it have gone to their own Acts, and reading the 1872 text alone will mislead on all of these.

• Sale of goods, to the Sale of Goods Act, 1930.
• Partnership, to the Indian Partnership Act, 1932.
• The remedy of specific performance and injunctions, to the Specific Relief Act, 1963.
• Agreements to arbitrate, to the Arbitration and Conciliation Act, 1996, which governs the clause even where this Act governs the contract around it.

What has changed, and when

The operative text of 1872 has been stable. The movement has come from elsewhere, and two shifts matter in practice.

The Specific Relief (Amendment) Act, 2018 recast specific performance as a remedy a court grants as a general rule rather than one it may refuse at discretion. The practical effect is on how a party frames a claim: performance is no longer the harder of the two routes to ask for.

Section 73 has not changed, but the evidentiary bar for proving loss under it keeps moving in the judgments, and a liquidated damages clause is still read against section 74 rather than in place of it. A number in a contract is a ceiling to be justified, not a sum that follows automatically.

What turns on it in practice

The question a party actually faces is rarely whether a contract exists. It is which of its terms will be given effect, and on what evidence. A termination clause drafted as a right may operate as a penalty. A cap on liability may be read down against what the parties knew when they contracted. An agreement complete on its face may still be unenforceable for want of a lawful object.

Where performance rather than money is the point, the decision moves to the Specific Relief Act, 1963, and since 2018 it is a different decision than it was. Where the dispute will be arbitrated, the clause is construed under the Arbitration and Conciliation Act, 1996 although the contract around it is construed under this Act. Working out which of the three governs the step in front of you usually comes before anything else.