"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Thursday, September 9, 2010

Guest Post: Default Rules in the Indian Contract Act

In one of our previous posts this month, we posed this "poser": What are the Default Rules in the Indian Contract Act, 1872 (at least in the provisions pertaining to contracts generally)? In this guest post, Ms. Lovely Dasgupta, Assistant Professor (Law) at the National University of Juridical Sciences (NUJS), Kolkata, explicates the methodology for identifying default rules in the relevant portion of the Indian Contract Act, 1872 that deals with the general principles of contract. She teaches Contracts I and II, (part from several other courses) at NUJS. 
 
In this post, Ms. Dasgupta gives us two simple guidelines on how to identify default rules. We thank her immensely for writing us this guest post. Here goes the post.

"Default rules, as the name suggests are those rules that lay down the basic guidelines as to the formation, performance and discharge of a contract. However these rules operate in the absence of any contract to the contrary. On the other hand mandatory rules are those which cannot be contracted around. In other words they can be said to be binding on the parties even before the parties decide to contract. One can also argue that the mandatory rule both limit and protect the ‘freedom to contract’ principle. It restricts the freedom to contract by imposing obligations, and it protects freedom to contract by protecting the bargaining powers of the parties to the contract.

Default rules therefore will have to be ancillary to the mandatory rules, as without complying with the latter it will not be possible to contract out of the former. Theoretically it is easier to detail out the nature of a default rule vis-à-vis a mandatory rule but practically it may be difficult to distinguish the default rules from the mandatory rules. One needs to therefore minutely navigate through the various sections of the Indian Contract Act 1872 (hereinafter called the Act) to identify the default rules. This write up will survey the sections of the Act dealing with the general principles of contract, and attempt to identify the default rules. In the process the attempt would be to identify the method by which one can term a rule as a default rule in the context of the Act.

The Act, from sections 1-75 lays down the general principles of contract viz. from formation, to performance to discharge, breach and damages. Of the seventy five sections, sections 1-36 deals with the formation of contract, sections 37-72 deals with performance, discharge and quasi contractual obligations, and sections 73-75 deals with breach and damages. If one looks into the sections pertaining to formation especially Section 10 of the Indian Contract Act, one finds that the same embodies the mandatory rules of contract formation. This means that any contract to be valid has to comply with this checklist. The other sections in this part, that precedes or follows section 10 are mere elaboration of the mandatory rules prescribed in section 10.

However when it comes to performance, then the rules appear to be flexible. Thus for example Section 40 of the Act makes it clear that the parties are free to decide as to who should perform the contract i.e. either the promisor or any third party can perform the contract. Similarly Sections 42, 43and 45 are clear examples of default rules which can be contracted around, as is evident from the language of these sections. On the other hand Section 53, 64 and Section 75 of the Act makes it clear that restitution does not prevent the claim of damages. In other words one cannot have a contract to the contrary wherein one claim is barred vis-à-vis the other. Similarly the sections 46-50 and section 55 are examples of default rules as they leave on the parties to decide the time of performance and the place of performance and the mode of performance.

Similarly the section 56 dealing with frustration/impossibility of performance is an example of default rule, as it merely states when the contract is said to be impossible to perform. This thereby gives ample leeway to the parties to draft the conditions that they regard as will render the contract as impossible to perform. One look at section 62 and section 63 makes it clear that the rules regarding novation, recission and alteration, as well as performance of the original promise are all at the discretion of the parties to the contract. However so far as the right of restitution under section 64 and 65 is concerned, the same cannot be contracted out, hence is a mandatory provision.

One need not say anything about the sections from 68-72, as they are quasi contractual obligations imposed by law and hence binding. One last example of mandatory rule is Section 74 of the Act, which restricts the right of the parties to impose penalty on the defaulting party. Thus the brief overview of the few provisions of the Act for identifying the default rule proceeded on two simple guidelines. (One) Is to read the bare language of the sections and ask the question: whether it is possible to have a contract without complying with this requirement? If the answer is no then the rule embodied in the section is a mandatory rule and not a default rule which can be contracted around. (Second) To think about the purpose of having the particular section and ask: what is the need to have this section? If the answer is that the rule embodied in the section is a guideline as to the possible manner in which the contract can be drafted/ formed, a guideline which if not adhered to will not affect the efficacy of the contract, then the rule is a default rule.

At the end the process of identifying the default rules in the Indian Contract Act is nothing but a process of reading and re-reading the bare act. As a student or a practitioner of law, one has to be thorough with the fundamentals to be able to identify the spirit of the sections that form the foundation of the Indian Contract Act i.e. the sections embodying the general principles of contract. I believe that most of the problem arises because of the lack of this clarity both amongst the student as well as the practitioners. Since identification of default rules successfully is also about one's conceptual clarity."

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