019 - 1966 - Law of Contract PDF

LAW OF CONTRACT
Girish C. Patef
I. INTRODUCTION
Contract is indeed an 'accordian' word. Its shape will depend, at any
moment, upon the tune that society is playing. This means, to the practis-
ing lawyer or judge, that surrounding currents of thought may illumine the
daily problems of contract law. It also means, to those who wonder about
the paths of historic destiny, that what happens in law Courts and legislatures
with relation to contract may throw in bold relief the profiles of our society
and our generation. 2
T H E LAW OF CONTACT is the meeting point and common ground of

law, ethics, politics, philosophy and economics. Its development, there-
fore, provides a very exciting field of study of the interplay of the
socioeconomic forces on the one hand and ecenomic doctrine and
ethicopolitical ideologies on the other. T h e institution of contract is
the product of two factors, namely, moral and economic. As moral
ideas advance and economic forces change, the institution of contract is
bound to be influenced and modified by these changes, and the law
governing contracts must by necessity come forward to reflect these
changes or else its rigidity will create many areas of tension between
the legal framework and the socioeconomic reality, resulting either in
the rigid adherence to the legal formula to the utter disregard of the
ethical implications and the social contexts on the one hand or in the
courageous but awkward attempts on the part of the progressive
judges to be free from the verbal formula of the law so as to do
what social reality and justice demand on the other hand.
T h e classical law of ^contract was constructed on the foundation
of the two shibboleths of the freedom of contract and the sanctity of
contract, both of which were the products of the doctrine of laissez-
faire and the philosophy of natural law and natural rights during
the eighteenth and nineteenth centuries. But even at the time of
their heyday, the concept of freedom of contract suffered from many
weaknesses and that of sanctity of contract was subject to limitations.
With the passage of time with its attendent fundamental socioeconomic
changes and the rise of the new political and economic ideologies, these
fundamental assumptions of the classical law of contract began to b e
challenged from all sides. T h e doctrine of the freedom of will was
confronted with the social pressures and economic compulsions of all
sorts and the principle of the formal equality of the two contracting
*LL.M. (Guj.) LL.M. (Harvard), Principal, New Law College, Ahmedabad.

1. This survey proposes to survey and evaluate the development of the law of
contract during the year 1966. It is restricted only to the general principles of the law
of contract and excludes all types of specific contracts from its purview. The survey
does not claim to be exhaustive.
2. Cohen and Cohen, Readings in Jurisprudence and Legal Philosophy 101(1953).
www.ili.ac.in The Indian Law Institute

218 ANNUAL SURVEY OF INDIAN LAW 1966
parties became an instrument of oppression and injustice in the face of

economic inequality. As a result of the humanitarin philosophy,
the moral principle that one should abide by one's agreements and fulfil one's
promises "was being increasingly met" by another moral principle, namely,
that one should not take advantage of an unfair contract which one has per-
suaded another party to make under economic or social pressure.8
T h e philosophy of welfare state has converted the state into a giant
business and industrial corporation, and the almost universal faith in
economic planning has reduced, beyond recognition, the scope of the
freedom of contract. And lastly, the process of mass production and
distribution has given birth to the standard-form contracts "which have
so largely m a d e freedom of contract a fiction." 4 All these forces have
brought about the fundamental transformation in the nature and
functions of contract in the modern society. Everywhere the law of
contract faces the formidable challenges of new problems. How should
the society strike a just balance between the freedom of contract as a
useful principle of social order and the increasing scope of public
policy ? Should the state in market be treated like an individual? Is it
necessary to recognize the public contracts as a separate class? How can
we prevent the standard-form contracts from becoming the instrument
of oppression, exploitation and injustice? How far shall we be able to
maintain and protect the principle of the sanctity of the contract
against the onslaught of war, recurrent economic crises, and political
instability? T h e future of the law of contract depends upon its ability
to solve these problems successfully.
T h e Indian law of contract today has to face the challenges of
all these new burning problems of the rapid transformation of the
simple agricultural society into the modern, technological, industrial
and welfare nation. Moreover, the Constitution of India has arti-
culated in clear terms the fundamental values and ideals of the Indian
people which are destined to influence the development of our law in
all its branches. As against these, the most unfortunate fact is that
the Indian law of contract is embodied in the Indian Contract Act
which was enacted as far back as 1872 on the foundation of the then
existing English law which was in its early formative stage. AH these
factors, together with the unsatisfactory wording of our Contract Act
place a very heavy responsibility upon our jadiciary to build up the
modern, adequate and progressive law of contract upon the edifice of
the old Act and this calls for boldness and courage on the part of our
judges, functional approach as opposed to the mechanical one, keen
awareness of socioeconomic reality and their readiness to permeat our
entire law with the fundamental values embodied in our Constitution.
I n the following pages, an attempt is made to survey the develop-
ment of the law of contract during the year 1966 by selecting the
3. P. S. Atiya, An Introduction to the Law of Contcact, 10-11 (1961).
4. Op. cit. 232

LAW OF CONTRACT 219
significant cases decided by the Supreme Court and the High Courts
and to examine and analyze t h e m against the socioeconomic back-
ground and to evaluate the judicial performance in terms of its willing-
ness and liability to develop the Indian Contract law so as to meet the
new challenge successfully.
During the year 1966, eight cases were decided by the Supreme
Court and forty-eight cases decided by the High Courts have been
reported in the A . I . R . T h e statistical analysis of these cases 5 from the
point of view of their number and subject matter may help us to
understand the trends in the changes in the Indian social structures.
T h e very small number of contract cases together with the
number of cases in the other related private law areas, in comparison
with the disproportionately large number of public law cases goes long
way to confirm the world wide trends towards the slow and gradual
'eclipse' of the lawyer's law, and the fast developing scope of
the public law of modern welfare state. Moreover, in spite
of the fact that the Indian Contract Act is a very old law a
very few cases involving the principles of the contract law have
reached the highter courts and this phenomenon is very strange and
surprizing. O n e would be tempted to make many interesting conjectures
— or shall we say provisional hypothesis? Does this show t h a t the new
developments hardly touch or affect the basic principles of the law of
contract as embodied in the Indian Contract Act of 1872 or that there
is a very wide gap between the commercial law and commercial
practices and needs so that the law of contract remain in books only,
or that the businessmen prefer the extra-judicial methods to the
judicial ones for the settlement of the commercial disputes reflecting
adversely upon the efficiency and suitability of the judicial system?
All these vague possibilities emphasize the extreme importance of the
actual study of the commercial practices*
O u t of fifty-six cases, fifteen cases involve the problem of illega-
lity and public policy. These cases point out the increasing area of
tension in the contract law when the freedom of contract is increasingly
challenged by the expanding scope of public policy in India and
emphasize the importance of the role of judiciary as an institution
entrusted with the task of continuous social engineering. Moreover,
every case of intervention by the courts in the sphere of contracts
exposes the myth of the assumed dogma that social welfare is best
promoted by unrestricted freedom of contract. 6
5. In the Supreme Court, out of four hundred and thirty reported cases, only
eight cases dealt with the principles of contract law, while in the High Courts only
forty-eight out of the total number of 1334 reported cases.
6. Compare Williston, "Freedom of Contract" 6 Cornell L.Q. 365 at 374 (1921)
In recent years the tide has set strongly in the other direction. Observations
of results has proved that unlimited freedom of contract, like unlimited free-

In ten cases, the state or other public authorities were one of the
contracting parties. This is the best evidence of the increasing role
of the state in the economic sphere of the community. There public
law contracts raise very difficult questions involving the delicate
problems of reconciling the two roles of the state, namely, its position
as a sovereign and its role as a businessman demanding equal treatment
with the private traders.
Some eight cases involved one or the other kind of standard-
form contracts which have begun to throw a new challenge to the
judiciary.
II. ILLEGALITY AND PUBLIC POLICY
T h e ideal of the welfare state has necessarily led to the expansion

of the functions of the state, affecting each and every aspect of the
individual and social life, and has consequently converted the modern
legislature into a very busy house enacting a large number of laws at
an acceleratingly increasing rate every year. These laws affect the
freedom of contract at various points and in different degrees and
therefore give rise to a large number of cases where the agreement is
challenged on the ground of its inconsistency with any of these laws.
Moreover, the changing socioeconomic structure of our society, the
clear articulation of the fundamental values of liberty, equality and
socioeconomic justice in our Constitution and the pervading influence
of the philosophy of humanitarianism necessarily lead to the expanding
scope of public policy which will continue to impinge more and upon
freedom of contract. 7 So long as the society continues to recognize
the utility of the doctrine of the freedom of contract as an instrument
of social engineering, the courts will have to perform a very difficult
task of striking a just balance between public policy which supports
and seeks to maintain the contract as a useful principle of social order
and public policy which seeks to protect other social interests and values.
Section 23 of the Indian Contract Act 8 which defines unlawful
consideration and object of a n agreement provides a framework within
which our courts have to discharge this function of reconciling freedom
dom in other directions, does not necessarily lead to public or individual
welfare and that the only ultimate test of proper limitations is that provided
by experience.
7. The entire change has been beautifully discussed by Cesslar who writes,
in the evolution of the law of contracts, the basic assumption of the past that
contract deals with the individual relations of men with each other has
gradually given way to the realization that in large sectors of our social and
economic life contract is no longer an individual and private affair, but a
social institution affecting more than the interests of the two contracting
parties. An analysis, therefore, of present day contract exclusively in terms of
of violation and contract as a social institution. Social Control has become an
integral part of contract itself, and cannot be omitted from any analysis of the
modern law of contract.
Cesslar, Contract as a Order quoted from Cohen & Cohen, op. cit. supra note 2
at 146.

LAW OF CONTRACT 221
of contract with public policy. This section, therefore, is destined to

play the most vital role in the development of the law of contract.
However this section still provides a very difficult sphere of the
law of contract where the unsatisfactory wording of the section adds
much to the already existing doubts and uncertainties which continue
to plague this field of the law not only in this country but also in
England. Some of the difficult questions arising under this section are
( l ) how shall we distinguish between an illegal contract and merely a
void agreement? (2) how shall we determine that a particular contract
is prohibited by law? (3) what is the meaning of the words "if
permitted, would defeat the provisions of any l a w ? " (4) what is the
scope of personal law under section 23? (5) how far should public policy
include the concept of fairness and justice between the parties? (6)
what are the consequences of an illegal contract, especially with respect
to collateral transactions, and recovery of money or property given
under it? T h e various cases of the year falling under section 23 can
be discussed under the following headings :
A. Contracts Prohibited by Law, or Defeating the Provisions of Law
In Neminath Appayya v. Jamboorao,9 the plaintiff filed a suit for
specific performance of an agreement of sale executed by the defendant
in favour of the former, under which the defendant agreed to convey
to the plaintiff two lands, and the question arose as to whether the
agreement was void under section 23 of the Contract Act inasmuch as
its specific parformance would result in the acquisition by the plaintiff
of the area of lands in excess of the ceiling fixed by the Bombay
Tenancy and Agricultural Lands Act and would thus defeat its
provisions.
T h e first question which the Court considered was whether the
agreement was expressly or impliedly prohibited by the Bombay Act.
In answering the question, the Court construed sections 34 and 35 of
the Act 10 and came to the conclusion that the object of section 35 was
very limited, namely, the nullification of only an excess acquisition of
land by purchase, gift, inheritance, bequest etc. and therefore the
agreement was not expressly or impliedly forbidden by the Act.
8. The Indian Contract Act, 1872 § 23 :
The consideration or object of an agreement is lawful, unless—
it is forbidden by law ;
is of such a nature that, if permitted, it would defeat the provisions of any
l a w ; or
is fraudulent: or
involves or implies injury to the person or property of another ; or
The Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be
unlawful. Every agreement of which the object or consideration is unlawful is
void.
9. A.I.R. 1966 Mys. 154.
10. The Bombay Tenancy and Agricultural Lands Act, 1948 § 34 :
Minimum land that can be be held by a person :—
(1) Subject to the provisions of Section 35, it shall not be lawful with effect
from the appointed day, for any person to hold, whether as owner or tenant
or partly as owner and partly as tenant, land in excess of the ceiling area.
However, the second question before the Court was more

important. Was the agreement of such a nature that if permitted,
would defeat the provisions of the Act? In this connection, the Court
observed that two principles — that an agreement whose purpose is to
commit an illegal act is void and that an agreement which is expressly
or impliedly prohibited by law is void, are well established principles
of law, and that a third principle could be deduced from these two
principles, namely, that an agreement or contract whose performance
is not possible without disobedience to law is void. It is this third
principle, the Court said, which is incorporated in the third paragraph
of section 23 of the Contract Act.11 The Court then construed the
third paragraph of the section viz., "if permitted, would defeat the
provisions of any law" as referring to the case where the performance
of an agreement would necessarily involve the transgression of law, to
be distinguished from the case where such transgression would be only
a bare possibility. Relying upon the well-know principle that legality
of contract is always presumed, the Court held that it was only the
first case which would be hit by section 23. The Court applied this
test12 to the facts of the case and decided that the specific performance
of the agreement would not necessarily result in the transgression of
the Act, as there were many other possibilities, such as asking for the
possession of the lesser area at the time of execution or alienation of
the excess area or the genuine assignment of the decree itself, and
hence the agreement of sale was not invalid and was capable of specific
performance.
The case points out the difficulty of interpretation of the third
paragraph of section 23, and of drawing a distinction between it and
the second paragraph of section 23. While the second paragraph
speaks of 'forbidden by law,' the third paragraph speaks of 'defeat the
provisions of any law,' When the statute expressly prohibits an
agreement, no difficulty arises. But how shall we distinguish between
the case of implied prohibition and the case falling under the third
paragraph of section 23? The Court tried to distinguish the two by
saying that in the former cases the agreement was prohibited at its
inception and the implied prohibition should be collected from the
language of the Act, while in the latter case, the agreement, though
§35:
Provision of Section 34 to apply to land, coming into possession of person on gift,
etc.:—
Where on account of gift, purchase assignment, lease, surrender or
any other kind of transfer inter vivos or by bequest except in favour of
recognised heirs, any land comes into the possession of any person and in
consequence thereof, the total land held by such person exceeds the area,
which he is authorised to hold under Section 34, the acquisition of such
excess land shall be invalid.
11. Supra note 9 at 160.
12. Id. at 162.

LAW OF CONTRACT 223
not prohibited at its inception, was such that its performance would
necessarily involve the transgression of the law. 1 3 Strictly speaking,
there is no distinction between the two. Section 23 does not refer to
any distinction between the making of a contract and its performance.
I n both the cases, the particular law would be violated a n d therefore
both must be considered as being forbidden by law and would fall
under the second paragraph of section 2 3 . It is very natural to believe
that the law prohibits its own violation, involved either in the making of
a contract or in its performance.
It is respectfully submitted that the third p a r a g r a p h of section 23
seems to cover a wider field then either the second p a r a g r a p h or that
suggested by the Court. It would — and should — cover all cases
where the agreement, though not expressly or implidly forbidden by
law, would tend to frustrate or nullify the clear policy of the legislation
in so far as it is expressed in its provisions. T h e agreement in question
may not directly or indirectly involve the transgression of the law.
Consider, for example, the case where the agreement extends the time
of limitation. I t would b e difficult to argue that such an agreement is
either expressly or impliedly prohibited by the Limitation Act. As
opposed to an agreement curtailing the period of limitation which is
expressly declared to be void, not by the Limitation Act, but by
section 27 of the Contract Act, 1 4 such an agreement would be void,
because to allow an agreement extending the period of limitation would
tend to defeat the policy of the Limitation Act based upon the various
considerations, such as the difficulty of proof, the need for vigilance on
the part of the claimant, the necessity for putting a n end to the
possibility of litigation etc. In the present case, there was no question
of defeating the provisions of the Act, because the Act itself m a d e this
provision against any attempt to defeat its policy by declaring an
excess acquisition of land as invalid, but without striking at the root of
any transaction by which such land h a d been acquired.
Let us carry the analysis still further. T h e provisions of law are
of two classes, namely, prohibitory or imperative provisions which
prohibit or command the doing of a particular act and the permissive
or enabling provisions which confer various kinds of rights, liberties,
privileges, powers and immunities. If the agreement is opposed to the
provisions of the first class, it would be void under the second p a r a g r a p h
of section 2 3 , if the result of the agreement would necessarily involve
13. Id. at 165-66
Every agreement, by which anyone is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.
One who sells the goodwill of a business may agree with the buyer to
refrain from carrying on a similar business, within specified local limits, so
long as the buyer, or any person deriving title to the goodwill from him,
carries on a like business therein : Provided that such limits appear to the
Court reasonable, regard being had to the nature of the business.

their violation. If the agreement affects the second class of provisions

either by contracting or enlarging the scope of rights, liberties etc., its
validity should be determined under the third p a r a g r a p h of section 2 3 .
If the agreement in question narrows down the scope of liberties or
powers, or surrenders the rights given by the law, its validity would
depend upon the policy considerations which have led the legislature in
conferring these rights, liberties etc. and upon the judgment of the
legislature whether such policy considerations should be protected by
restricting freedom of contract or should be allowed to be overridden
by the exercise of the freedom of contract. If, on the other hand,
the agreement expands the scope of liberties, rights, powers etc., its
validity would depend upon the question whether the Act is exhaustive
on this matter allowing no scope for any contract outside its provisions.
T h e question, again, whether the Act is exhaustive should depend upon
the language used by the legislature and the policy questions involved
in the Act. If the language is clear and unequivocal, no scope is left
for any contract outside its provisions. Otherwise, the policy questions
should determine the answer. It m a y be that the legislature may be
willing to permit the exercise of rights or liberties only upto the
maximum limit, considering the adverse effect upon the other interests
or social interests. In such a case, no agreement should be allowed to
expand the scope of rights or liberties or powers, even with the consent
of the other party.
This very problem came up for decision before the High Court of
J a m m u and Kashmir in Iskwari Singh v. Sumitra Devi.15 T h e case
involved a n agreement giving to either party the right of prior
purchase of the property of the other at a price twenty-five per cent
less than the market value. W h e n the property was sold by one party
to a stranger, the plaintiff filed a suit for possession of the property on
the ground of contiguity under the Right of Prior Purchase Act of 1936
or on the basis of the agreement.
T h e Court rejected the claim on the first ground as it held that it
was an unreasonable restriction on the fundamental right given by the
Constitution, as was decided by the Supreme Court in 1962. 1 6
It was, however, not necessary for the Court to decide the
question whether a right of prior purchase (the right of preemption)
could be created by way of contract, because the Court held that there
was no contract for the enforcement of the right contained in the
agreement, that the purchaser of the property was for consideration
and without notice and that the plaintiffs were simply instruments for
procuring the property for others. And yet, the Court proceeded to
answer the question which was, in its opinion, more or less academic. 1 7
15. A.I.R. 1966 J. &K. 89.

16- Bhan Nath v. Baij Nath, A.I.R. 1962 S.G. 1476.

LAW OF CONTRACT 225
The Court, first of all, referred to the difference of opinion

among the various High Court in India as to the validity of an
agreement creating a right of preemption, 18 but decided to dispose
of the question on the narrow ground of the Right of Prior Purchase
Act, 1936, of the state. The Court argued that the preemption could
not be exercised in the state on the ground of usage and that the only
law which permitted prior purchase was the Act in question, and
asked the question : Is the Act exhaustive ? The Court, relying upon
the preamble 19 to the Act and section l l 2 0 concluded that the right of
prior purchase could be exercised only within the four corners of the
Act and that there was no scope for any contract which would be
outside or contrary to the provisions of the Act. If such agreements
were encouraged or enforced, the Court argued, they would obviously
defeat the provisions of the Act and, therefore, such agreements must
be held to be void under section 23 of the Contract Act. 21
Here was, therefore, a clear case where the legislative enactment
created for the first time in the state six classes of preemptors and did
not expressly or impliedly prohibit agreements creating such right and
where the question arose as to whether an agreement creating a new
class of preemptors would defeat the provisions of the Act. The Court
correctly held that the answer would depend upon the question whether
the Act was exhaustive or had completely occupied the field, leaving
no scope for any ontside contract. The real difficulty begins at this
moment. How can one decide that the particular Act is exhaustive ?
The Court simply looked to the language of the Act to answer this
question. No doubt legislative language is certainly very important,
but is not always conclusive. In this very case, the language of the
preamble is not particularly helpful, while the language of section 11
might be interpreted otherwise, as seeking to cover all cases of sales or
foreclosures, without any exception, not as expressing the inflexible
rule excluding all possibility for the creation of the right of preemption
by the private act of the parties. It would have been far better if
18. There are three views: (1) Some Gourts have held that the right of prior
purchase cannot be created by means of a contract as it offends the rule of perpetuity.
A.I.R. 1947 Bom. 191, A.I.R. 1935 All. 493. (2) Some Courts have held that such a
contract is enforceable during the life time of the actual parties to the contract only.
A.I.R. 1928 Pat. 637, A.I.R. 1939 Cal. 421, A.I.R. 1923 All. 511. (3) Some Courts
have held that such a contract is enforceable at law: A.I.R. 1927 All. 170 (FB), A.I.R.
1914 P.C. 11, A.I.R. 1944 Nag. 187, A.I.R. 1929 All. 667, A.I.R. 1949 Mad. 265. See
Audh Behari v. Gajadhar, A.I.R. 1954 S.G. 417.
19. The Right of Prior Purchase Act, 1936, preamble :
Whereas it is expedient to grant the right of prior purchase under circumstan-
ces in certain immovable property, it is hereby enacted as follows.
20. The Right of Prior Purchase Act, 1936 § 11 :
In respect of all sales and foreclosures, not completed before the commence-
ment of this Act, the right of prior purchase shall be determined by the pro-
visions of this Act.

the Court had approached the problem from the point of view of the
various interests and policies involved in it and then considered
whether the judgment of the legislature to create certain classes of
preemptions after evaluating these interests would have been conistent
with the creation of the new class by way of agreement. T h e question
involves three basic interests: firstly the interest of a person in selecting
his neighbours and preventing the entry of strangers in the neigh-
bourhood; secondly, restriction upon the property of another which the
right of preemption imposes; thirdly, the interest of the society in
securing national and social integration which would be obstructed by
such agreements. T h e Court might have argued that considering these
important interests involved, the legislature had thought it fit to
regulate the right of preemption exclusively and had not considered it
conducive to the broad social interests to allow the creation of the
preemptive right by the juristic act of the parties.
T h e court m a d e one observation which is dangerous in its impli-
cations. T h e Court observed that a right which was not recognized in
law could not be created by a contract. 2 1 W h a t does the Court mean
by 'a right not recognised in law?' Does this statement express the
correct scope of the operation of contract in our legal system? Section 23
of the Contract Act does not determine the positive content of a
contract, it only determines what cannot be permitted to be done by
contract. T h e principle is that any type of contractual relation can be
created by a contract unless it is hit by section 23 of the Contract Act,
other sections of Contract Act or other laws. Underlying this question
is the more basic question, namely, what is the basic rule of our legal
svstem ? Is it that everything is prohibited unless it is specifically
permitted or that everything is permitted what is not expressly prohi-
bited ? If the statement of the Court refers to the first principle, it is
very dangerous from the point of view of h u m a n liberty.
T h e third p a r a g r a p h of section 23 of the Contract Act, therefore,
very important and its correct interpretation and appreciation is
absolutely essential, because that would determine the final scope to be
allowed to freedom of contract in the face of the increasing number of
laws where policy is likely to be affected by the contracts entered into
by parties. Any wrong approach would either result in the invalidity
of a very large number of contracts or in the frustration of the
legislative policy.
T h e decision of the M a d h y a Pradesh High Court in Dahyabhai &
Co. v. 1. T. Commissioner22 is a very good illustration of the conceptual
approach of the Court to the problems of illegality. T h e facts of the
case were t h a t one D a h y a b h a i who was carrying on the business
of plying buses and trucks under a permit granted in his own name
22. A.I.R. 1966 M.P. 13.

LAW OF CONTRACT 227
admitted one partner in his business. U n d e r the agreement, the profits

and losses were to be shared equally and the purpose of the agreement
mentioned therein was to improve efficiency in management. The
income tax officer and the tribunal held that the partnership violated
sections 31 and 59(2) of the Motor vehicles Act, 1939 and, therefore,
was illegal under section 23 of the Contract Act and was not entitled
to registration under section 26A of the Income T a x Act, 1939. The
case came before the High Court by way of reference.
T h e Court referred to the well-known principles of the partnership
law that partnership business can be carried on with the property
belonging to one partner and that the constitution of the partnership
firm does not necessarily involve the transfer of the property of one
partner to the firm, and held, on the facts of the case, that the
partnership in question did not involve the tranfer of vehicles belonging
to Dahyabhai or his permit to the firm.23 As the Motor Vehicles Act,
1939, did not expressly prohibit partnership for carrying on the
business of tunning stage carriages and trucks, the Court, relying upon
a number of cases including the Supreme Court's decision in
Umachanran case, 24 which have taken the view that where the relevant
statute did not prohibit a licensee or a permit holder from taking a
partner but simply prohibited a transfer or a sub-lease of the licence or
the permit, the licensee or the permit holder by merely admitting the
partner or partners in the business which the licence or the permit
related did not transgress the prohibition against the transfer or
sub-lease, concluded that the patnership in question was legal and was
entitled to registration. 3 5
T h e approach of the courts discernible from all these cases seems
to be unduly suffering from the vice of conceptualism. Their argu-
ments run as follows : T h e Act does not prohibit partnership but only
the transfer of permit. T h e partnership agreement does not necessarily
involve the transfer of a permit. Therefore, the partnership is legal.
T h e entire approach is logically unassailable but rests upon an untrue
assumption that all licensing statutes are of the same type, and this
assumption is the result of the complete neglect of the policy or
objectives which the legislature seeks to achieve through the various
licensing statutes. T h e correct approach must be based upon the
answer to the questions such as : ( l ) W h a t is the object of the licensing
statute ? Does it simply aim at the collection of revenue or the
collection of information carrying on certain activities or the securing of
a certain standards in any particular business or profession ? (2) W h a t
are the factors which are required to be taken into consideration before
the licence or the permit is granted to any applicant under the statute ?
23. Id. at 17. '
24. Umacharan Shaw and Bros. v. Commr. of Income-Tax, West Bengal, (1959) 37
I.T.R. 271 (S.C).

Does it especially insist upon certain personal qualifications, such as

character, integrity, skill, educational qualifications etc.? (3) Why does
it prohibit the transfer or the sub-lease of the licence or the permit ?
(4) What are the facts of the case ? Would a new partner be only a
sleeping partner or be entitled to participate in the partnership business.
In this connection it is to remember another well known principle of
partnership law that every partner is an agent of the firm and is
entitled to participate in the business unless expressly excluded by the
agreement, and, therefore, the distinction drawn by the Madras High
Court in Telu Pada Tachi v. Siva Sooriami2Q is very significant; viz*, the
distinction between a case in which the partner merely shares in the
profits and takes no active part in the sale of liquor and a case where
the partnership deed entitles the other partners to take part in
business.
The Supreme Court decision in Umacharan case, above referred to,
can be distinguished on the ground that in that case, all the persons who
subsequently formed the partnership were themselves holding permits
to sell liquor in their own names. It is different from a case where
one person holds a permit and then admits another partner who
himself holds no permit.
When a permit or licence is granted to an individual on the basis
of his personal qualifications, can it not be argued that the policy of
the Act would be defeated if an active partner was admitted to the
business? The case would be different when the firm itself applies for
a licence or a permit, because in that case, the qualifications or
eligibility of all the partners can be considered by the licensing
authority.
B. Personal Law
It is accepted that the word 'law' in the third paragraph of
section 23 includes the personal law also. So if any agreement tends
to defeat the provisions of personal law, it would be void. As the
scope of personal laws in India is, today, restricted mainly to domestic
relations, the agreements affecting personal statutes would generally
come up for decision under this clause. However, as the personal
laws like the Hindu law (before its codification) or the Muslim law
are more or less out of tune with the present social structure and as the
Western notions about family, marriages and equality of the two sexes
more and more influence the Indians, this third clause of section 23,
in its application to the personal laws, creates a very difficult problem
of reconciling or compromising the traditional institutions and principles
and the modern Westernized notions. In this sphere there are two
very significant decisions, involving the problem of Muslim law.
26. A.I.R. 1950 Mad. 444 (F.B.).

LAW OF CONTRACT 229
In Nizamul Hague v. Begam Noorjehan21 the question arose as to

whether the agreement under which the husband agreed to live with
her wife at her house was opposed to Muslim law? The agreement was
made in the circumstances that the wife who was originally a Hindu
feared that it might not be convenient to her to live with her husband's
people and that she might be asked by them to observe strict forms
of religious observance. When the husband left the residence of the
wife to live with his people, the wife claimed separate maintenance
under section 488 of the Code of Criminal Procedure.
The Court observed that, on the one hand, agreements compelling
the husband to live with his* wife separately from his people would be
void under the Muslim law, while on the other hand, agreements
providing for separate maintenance under certain circumstances are
accepted as valid, and decided that the agreement in the suit was
neither opposed to Muslim law nor opposed to public policy.28
Thus the case involved an open clash between the principle of
the sanctity of the traditional institutions of marriage and family with
all their necessary incidents and the modern doctrine which rejects the
subordinate position of the wife and respects the independent
personality of a woman. The novelty of the decision is the provision
for separate residence for a reason, namely, that she, being originally
a Hindu, would find it difficult to live with the husband's family. To
allow a wife to extract such an agreement from her husband compelling
him to live with her because of the difficulty of observing strict forms
would seem to be possible only in the modern conditions.
Sukha v. Mnni,29 though a very short decision, is very interesting
and illuminating. The short question with arose in this case was
whether the agreement for the maintenance of an illegitimate child
was illegal as being opposed to Muslim law and as defeating its
provisions. It is a well recognized principle of Muslim law that it is
no duty of a man who has begotten an illegitimate child to maintain
it. The Court, however, decided to uphold the validity of the
agreement on two grounds : First, there is a high authority to the
proposition that the terms of the agreement for maintenance are to be
enforced regardless of the provisions of personal law. 30 However, if
section 23 of the Contract Act includes the personal law and if the
agreement of maintenance is opposed to it, it is very difficult to
understand how it can be enforced regardless of the provisions of
personal law. The second ground is more important. Let the Court
itself speak:
An agreement to maintain an illegitimate child, for which the Mohammedan
Law as such makes no provisions, will in my opinion not have the effect of
27. A.I.R. 1966 Cal. 465.

28. Id. at 467.
29. A.I.R. 1966 Raj. 163.
30. Id. at 164. See also Khwaja Muhmmad Khan v. Husaini Begum, (1910) IX.R.
32 All. 410.
defeating the provisions of any law. As a matter of fact, maintenance of

illegitimate children has been statutorily recognised under S. 488 of the Code
of Criminal Procedure in our country and it is in consonance with this whole-
some public policy that the offsprings born under such circumstances are to
be provided for and should not be left to be the misfortunes of vagrancy and
its attendant social consequences. 31
T h e decision is very significant for its enlightened approach in

two respects : First, it reprements a clear attempt to narrow down the
scope and operation of personal law as a ground of invalidating
agreements under section 2 3 . T h e provision of the Muslim law that
there is no legal duty to maintain an illegitimate child was not inter-
preted as imperative or exhaustive on the point prohibiting or leaving
no scope for any agreement to maintain such a child, which interpre-
tation would not be impossible if the comingling of law> religion and
morality in ancient times is borne in mind. Second, the Court has
tried to use a legislative enactment as an index of the public policy of
the community. This decision, therefore, points out usefulness of
legislation as a very important objective criterion of public policy.
C. Public Policy
Public policy is the most important ground of invalidity of any
agreement under section 23 of the Contract Act. T h e concept
expresses the fundamental values and principles of the society. Sec-
tion 23 leaves the question of determining the scope of public policy
to the courts. T h e fact that the courts, if not checked, would bring
in their own value-choices or their individual preferences in the
concept of public policy h a d led to the petrification of the grounds of
public policy. Every now and then the courts are reminded that the
categories of public policy are closed and no new ground of public
policy can be created by them. This has unduly and' harmfully
inhibited the creative activity of the courts in moulding and developing
the law of contract so as to adopt it to the changing needs and circum-
stances. W h a t is necessary to emphasize here is that the concept of
public policy is not a legal precept but a legal standard. It has built-
in flexibility and adaptability. Its distinction from a rigid rule or
precept must be maintained. T h e safeguard against the importing of
personal likes and dislikes of the judges into decisions and against their
arbitrariness should consist in the development of the objective criteria
or sources of the principles of public policy as far as possible. The
courts must constantly be reminded that the concept of public policy
incorporates, not their own preferences but the value-judgments of the
community.
During the year 1966, there were two very significant cases
involving the question of public policy in its application to somewhat
unexplored areas.
31 Supra note 29 at 164.

LAW OF CONTRACT 231
In Gulabchand v. Kudilalm the appeal arose out of a suit instituted

by Gulabchand against the heirs and legal representatives of
Govindram for specific performance of an agreement whereby
Govindram agreed to sell to the appellant his share in a firm the
business of which was to act as managing agents of the textile mills.
As serious disputes arose among two groups of partners, one group
headed by Govindram, the board of directors of the mills appointed a
committee to inquire into certain allegations against Govindram and
others. Pending the disputes, Govindram in the meanwhile m a d e an
offer to Gulabchand who was one of the three members of the
committee appointed by the mills, to make him a partner in the
managing agency business, which offer was accepted by the latter and
the contract was concluded. As Govindram and after his death his
heirs and legal representatives refused to carry out the agreement,
Gulabchand filed the suit for specific performance of the agreement.
O n e of the many questions which were raised before the courts was
whether the offer was m a d e by way of a bribe and whether the agree-
ment was void as opposed to public policy. T h e lower courts held
that the offer was in fact m a d e by way of bribe and, therefore, the
agreement was void under section 23 of the Contract Act.
In an appeal before it, the Supreme Court accepted the finding
of the lower courts as to bribe, discussed at length the question of the
burden of proof in civil cases involving charges of a criminal or fraudu-
lent character and summarily disposed of the question of the validity
of the agreement by saying that it was not necessary to decide the
point whether such agreement was opposed to morality, as the agree-
ment, in its opinion, was clearly covered otherwise by section 2 3 . 3 3
It is unfortunate t h a t the Supreme Court did not seize this
opportunity for clearing certain very basic issues raised and discussed
by the M a d h y a Pradesh High Court, whose judgment certainly deserves
full discussion. 34 T w o main questions arise for consideration, namely,
( l ) what is the ground of public policy involved in this case? (2) W h a t
is the public interest which is sought to be protected by public policy?
T h e High Court held that the agreement was void, because its
object was unlawful in that it involved in its fulfilment a tendency to
create a conflict between the plaintiffs' duty as a member of the inquiry
committee and his personal interest. 3 5 According to the Court, agree-
ments tending to create interest against duty fall under a recognized
category of public policy, and the Court referred to a number of
of decisions to this effect. 36 However, the question is not so simple as
32. A.I.R. 1966 S.C. 1734.
33. Id. at 1738.
34. Gulabchand v. KudilaU A.I R. 1959 M.P. 151.
35. Id. at 166.
36. Ibid.

it appears to be. A number of querries crops up in our minds. What

type of interest is here referred to? Is this duty only legal or can it be
moral also? To what types of legal duty does this principle apply—
only public duties or duties of fiduciary character also or to all kinds
of legal duties?37 These questions are not merely academic, because as
the social relations became more and more complex and the interests
and duties of men multiply, these questions are bound to crop up
again and again.
The High Court observed that for declaring said contract void, it
would be sufficient to show that the personal interest created by the
contract had a tendency to prevent the plaintiff from discharging his
duties faithfully and honestly, that the plaintiff might not have been
actually influenced by personal considerations while reporting on the
allegations against the defendant, that when there was room for the
operation of any personal interest, the tendency referred to could not
be said to be absent. 38
The Court referred to one very significant problem, namely, the
question whether the doctrine of public policy could be applied to
harmful tendencies, as opposed to harmful acts, but said that the
question should not depend upon section 23 of the Contract Act.39 The
distinction is certainly a very crucial one. In the case of harmful acts,
the actual effects or consequences of the act must be considered and it
is only when the harm to the public is substantially incontestable that
the agreement should be struck off. On the other hand, in the case of
harmful tendencies, what is important is not the actual results of effect
but likelihood or the probability of such results or effect. This case
would entail a wider scope of public policy.40 The important question
in this connection would be : What decree of strength of such tendency
or of likelihood or possibility of harmful consequences should be required
in order to invalidate any agreement? Of course, the question cannot
be answered precisely, and does not expect such an answer. What is
important to bear in mind is that extremely loose or strict approach
would either destory freedom of contract or public interests and
therefore, this calls for a very careful consideration on the part of the
judiciary. It once again emphasizes the judicial function of social
engineering.
37. See in this connection Neville v. Dominion of Canada News Co. Ltd., [1915] 3
K.B. 556 where the promise given by the owners of a business journal not to publish
any common on the affairs of a company was held to be invalid partly because it was
in restraint of trade and partly on an entirely novel principle ; namely, that the contract
would tend to create a conflict between interest and duty (in this case, the duty which
the news paper owe to the readers.)
39. Id. at 167.
40. In this connection see the discussion in Salmond on Jurisprudence (Editor:
Fitzerald) 355-57 (12th ed. 1966).

LAW OF CONTRACT 233
In this case, the High Court decided that the interests of a very
large number of shareholders of the public limited company were
involved and therefore the agreement would be opposed to public
policy. T h e Court then considered the question of the meaning of
public interest. T h e Court said,
[I]t is not essential to prove the element of injury with reference to the general
public. The issue is always raised with reference to the interests of a section
of the community and it is sufficient to show that the interests of the com-
munity are the interests of the public. 41
But how can we determine that the interests of the community are
those of the public? T h e Court evolved the criteria.
[IJf a section of community is composed of individuals, not numerically
negligible, and the members of the community are distinguishable from other
members of the general public by some characteristics, what are not personal
or individual, than the section of the community would be public and its
interest would be public interest...The question whether a section of the com-
munity is or is not public and whether its interests and public interests thus
depend on the attributes by which the section of the community is deter-
mined... 42
However, the criterion seemingly simple, is vague depending
upon the meaning of 'community', 'public', 'not numerically negligible',
'characteristics which are not personal or individual'. In fact the
inquiry appears to be misdirected. It is based upon the untrue belief
that it is possible to find out some objective criteria for distinguishing
between the interests of a group of private individuals which are not
public interests and the interests of a group which are public. Instead
of trying an impossible task of distinguishing the individual and group
interests and public interests, the Court ought to have considered the
various interests involved without bothering to name them. The
concept of public policy calls for the proper evaluation and adjustment
of the conflict of interests of the individual and social groups. I n this
very case, the main interests were : the public interests in the freedom
and sanctity of contract; the interests of the shareholders, the need for
honesty, faithfulness and integrity in the discharge of one's duties, the
social interests in the proper functioning of its business houses. In
fact all are social interests. T h e real problem is : H o w to evaluate
and adjust them? At the end, the Court itself tried to look at the
problem correctly. After considering the-social interest in the integrity
of the institution of justice, the Court argued : why the same principle
should not be extended to the functioning of a mere fact finding body
of trusted men appointed by a competent authority to investigate into
certain matters of public importance, even if it be not a judicial or a
quasi-judicial body?
T h e decision of the M a d r a s High Court in Lily White v.
Munuswami,^ involved the question touching another facet of the
42. Id. at 169.
43. A.I.R. 1966 Mad. 13.

doctrine of public policy. The plaintiff in this case gave a new saree
and a blouse to the firm for dry-cleaning and claimed the market
value for the saree which was never redelivered. The defendant
contested this claim on the ground that one of the conditions of the
contract was that the customer was entitled to claim only fifty per cent,
of the market price or value of the articles, in case of loss. The Court
rejected the defence and invalidated the clause.
The clause limiting the quantum of liability as in this case is one
of the different kinds of exception or exemption clauses inserted by one
party in a standard-form contract. Such exception clauses create the
most difficult problem for the courts to solve or to grapple with. It is
possible to analyze such standard-form contracts in terms of the
traditional principles of the law of contract, namely, that of intention
and free will of the parties, and the exception clause then may be
interpreted as a condition inserted in a contract, freely assented to by
the other contracting party. Realistically speaking, such standard-form
contracts are contracts in name only and their terms are more like
legislative rules imposed by one party than the contractual terms freely
agreed upon by both the parties. The freedom of choice of the other
party is only illusory. He is not a contracting party, but only a
consumer who has the freedom of accepting or rejecting the goods or
services offered by the other party, but who cannot change or modify
the terms of the contract.
It is unfortunate that the Madras High Court did not seize the
opportunity presented by the case to analyze the true nature of
exception clauses in such contracts and to discuss the various possible
methods of dealing with them. Of course, the Court did show the
courage and boldness in striking down the clause, but could not
properly discuss the ground on which it invalidated the clause. The
Court described the grounds in various ways, namely, "as opposed to
public policy," "as opposed to the fundamental principles of the law
of contract," "not in the interests of the public," "as a flagrant
infringement of the law relating to negligence," "as putting a premium
upon the abstraction of clothes, which may be committed by the
employee of a firm intent on private gain." The Court, feeling the
sense of injustice in such a clause, seems to be struggling hard to
pinpoint a ground or a clause on whose basis it can strike down the
same.
The English courts, though the lovers of traditions, are striving
very hard to solve the problems posed by the exception clauses of all
types, by inventing various devices which would ensure fairness and
justice between the two parties so far as they can do within the
traditional framework of the common law of contracts, such as the
requirement of reasonable notice of the terms of the contracts, strict
interpretation of the clauses, the 'contra proferentem' rule, the doctrine

LAW OF CONTRACT 235
of the fundamental breach of contract or the doctrine of the

fundamental term. But the courts are working under severe limitations
and the legislature is beginning to play an active role.
T h e courts in India, facing these problems, are not bound to
follow the English solutions. O n the contrary, they should face the
problem squarely and try to solve it rationally by using the concept of
public policy in section 23 in a more dynamic and functional manner.
So long as any agreement is based on the substantial equality of
bargaining position between the two parties and represents a method
of satisfaction of their needs by mutual exchange, there is no question
of unfairness or unreasonableness or injustice between them, as free
agreement itself is constitutive of justice. In such a case the doctrine
of freedom of contract itself embraces the value of fairness or justness,
and the only ground of invalidating such an agreement will be public
policy as representing other values or public interests. But where
there is basic inequality of the bargaining position between the two
parties and the freedom of choice of one of the parties is only illusory,
the contract based upon mutual agreement and free choice becomes
a fiction and loses its value as a principle of social order. T h e n , the
doctrine of freedom of contract comes to embrace the interests of a
particular class and becomes opposed to the fundamental principles of
fairness or justice between the parties. T h e concept of public policy
should embrace an independent value of fairness or reasonableness or
justice which would and should be an object worthy of protection
against the abuse of the freedom of contract. T h e court, then, should
analyze, evaluate and adjust the conflicting interests involved in the
question raised by the exception clauses in standard-form contracts.
These conflicting interests are: (l) interests of the dominant party
relying upon the exception clauses ; (2) need for fairness between the
parties; (3) other interests of the society. In other words, unfairness
or unreasonableness should be developed as an independent head of
public policy for invalidating agreements which are not based upon
equal bargaining position of the two parties. 4 4
Ill, NEGATIVE STIPULATIONS IN CONTRACTS OF
PERSONAL SERVICE AND INJUNCTION
If any decision of the -year 1966 can be described as the
landmark, it is the decison of M r . Justice Bhagwati of the Gujarat
44. Lord Denning expressed the opinion that an unreasonable onerous term in a
standard-form contract would not be enforced by the courts, for "there is the vigilance
of the common law which, while allowing freedom of contract, watches to see that it
is not abused." John Lee and Son (Grauham) Ltd. v. Railway Executive, [1949] 2 All E.R.
581 at 584.
See also the American Law Institutes* Uniform Commercial Code States (§2-302) :
If the Court as a matter of law finds the contract or any clause of the contract
to have been unconscionable at the time it was made the court may refuse
to enforce the remainder of the contract without the unconscionable clause,
or it may so limit the application of any unconscionable clause as to avoid any
unconscionable result.
See also 2 Pound, Jurisprudence 453 (1959).
H i g h Court in Lalbhai D. & Co. v. Chittaranjan.*5 I t provides a very

illuminating example of a decision where the Court faces boldly and
openly the open value-conflict and tries to base its decision on the firm
basis of the proper evaluation of the various interests involved in the
case. T h e decision also is one of the most glaring examples of the
increasing influence of the pattern of value-judgments as embodied in
the Constitution of India upon the wide sphere of the private law.
In this case, Lalbhai & Co., the plaintiffs, filed a suit for
injunction to restrain the defendant from serving elsewhere during the
term of the contract in breach of the negative stipulation contained in
the contract. T h e defendant was a fresh engineering graduate and
joined the plaintiff's company as a n assistant in the engineering
department for a period of three years and the agreement included the
usual negative stipulation.
M r . Justice Bhagwati, speaking for the division bench, gave a
very enlightened judgment which was free from the vice of over-
conceptualism and which freely discussed and balanced the conflict of
fundamental values. He held that the negative stipulation in the case
was not in restaint of trade. T h e full-length analysis of the judgment
will be highly rewarding and, therefore, is attempted here, together
with comments on its various aspects.
T h e Court proceeded on the basis of the distinction between the
question of the validity of the negative stipulation in a contract of
personal service and the question of its enforcement by way of the
several legal remedies. This distinction is certainly very important
because different policy factors might operate at these two levels.
Both in England and India, a distinction is observed between the
negative stipulation which would operate only during the course of
employment and the negative stipulation which would extent even after
the cessation of the contract. In England, however, the same criteria
of reasonableness are applied to both. But generally speaking, the
former are rarely held to be unreasonable, while the latter may or
may not be, depending upon the facts of the case.
In India, this distinction must be made, because section 27 of the
Contract Act which prohibits agreements in restraint of trade is absolute
in its terms so every such agreement imposing restraint upon freedom
of trade whether partial or complete, reasonable or unreasonable is
void. So if the former kind of negative stipulation is to be saved, it
must not be considered in restraint of trade under section 27, because
the Indian Contract Act makes a distinction between restriction on
trade which is always void and a condition which is not. While the
English law draws the distinction between reasonable restriction of
t r a d e and unreasonable restriction.
45. A.I.R. 1966 Guj. 189.

LAW OF CONTRACT 237
Moreover, the distinction is functionally also justifiable, because

in the former case, the contract continues and the person is actually
enjoying his freedom of trade, while in the latter case, the contract is
at an end and the person neither serves his employer nor has to serve
any other person. So the former is entirely on a different basis than
the latter. I n the former the negative stipulation accompanies the
positive one which together secure to the employer the sincerity,
singleminded devotion and attention of the employee, while in the
latter case, it is purely a negative stipulation whose purpose is
completely different.
T h e Court rightly held that the negative stipulation of the former
kind is not in restraint of trade is not hit by section 27 of the Contract
Act and is, therefore, not invalid. 4 6
However, in such a case, the court is not completely helpless,
where such a stipulation is unjust or unreasonable. T h e test of public
policy in section 23 has still to be satisfied. So in some cases, even
this kind of negative stipulation can be struck down on the ground of
public policy which, we have seen, embraces both the idea of fairness
between the two parties and that of other public or social interests. 47
T h e Court next considered the question of its enforcement by
way of legal remedies, such as damages, specific performance and
injunction. T h e question of specific performance of a contract is out of
question, as section 14(l)(d) of the Specific Relief Act, 1963, embodies
the principle of public policy that a contract of personal service cannot
be specifically enforced, as it would smack of saiavery. T h e question
then arises as to whether such contracts can be enforced by wav of
injunction so as to prevent the breach of negative stipulation. Sec-
tion 42 of the Specific Relief Act, 1963, expressly provides t h a t where
a contract contains both positive and negative stipulations, the mere
fact that the court cannot order the specific performance of the positive
stipulation will not preclude it from granting injunction to perform the
negative stipulation. But, section 42 does not take away the discretion
of the court in the granting of injunction in such a case, though the
discretion is to be exercised on the basis of certain principles. The
Court enumerated the various principles to guide its discretion.
T h e main principle is that the effect of the grant of injunction
should not be the specific performance of the contract by indirect
46. Id. at 192.
47. Compare the observation of Shelat, J., in a later case of N. S. Golikari v.
Century S. and M. Co., A.I.R. 1967 S.C. 1098, at 1104 :
A negative covenant that the employee would not engage himself in trade or
business or would not get himself employed by any other master for whom
he would perform similar or substantially similar duties is not therefore a
restraint of trade unless the contract as aforesaid is unconscionable or exces-
sively harsh or- unreasonable or one-sided.

method, on the principle that the court will not do indirectly that
which it cannot do directly. 48 This question should be considered,
having regard to the practical realities of the situation and the sole
question should be : Would the defendant be either reduced to idleness
and starvation or be compelled to go back in the employment of the
plaintiff ? The merit of the judgment lies in the express recognition
that the Court retains the discretion in the matter even in a case where
the granting of injunction may not result in indirect specific enforce-
ment of the contract by sending him to starvation.
But the question remains : How to exercise discretion in such a
situation ? In the further analysis of this question, the decision dis-
tinguishes itself from all others within this sphere. The important
factors are : 49 (i) The object of injunction must not be to spite or
punish the employee for having broken the contract, (ii) The object
of inducing the worker to go back to his master cannot be the sole
object of the granting of injunction, though it may be its incidental
result.
In making this statement, the Court seems to go beyond that the
English judges have gone, because they draw a distinction between
'tempting or inducing an employee to go back to his employer' and
'compelling him do so'. 50 Mr. Justice Bhagwati is right in discarding
the distinction, because the distinction between 'temptation' and
'compulsion' (which does not involve the actual use of physical force)
appears to be a doubtful one. To think that a man is compelled only
when he threatened to be reduced to idleness and starvation involves
a very primitive psychology of man's motivations and behaviour. If
one considers the complexity of human personality and the inexplicable
drives and impulses which struggle to drive him into various patterns
of behaviour, this not only involves an oversimplification, but implies
an insult to his personality. The modern man would not like to draw
the distinction between complete idleness and the illusory freedom
49. Ibid. Bhagwati J., observed :
The object to get back the employee in service is, therefore, not an object
which the law countenances and it cannot be legitimative object for enforce-
ment of a negative stipulation that the employee would, even if not compelled,
be at least induced or to use the words of Branson J. in [1937] 1 K.B. 209
"tempted to come back." The law cannot regard such a consideration as a
relevant consideration for if such a. consideration were relevant, the Court
would in effect be doing indirectly what it cannot do directly, because the
Court would be issuing an injunction in order to induce the employee to go
back to his employer, a thing which the Court should not think of doing. An
injunction if otherwise properly granted may have the effect of inducing or
tempting the employee to go back to the service of his employer but that is not
the object for which injunction can be granted by the Court.
50. "It is one thing to tempt him to perform the contract, another to subject him
to irresistible compulsion." Cheshire and FifToot, The Law of Contract 535 (6th edn.
1964).

LAW OF CONTRACT 239
given to him to earn his livelihood in any other less inferior position or
occupation wherein he could not be in a position to use his potentialities,
skill, knowledge to the fullest extent. Both are sufficient to kill him, in
one case, physically, in another case psychologically. For him there is
nothing to choose between the two. Moreover, any other job which he
is free to do would not generally be as remunerative as the present one,
because he cannot use his special knowledge there, this means reduction
in the standard of living of his family. And to lose one hundred or
two hundred rupees in this so highly competitive world does make a
lot of difference, and virtually it amounts to compulsion. So, M r .
Justice Bhagwati was perfectly right in saying that to induce or tempt
the employee to go back to his employer should not be the object of
injunction.
Moreover, section 42 speaks of positive and negative covenant
and provides for the enforceability of the negative covenant and
when the positive covenant cannot be enforced. It must be remem-
bered that what is to be enforced is the negative covenant, and not
the positive one. So the object of inducing or tempting a person to
perform his positive covenant should not and could not be brought in
as a relevant consideration while enforcing the negative covenent.
T h e question of the granting of injunction would raise a very
important conflict between the freedom of contract and sanctity of
contract on the one had and the freedom of occupation on the other
hand. T h e exaggerated importance to one would destroy the other.
So it is the duty of the courts to try to strike a balance between the
two so as to subserve public purpose.
According to M r . Justice Bhagwati this balance can be properly
struck if we import the principles evolved by the English courts while
dealing with cases of agreements in restraint of trade. These principles
are : (1) T h e agreement must be reasonable in reference to the interest
of the contracting parties. (2) It must be reasonable in reference to
the interest of the public. 5 1 Applying these two principles to the case
of injunction, the crucial questions would b e : ( l ) Is the grant of
injunction reasonably necessary for the protection of the legitimate
interests of the employer ? (2) Would it be injurious to the public
interest by depriving the society of the benefit of the services, skill
and intelligence of the employee ? T h e Court applied these two
principles to the facts of the present case and refused to grant
injunction.
T h e discussion of this part of the judgment is certainly the best
part, because it for the first time tries to put the entire question of the
enforceability of such negative covenants by way of injunction in the
proper perspective. Let us further analyze it in its value components.
51. Supra note 45 nt 197.

Once the court holds that the particular negative covenant is

valid the only question which remains is the method of its enforceability
and the choice lies between damages and injunction. T h e remedy by
way of damages does not, in most of the cases, involve any complications.
T h e following considerations are to be made, viz., first, whether the
employer would suffer a loss or damage by the breach of the negative
covenant by the employee ? This question depends upon the facts of
each case T h e relevant factors would be : (i) the value of employ-
ment i.e., whether it involves only routine work or any specialized skill;
(ii) whether there is any special training given to the employee;
(iii) whether such types of skill and knowledge are easily available, and
(iv) whether there are any trade secrets. If there is no loss, the
question appears to be simple. T h e employer must be given nominal
damages for the breach of contract and he has nothing to complain.
If the employer has suffered a loss or damage, the second question
arises as to whether that is capable of being compensated in terms of
money. Here there are different types of losses e.g., loss by way of
expenditure after the training of the servant, but this is calculable in
terms of money ; loss from competition, but this is only demnum sine
injuria ; higher salary which he may be required to give to another
employee, this is also calculable in terms of money ; planning by the
employer involving investment in t h a t industry, depending upon the
availability of the particular person with a higher specialized knowledge
in that field, and such types of persons are not easily available; and
trade secrets. T h e last two items will create difficulties, because they
might not be capable of being compensated in terms of money. It is
in such cases that the question of injunction arises.
But before we go to the question of injunction, three points in
favour of damages must be considered. First so far as the principle of
the sanctity of contract is concerned, it can equally be satisfied by the
grant of damages, because that is the usual remedy in cases of breach
of contract. Second, in common law countries the award of damages
is the general remedy, while the equitable remedy is not, as opposed to
the Continental countries where the converse is the true. And third
the judicial remedy of damages does not come into conflict with the
freedom of occupation, as the employee has to pay damages, but is not
precluded from serving elsewhere, and therefore the society does not
suffer.
T h e alternate remedy of injunction raises more difficult questions,
such as, ( l ) where the employer is not likely to suffer any loss or
damage the grant of injunction would only go to satisfy the abstract
doctrine of the sanctity of contract, which can be done by way of
damages without injuring the society. (2) Where the employer suffers
loss or damage which can be compansated in terms of money, injunc-
tion should not be granted, because of the superiority of the remedy

LAW OF CONTRACT 241
of damages (which we have considered elsewhere). (3) It is only

where the incalculable loss or damage is suffered by the employer, t h e
feasibility of its enforcement by way of injunction should be seriously
considered, but it should not be granted as a matter or course. Here
the entire question must be considered in terms of the various interests
in conflict, namely, interest of the employer, freedom of the other
party, social interest in the services and skill of the employee, and
sanctity of contract.
T h e second interest has some distinct superiority over the first onej
because the conflict is between the property interest and personality
interest and in the modern world, particularly in modern India, the
trend is 'higher valuing of personality, lower valuing of property'. In
1891, Jhering formulated :
Formerly high valuing of property, lower valuing of the person. Now lower
valuing of property, higher valuing of the person. 62
Moreover, the freedom of occupation must be considered as a

higher value than freedom of contract and sanctity of contract, because
its higher place is recognized by the Constitution of India itself. 53
Similarly the sanctity of contract must give way to the interest of the
society in having the advantage of the skill, knowledge and intelligence
of every member. Particularly this is very important in all under-
developed countries which experience the shortage of skilled persons.
And the protection of trade secrets should be balanced against the
dissemination of knowledge in the society.
T h e decision rightly emphasizes the need for the proper evaluation

of these conflicting interests and values before deciding to grant
injunction. T h e judgment is also significant for some other reasons.
Mr. Justice Bhagwati, though refused to hold that section 42 in so far
as and to the extent to which it empowers the court to restrain a
person from practising any trade or profession is violative of
article 19(l)(^), 5 4 he brought all the questions of reasonableness and
public interest into consideration of the question. 5 5 I t represents a
very laudable attempt on the part of the Court to permeate the entire
legal system with the spirit of the Constitution which is expressed in
the fundamental rights and directive principles of state policy.
T h e decision is based upon the keen awareness of the socio-

economic reality, especially the problem of unemployment and over-
population in India, the possibility of the abuse of the freedom of
52. Quoted from 2 Pound, Jurisprudence 429-30 (1959).

53. Ind. Const, art. 19(1) {g):
To practise any profession, or to carry on any occupation, trade or business.
54. Supra note 53.

contract, inequality in t h e bargaining position, between the two

contracting parties and the social need. It symbolizes a very bold
a t t e m p t on the p a r t of the Court to extricate the law of contract from
t h e m y t h of the equality of bargaining power. T h o u g h the Court does
not profess to exercise any absolving power, it rightly tries to mitigate
t h e unjust result of the myth by striking a balance between various
conflicting interests while deciding the question of injunction. 56
T h e judgment rightly emphasizes the true function of the judiciary

in a developing country. M r . Justice Bhagwati observed :
If we adopt this principle it would be possible for the Court to permit them-
selves a freedom of action which would enable them to bring the law com-
pletely in line with social and economic conditions of the Couutry and to
administer the law in a manner which would satisfy the needs of the com-
munity in these conditions. It was strongly pressed upon us that by accepting
the principles we would be importing an extraneous consideration not
permitted by the language of the statute but we must remember that the law
must adapt itself to the changing needs of the society and wherever it is possible
we must not hesitate to adopt new principles for otherwise law will become
'antiquated straight jacket and than dead letter" and ''the judicial hand
would stiffen in mortmain if it had not in the work of creation." 67
IV. CONTRACTS IN R E S T R A I N T OF L E G A L PROCEEDINGS
A recurrent question in connection with the contracts in restraint

of legal proceedings under section 28 of the Indian Contract Act 5 8
came u p for decision before the Patna High Court in New Asiatic
Insurance Co. v. B. S. Co-op. Bank.59
T h e facts of the case were t h a t the respondent (plaintiff) sent
goods by railways and the goods were insured with the appellant
(defendant). T h e respondent was informed by the railway about the
theft of the goods and lodging a claim. T h e n the respondent sent its
claim to the appellant, on September 1, 1951. T h e question arose as
to whether insurance company was liable in accordance with the terms
of the policy for the loss suffered by the respondent-plaintiff. T h e
terms of the policy provided that the risk would last only for three
56. Bhagwati, J . said,

Now under the law of the land as we have discussed above, such a stipulation
for the law does not give any absolving power to the Court, even-though the
stipulation may not be the result of contract between the parties on equal
bargaining terms. But when the question arises as to whether the Court
should enforce such a negative stipulation by means of an extraordinary
remedy of injunction, the Court must ask itself: Must I interpose at the
instance of the employer ?
Supra note 45 at 196.
57. Id. at 197-198.
58. The relevant part here of § 28 of the Indian Contract Act, 1872 :
Every agreement,...., which limits the time within which he may thus enforce
his rights, is void to that extent.
59. A I.R. 1966 Pat. 69.

LAW OF CONTRACT 243
days after the arrival of train at distination and no liability would

attach to the company unless a notice was given within ten days of
the expiry of the risk to the company. The plaintiff gave notice much
after ten days.
Mr. Justice Tarkeshwar Nath and Mr. Justice Misra both agreed
that the condition one as to the risk was an essential condition, because
the object of the insurance of the present kind was to cover the risk in
transit of goods. The burden of proving as to when train arrived at
destination was on the assured who failed to bring on record evidence
to that effect.60
As to the second condition with respect to notice, both the
Judges disagreed. This question is certainly very important and is
even today not free from difficulty. Mr. Justice Tarkeshwar Nath
held that the term in the policy with regard to giving a notice within ten
days of the expiry of the risk was equally important and the condition
had to be fulfilled before saddling the company with any liability for
loss.61 He further held that section 28 of the Indian Contract Act was
also not attracted as that section aimed only at covenants not to sue
at any time or for a limited time, and was not aimed at a provision
extinguishing the right to sue in certain events.62 The learned Judge
distinguished Governor General in Council v. Firm Badri Das Gauri Dutt,^
which construed the stipulation as to notice only as a rule of guidance
and rule of law, and Dominion of India v. Rupchand Meerchand,^ on the
ground that both the cases involved the question of general liability of
the railway.
On the other hand Mr. Justice Misra expressed doubt as to
whether the condition as to notice was an essential condition or not.
considering the object of the condition viz^ to enable the insurer to
institute an inquiry as to the circumstances of the loss, the condition
might be regarded as essential; while it might be argued that once
loss had occurred the insurance liability had accrued and any condition
as to the period within which information of the loss should be given
to the ensurer should not be regarded as an essential condition non-
fulfillment of which would entail the forfeiture of the right of the
plaintiff to claim compensation. The learngd Judge, therefore, reserved
his opinion on this. 65
It is this question which merits special discussion. It is nowadays
very common that the various kinds of standard-form contracts
contain different types of exemption or limiting clauses. One such
60. Id. at 72 & 75.
61. Id. at 74.
62. Id. at 73.
63. A.I.R. 1952 AIL 702.
64. A.I.R. 1953 Nag. 169.

condition relates to the time within which the notice must be given or
the claim must be m a d e . 6 5 a Such exception clauses raise a very difficult
question of their validity under section 28 of the Contract Act. In
majority of the cases the courts have tried to distinguish between the
case of the extinction of the right itself and the case of the destruction
of the remedy before the time of limitation and have regarded the
former as valid. T h e following statement of M r . Justice Batchela in
Baroda Spinning and Weaving Co. Ltd. v. Saiyanarayana Marine and Fire
Insurance Co. Ltd.,66 is the best representative of this approach :
As I understand the matter, what the plaintiff was forbidden to do was to
limit the time within which he was to enforce his rights ; what he has done is
to limit the time within which he is to have any rights to enforce, and that
appears to me to be a very different thing.
T h e question is certainly a very complex one which demands a
clear analysis of the conditions of such contracts both from the concep-
tional and functional points of view. It also calls for the proper
evaluation of the different interests involved in the context of socio-
economical reality which is expressed by the standard-form contracts
which usually contain such clauses. As the question defies any simple
solution, an attempt is here m a d e to present the different aspects of the
problem without any presumptuous attempt to give a final answer.
This condition is generally described as a condition precedent to
liability. But the conceptual analysis would show that such a clause is
a condition subsequent which, upon the nonfulfillment of the clause, will
extinguish the liability. In the instant case, the liability of the insurance
company arises as soon as the loss occurs, but this liability is made
subject to the condition as to notice within ten days. If such notice is
not given, the liability will cease to exist. This misunderstanding, there-
fore, must be removed if we want to tackle the problem correctly. It
is not the accruing of liability, but the continuance or extinction of
liability already accrued which is subject to such condition. So this
65a. E.g. some exemption clause a r e :

In no case whatever shall be company be liable for any loss or damage after
the expiration of twelve months from the happening of the loss or damage
unless the claim is the subject of pending action or arbitration.
The rights of the assured shall be extinguished in respect of the claim made
after one year.
No claim or dispute of any sort whatever can be recognised if not made in
writing within 60 days from due date of payment.
If a claim were made and rejected and an action or suit were not commenced
within 3 months after such rejection all benefits under the policy shall be
forfeited.
No claim will be admitted unless properly made and proved within 40 days
from the date thereof.
66. (1914) 38 Bom. 344 at 356. See also Pollock and Mulla, Indian Contract and
Specific Relief Act 239 (8th edn. 1957): "In short, an agreement providing for the
relinquishment of rights and remedies is valid, but an agreement for the relinquish-
ment of remedies only fails within the mischief of S. 28."

LAW OF CONTRACT 245
condition raises a question: If liability has already accrued, should it be

destroyed or extinguished because of the nonfulfillment of the condition?
T h e word 'liability' used in the clause as to notice in this case may
have either of two meanings. It might mean 'liability' as the correla-
tive of obligation as in this case the duty to pay the insurance money, or
it might refer to liability to be sued. 6 7 ' T h e clause as to termination
of liability if no notice is given within ten days is an exception or an
exemption 'clause in both the cases. In one case, the absence of notice
will terminate the obligation itself, while in the second case, it will
terminate the liability to be sued. In both the cases, the parties to
the contract can be said to be creating what may be described as the
private law of limitation besides the Indian Limitation Act. If the word
^liability'is taken to mean 'liability' to be sued, then, the clause will be
hit by section 28 of the Contract Act which prohibits any agreement
which limits the time within which a party m a y enforce his rights.
If the word 'liability' means the obligation itself, this distinction
above referred to seems to suggest that such an agreement does not
come within the perview of section 28, because it extinguishes the right
or the obligation itself, not the remedy. This distinction is doubtful
and open to challenge. 6 7 a
From the point of view of the person claiming the rights, there is
not much significant difference between the extinction of a right and its
conversion into an imperfect right. If a party cannot convert a perfect
right into an imperfect one before the time fixed by the law of limita-
tion, how can he be allowed to destroy the right itself before such time?
T h e distinction between the extinction of right and remedy and the
extinction of the remedy is unrealistic. 6 8 T h e distinction will lead to
evasion of section 28 because the slight change in the wording of the
67. See Brian Coole, Exception Clauses 148 (1964).

67a. Consider the few examples: (a) 'The suit must be brought within
10 days, thereafter no suit shall lie.' This is prohibited by s. 28. (b) 'The suit
must be brought within 10 days,—otherwise the right will cease to exist.'
Is this permissible? (c) 'The notice must be given within 10 days, otherwise no
suit shall lie thereafter.' This will be hit by s. 28, (d) 'Notice must be given
within 10 days, otherwise the original right will cease to exist.' It is said that
this is valid.
68. Especially for the writers belonging to the realist school of jurisprudence.
The following quotation from Justice Holmes is the best example of this approach:
The primary rights and duties with which jurisprudence busies itself again
are nothing but prophecies. One of the many evil effects of the confusion
between legal and moral ideas,...., is that theory is apt to get the cart
before the horse, and to consider the right or the duty as something existing
apart from and independent of the consequences of its breach, to which certain
sanctions, are added afterward. But, as I shall try to show, a legal duty so
called is nothing but a prediction that if a man does or omits certain things
he will be made to suffer in this or that way by judgment of the court, and
so of a legal right.
Justice Homles, *The Path of the Law' quoted from Fuller, The Problems of
Jurisprudence 327 (temp. edn. 1949).

condition will save it. I t cannot be the purpose of the legislation to

permit the evasion of section 28 in such a simple manner.
It is argued that conditions under discussion are important and
essential, because they enanble the insurance companies to make prompt
and adequate investigation in order to find out the nature, manner and
cause of the loss and may prevent or at least reduce the opportunity of
making false or bogus cliams. But this purpose is not different from
the policy considerations which lie behind the law of limitation which
determines how long the liability to be sued should continue. After
considering the different factors, such as the protection of the party
against whom the claim is made, the need for vigilence on the part of
the claimant, end of litigation, certainty etc. the law of limitation
prescribes the time limit for various claims. T h e n why should the
parties be allowed to reduce the time limit ?
At the most, the parties may be allowed to lay down condition as
to notice a n d may be permitted to claim the reduction in the amount
to be paid by t h e m if the other party fails to give notice or put forward
the claim. But the extinction of liability altogether is not and cannot
be permitted.
T h e question then arises : W h a t should we do with this type of
condition ? T h e r e are various alternatives : (a) T h e best way would be
to strike down such condition under section 28 of the Contract Act
itself, (b) If the courts feel themselves too much bound to precedents
which have drawn the distinction above referred to, it can be struck
down under section 28 of the Contract Act on the ground that it would
defeat the provisions of section 28 of the Contract Act. (c) Consider-
ing the general use of such a condition as the best and ingenious way of
avoiding liability in the modern conditions of life where people enter in
numerable types of such contracts and the inclusion of such a
condition in standard-form contracts which are really imposed upon
individuals, it may be argued that the courts should strike down such a
clause as being opposed to public policy, on the ground of unfairness
between the parties and injury to the society which arises from the
evasion of such liability.
At least such clauses must always be interpreted as exception
clauses which should attract ali the devices adopted by the English
courts to save the other party whenever reliance is placed upon such
clauses in standard-form contracts. However, all these are just possible
alternatives and the choice is difficult to make. W h a t is necessary is,
as we have said above, the detailed examination of the problem legally
and sociologically.
V. C O N T R A C T BY TELEPHONE
A very interesting question came up for decision before the
Supreme Court in Bhagwandas v. Girdharlal & Co. 69 The question was
69. A.I.R. 1966 S.C. 543.

LAW OF CONTRACT 247
very simple : W h a t is the place of making of a contract in the case of

contract by telephone ? And yet, it brought but a sharp cleavage of
opinion between Mr. Justice Shah and M r . Justice Wanchoo on the
one hand and M r . Justice Hidayatullah on the other. It illustrates the
scope for creative choice which the Court has while interpreting an
enacted law and the different techniques of statutory interpretation,
especially when an attempt is m a d e to apply the law enacted long ago
to the problem created by modern invention.
T h e facts of the case were very simple. A contract for the supply
of cotton seed cake was negotiated and concluded between the plaintiffs
at Ahmedabad and defendants at K h a m g a o n by conversation on long
distance telephone. In a suit filed by the plaintiffs for breach of
contract, the question arose as to the jurisdiction of the A h m e d a b a d
court. T h e crucial question was : W h e r e the contract has been m a d e —
whether in Ahmedabad where the plaintiffs heard the acceptance or at
Khamgaon where the acceptance was made? Both the lower court and
the High Court in revision held in favour of the jurisdiction of the
Ahmedabad court, but the Supreme Court was divided between
M r . Justice Shah who delivered the majority judgment for himself and
M r . Justice Wanchoo and M r . Justice Hidayatullah who gave a dissenting
judgment.
Mr. Justice Shah confirming the judgment of the High Court,
argued that section 4 of the Indian Contract Act does not deal with the
place where the contract is made and therefore the question should be
decided by considering the general provisions m a d e in section 2. 7 0 T h e
general rule is that a contract is complete only when the offer is
accepted and the acceptance is communicated to the offerer. This
necessarily follows from the doctrine of "consensus ad i d e a m " or " t h e
meeting of minds." However, in the case of a contract through post
or telegram, an exception was engrafted to the general rule, not on any
logical grounds but purely on the grounds of commercial expediency or
in the words of Cheshire, " u p o n empirical grounds," 7 1 I n this case,
therefore, the contract is complete as soon as the letter of acceptance is
put in the course of transmission so as to be out of control of the
acceptor.
M r . Justice Shah further argued t h a t a contract by telephone
could not have been envisaged by the draftsman of the Indian Contract
Act and therefore they could not have intended to make a rule in that
behalf. 72 T h e result is t h a t the case presents a clear choice before the
Court as to whether the general rule or the exception should be applied.
He, then, compared the contract by telephone and contract by post
and decided that a contract by telephone is more analogous to an oral
70. Id. at 548.

71. Cheshire and Fifoot, The Law of Contract 43 (6th edn. 1964).

contract where the parties are present. In both the cases, the communi-
cation is instantaneous, each party is able to hear the voice of the other
and the parties are in a sense in the presence of each other. He
of course conceded that in the case of a contract by telephone, a third
agency would intervene, but this intervention would be radically
different from the intervention in the case of post or telegram. If,
therefore, the reasons between the general rule and the exception are
borne in mind and if the distinction between the two kinds of contract
is considered, M r . Justice Shah decided that the "essential nature of
conversation by telephone" would make it reasonable to hold that
general rule should be applied, rather than the exception. In this
decision, he heavily relied upon the decision of Lord Banning in
Entores Ltd. v. Miles Far East Corporation™ where the Court of Appeal
treated the contract by Telex on a different footing from t h a t by post.
M r . Justice Hiyadatullah on the other hand, writing a very learned
dissent, discussed in details the English law on the point and consi-
dered the opinions of the jurists and the solutions offered by other
countries. H e based his dissent on two grounds that there is a
difference of opinion in the countries of the world on the question of
the application of the general rule or the exception to the case of a
contract by telephone ; and t h a t the wording of the Indian Contract
Act does not warrant the acceptance of the decision in the Entores
case. 7 4
M r . Justice Hidayatullah after analyzing the Entores decision,
observed that even Lord B a n n i n g has accepted that a contract made
on the telephone might be complete even when the acceptance was not
received by the proposer and based it on the ground of estoppel. 7 5 In
such a case, where there is no communication at all, how can it be said
t h a t the contract was completed at the proposer's end and not at the
acceptor's end ? H e considered that the contract by telephone did not
present such a distinct case t h a t the exception as applied to the con-
tract by post should not be applied to it.
M r . Justice Hidayatullah, however, mainly relies upon the second
ground. In opposition to M r . Justice Shah he held that section 4 of the
Indian Contract Act would cover the case of communication over the
telephone. H e says :
If the language of our enactment creates a non possumus adament rule, which
cannot be made to yield to any new theories held in foreign Courts, our clear
duty will be to read the statute naturally and to follow it. 76
He, therefore, would not uphold the jurisdiction of the Ahmeda-
bad city civil court on the ground that,
We cannot go against the language by accepting an interpretation given with-
out considering the language of our Act. 77
73. [1955] 2 Q.B. 327.

75. Id. at 552.
76. Af.at551.
77. Id. at 557.
LAW OF CONTRACT 249
It is submitted t h a t the majority opinion of the Court seems to be

the correct one. M r , Justice Shah was right in holding that the Indian
Contract Act does not specifically provide for the place of the making
of the contract and that the question should therefore be decided on
the basis of reasons and policy considerations. Section 4 of the Indian
Contract Act 7 8 determines the time when the contract is complete as
against the proposer and the acceptor, but does not decide the question
of the place of the making of contract. T h e policy considerations that
lie between the general rule and exception as to the post or telegraph
and the essential nature of the contract by telephone would support
the view that the general rule should be applied to it rather than the
exception.
Thus the entire decision rests on the answer to the problem :
Whether the Contract Act makes a provision to cover the case. For
M r . Justice Shah the answer was no, while M r . Justice Hidayatullah
thought otherwise. However, the basic question hidden behind the
simple issue relates to the difficulty of answeiing this question. This
touches the question of the interpretation of the statutes : how to
interpret the language of the Act in the dynamic society ? T h e approach
of both the Judges, it is humbly submitted, seems to involve a doubtful
and controversial approach. While M r . Justice Shah observed,
obviously the draftsmen of the Indian Contract Act did not envisage use of
the telephone as a means of personal conversation between parties separated
in space, and could not have intended to make any rule in that behalf.79
Mr. Justice Hidayatullah said :
It is plain that the law was framed at a time when telephones, wireless,
Telstar and Earlybird were not contemplated. If time has marched and
inventions have made it easy to communicate instanleneously over long dis-
tance and the language of our law does not fit the new conditions, it can be
modified to reject the old principles 8 0
Both seem to attach importance to the question as to whether the

legislature did or did not envisage the telephone. However, this
question should not be considered as important or material. The
fundamental issue is : how does J:he legislature use the language ? Does
The communication of a proposal is complete when it comes to the knowledge
of the person to whom it is made.
The communication of an acceptance is complete,—
as against the proposer, when it is put in a course of transmission to him, so
as to be out of the power of the acceptor ;
as against the acceptor, when it come to the knowledge of the proposer.
The communication of a revocation is complete,—
as against the person who makes it, when it is put into a course of transmission
to the person to whom it is made so as to be out of the power of the person
who makes i t ;
as against the person to whom it is made, when it comes to his knowledge.
80. Id. at 557.

it use a particular word or expression only by considering the specific

situations or illustrations to which it is applicable at that time ? In
other words, is the language of the legislature purely event-oriented or
purpose-oriented ? If it is purely event-oriented, then it is clear that
its language used at a particular point of time could not be applied to
situations or events not visualized by the legislature at that time. If,
on the other hand, its language is merely purpose-oriented, then it
allows scope for dynamic and expansive interpretation so as to cover
new situations and developments so long as the general language
permits it. 8 1 Both answers no doubt involve difficulties, but on the
whole, the latter approach is more sound, so long as the principle of
respect for legislative language is maintained.
If we accept this approach the entire question should have been
decided on the basis of the principles and purposes rather than that of
the intention of the legislature. T h e intention of the legislature in the
narrower sense of covering the very specific event or situation is a
myth. T h e correct approach, however, should be based upon the
principles that it is the duty of the courts to respect the language of
the legislature and t h a t the legislative language expresses the broad
a n d general purposes of the legislature and not its specific intent with
respect to this event or that situation.
I n this very case, M r . Justice Hidayatullah observed that
section 4 of the Contract Act covered all the new inventions- So
far his approach is dynamic. But does it necessarily mean that its
language must be applied to telephone ? T o say t h a t the general
language can cover this situation is one t h i n g ; but to say that it should
cover the situation is another thing. T h e former is ?. question of
meaning, the latter is a policy question which the Court should decide
on the basis of the policy considerations accepted by the legislature.
Moreover, M r . Justice Hidayatullah used another common method
of argument that if the legislature finds particular language inadequate
or unsatisfactory, it can and should change it, but because the legis-
lature has not made any attempt to modify it, it may be presumed
t h a t the legislature has considered it adequate. This approach seems to
be faulty. It is not proper to presume the adequacy of the language
from the silence or the inaction of the legislature. T h e legislative
inaction or silence cannot be interpreted as its approval of the language.
T h e r e are innumerable reasons why the legislature may not make any
attempt to modify the language, for example, pressure of time, lack of
consensus, expediency, lack of political interest, laziness, forgetfulness
or indifference. T o interpret the legislative silence or inaction only in
one way is to pass the buck to the legislature and to abdicate the true
81. See Fuller, "Obstacles to Understanding" p. 13 and other memeographed

material, distributed by way of supplementary to Reading in Jurisprudence (1962-63),
for an excellent analysis of this problem.

LAW OF CONTRACT 251
function of the judiciary, namely, that of the rational development of

the legal system within the general limitation imposed by the doctrine
of separation of powers.
VI. GOVERNMENT CONTRACTS
As a direct result of the doctrine of welfare state, the business
and commercial activities of the state either directly or through the
instrumentalities are increasing at an accelerating rate, giving rise to a
large number of contracts between the state and private individuals or
corporations, and between public authorities or corporations. These
government contracts raise to some extent very typical problems of
their own. So far it was even today it is considered to be one of the
essential functions of the state to protect and preserve the doctrine of
freedom of contracts in the relation between private individuals. In
government contracts, the state itself claims the benefit of the freedom
of contract. T h e government in such cases occupies the double
position : as a contracting party like a businessman and as a public
authority whose function is to protect other public or social interests.
This leads to two types of questions : First, how far should the state be
allowed to fetter its discretionary or sovereign power by contracts with
private parties ? Second, is it possible to apply the doctrine of public
policy in the sphere of government contracts wherein it might be urged
that the state itself represents public or social interests and therefore its
contracts cannot be opposed to public policy ?
T h e cases involving government contracts can be discussed under
the following h e a d i n g s :
A. Government Contracts and Article 299 of the Constitution

T h e question of the inter-relationship between the mandatory
character of the formal requirements which the government contract
82. Ind. Const, art. 299 :
All contracts made in the exercise of the executive power of the Union or of a
State shall be expressed to be made by the President, or by the Governor of
i he State, as the case m a y b e , and all such contracts and all assurances pro-
perty made in the exercise of that power shall be executed on behalf of the
President or the Governor by such persons and in such manner as he may
direct or authorise.
Neither the President nor the Governor shall be personally liable in respect of
any contract or assurance made or executed for the purposes of this Constitu-
tion, or for the purposes of any enactment relating to the Governor of India
heretofore in force, nor shall any person making or executing any such con-
tract or assurance on behalf of any of them be personally liable in respect
thereof.
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,
§.70
Where a person lawfully does anything for another person, or delivers any-
thing to him not intending to do so gratuitously, and such other person
enjoys the benefit thereof, the latter is bound to make compensation to the
former in respect of, or to restore, the thing so done or delivered.

must comply with under article 299 of the Constitution of India and
the applicability of sections 65 and 70 of the Indian Contract Act is,
even after many pronouncements by the Supreme Court and High
Courts, still a living issue. 84 T h e decision of the Allahabad High
Court in B. D. Nathani v. State of U.P.*5 is selected, not for any new
point of law but for seizing the opportunity of making some comments
on the issues raised by government contracts. T h e case involved a
claim by the state of U t t a r Pradesh against the private contractors for
recovery of hire charges for the supply of vehicles by the state to the
defendant.
T h o u g h the Court observed that the commercial activities
of the state were also its activities in the exercise of its
executive powers and the article 299 of the Constitution would
apply to all kinds of government contracts, it did not consider
the question of the validity of the contract in issue on the ground of
article 299 — the question which was regarded by the Court as of
academic interest only — since it held that there was a contract and it
was acted upon by the parties and therefore the state was entitled to
recover under either section 65 or section 70 of the Contract Act. T h e
case calls for certain comments. I t is significant t h a t in spite of the clear
recognition of the mandatory character of the formal requirements of
article 299 and many decisions to the effect that all government con-
tracts which did not comply with formalities are void, a number of
cases arise every year, wherein the question of the validity of
the contracts for noncompliance with the formalities arise
before the courts, and these cases must be representing only a very
small fraction of the actual government contracts, entered into by the
government without complying with these formal requirements but
giving rise to no litigation. It would be fruitful to study this problem
realistically and to demonstrate what this regular pattern of noncom-
pliance with the constitutional requirements actually indicates. Does
it show very scant respect for the constitutional requirements on the
part of the government officers making contracts on behalf of the
government ? O r does it point out the practical difficulties of comply-
ing with these requirements in the case of every contract to which the
state is a party ? T h e Supreme Court itself observed :
It also happens that Government contracts are sometimes made in disregard
of the forms prescribed ; but that would not....be a ground for holding that
departure from a provision which is mandatory and at the same time salutory
maybe permitted. 86
This statement which points out the contract between law in books
and law in action once again emphasizes the realistic and functional
study of these formal requirements in government contracts. The
84. See Seervai, Constitutional Law of India 809-11 (1967).
85. A.I.R. 1966 All. 507.
86. Sheth Bhikhraj Jaipuria v. Union of India, [1962] 2 S.C.R. 880.

LAW OF CONTRACT 253
study may reveal t h a t these requirements may be used by either party

for getting out of the contractual obligations whenever they become
burdensome.
As regards the applicability of section 65 or section 70 of the
Contract Act to government contracts not complying with the formal
requirements of article 299, Seervai once again has raised some doubt
by quoting Sir Maurice Gwyer who said
It is....different to appreciate the common sense of enforcing a contract under
the provisions of sections 65 and 70 where it is expressly forbidden by the
statute governing the corporation. 87
Sir Maurice Gwyer argued on the basis that, having regard to
the requirements of section 175 of the Government of India Act, 1935
(similar to article 299 of the Constitution) the government lacked the
capacity to make a contract in a manner different from that prescribed
by that section, and therefore, the decision of the Privy Council in
Mohori Bibi v. Dharam Das GhoseQ& directly applied, and t h a t such
alleged contracts are neither agreements nor contracts within the
meaning of the word as defined in the Contract Act.
Section 65 of the Indian Contract Act which incorporates the
rule of equity creates many difficulties. It does not deal with the
question of enforceability of an agreement or contract in any sense.
It is assumed that the agreement or the contract is void and therefore
not enforceable at law. It just provides for the restoration of the
parties to the original position as if there were no contract. To
attempt to restore the parties in this way is not to enforce the
contract in any sense of the term. It is a rule based upon the princi-
ple of justice. T o confound the two questions, that of the enforce-
ability of the alleged contract and that of restitution, is one of the
principal sources of confusion in this field. T h e Indian Contract
Act does not expressly provide for any distinction between a void
agreement and an illegal contract. Sections 23 and 24 only speak of
a void agreement because of unlawful object or consideration. Section 65
also speaks of only a void agreement or contract. So the question has
been discusssed as to whether the duty of restitution provided for by
section 65 exists even in the case of illegal contracts. T h e view taken
by the Indian courts is that illegal agreements are outside the purview
of section 65 and that the principles of the English law of contract
should be applied. It is submitted that this question cannot be solved
in this manner. How can one say that section 65 cannot apply to the
case of an illegal contract when the Contract Act does not use that
word at all and speaks only of a void agreement, whatever the
defect ? Similarly, the inapplicability of section 65 to a benefit
derived by the minor under a void agreement is sought to be explained
87. Seervai, op. cit. supra note 84 at 809.

88. (1903) 30 LA. 114.

on the basis that the transaction entered into by a minor who

suffers from inherent incapacity is neither agreement nor contract
within the meaning of section 65. This also appears to be a wrong
approach.
These questions are certainly very important ones. O n the one
hand, to allow the recovery of money or benefit given under an illegal
contract or a minor's agreement may not be desirable from the point
of view of the public policy; on the other hand, the language of sec-
tion 65 is clear and on the face of it, is applicable to such cases.
T h e conflict appears to be between public policy and equitable duty
of restitution as laid down in section 65 of the Contract Act. The
only way of reconciling the two is to read the clear language of sec-
tion 65, not in absolute terms, but subject to the overriding considera-
tion of public policy, the basis of some such principle of construction
is that the legislature is always presumed to intend to protect and
preserve certain fundamental values and principles of the society,
unless they are expressly excluded by it. T h e other solution is to
amend the section.
T h e question of government contracts which are not in accordance
with the formal requirements of article 299 raises the same problem.
These requirements aim at preventing the state from being saddled
with liability for unauthorized contracts and preventing the wasting of
government funds by being drained into improper channels by virtue
of such unauthorized contracts, and therefore are in the public interest.
O n the other hand, there is involved the equitable rule of restitution
or unjust enrichment. If restitution were not permitted, it would
h a r m both the parties. T h e private party will definitely suffer. But
the more serious consequence is t h a t the government itself will not be
entitled to recover under section 65 and would certainly be saddled, of
course indirectly, with liability by losing the benefit given by it under
the contract. T h e only way open other than the direct method of
amendment of section 65 is to interpret section 65 in the m a n n e r
suggested above so as to allow scope for the adjustment of the
conflicting interests involved in such questions.
Section 70 of the Contract Act also raises many complications.
Whilst section 65 provides for the restoration of any advantage received
under void agreement or contract, section 70 provides for the
restoration of a thing delivered or for compensation for the act done,
independent of any agreement or contract, but not gratuously by a
person who enjoys the benefit of such thing or act. Section 65 only
speaks of a void agreement or contract and does not refer expressly to
any question of legality or illegality; section 70 requires that the person
claiming the compensation or restoration must have acted lawfully.
W h a t does the word 'lawfully' m e a n ? It is possible to say that a party
who has done some act or given some thing to the government in

LAW OF CONTRACT 255
accordance with a contract which is m a d e in clear violation of the

mandatory provisions of article 299 has done so lawfully? It is
submitted that the principle of unjust enrichment embodied in this
section is subject to limitations based upon certain other policy
considerations, such as, t h a t the section ought not to be so read as
to justify the officious interference of one m a n with the affairs or
property 6f another. This would go to secure his right to privacy and
this can be achieved only by restricting the application of the section
to a case where the other party has the choice of rejecting the benefit
and yet has accepted it. And that the act must have been done or
the thing must have been delivered lawfully.
T h e entire question as to whether section 70 applies to defective
government contracts, therefore, depends upon the characterization of
the act done or the delivery of the thing under a defective contract,
not complying with article 299 of Constitution as lawful or unlawful.
Moreover from the point of view of the use of the resources of
the nation, the remedy which m a y be given under section 65 or
section 70 dots not go the full way of solving the problem. Both the
sections provide for the return of benefit actually received by the other
party. But there is no remedy when one party has incurred expenses
on the basis of the contract, but has not so far given any actual
benefit to the other party. This aspect of the question should also be
considered and studied from the point of view of both the losing party
and the society in so far as it involves waste of economic recourses in
the case of uncompleted works.
All these show the basic dilemma involved in dealing with govern-
ment contracts in which the government is both a party to the
contract and also representative of the social interest.
B. Government Contracts on par with Private Contracts
A number of cases not important or significant in themselves, go
a long way to confirm the trends in the Indian courts towards the
equality of treatment between the government and the individuals so
far as the contractual principles are concerned.
Thus, in S. P. Consolidated Engineering Company (P.) Ltd. v. Union
of India,89 and The State of U.P. v. Raja Ram,90 the common law rule
that the debtor must seek the creditor was made applicable to the
state in India.
Similarly, in Ram Lai v. Punjab State,91 involving the question of
interpretation of the contract with the state of Punjab relating to the
arbitration, the High Court said
It is unnecessary to point out that a recognised rule of construction according
to which contracts are interpreted, do not seem to draw any distinction
89. A.I.R. 1966 Cal. 259.

90. A.I.R. 1966 All. 159.
91. A.I.R. 1966 Punj. 436.

between contracts to which the Government is one of the parties and the con-
tracts between two private parties. At least no principle nor precdent has
been brought to our notice what would land support to any such distinc-
tion in the eye of law.... 92
O f course, in this case, this principle was discussed, while rejecting the
argument of strict construction against the government in contracts
to which the government is a party.
These cases are referred to only in order to show that the question
of treating the government on par with private individuals in cases of
contracts and of applying the same principles of the contract law is not
a very simple question. T h e principle of equal treatment may cut in
both the ways. Sometimes the government may get such treatment as
would not be conducive to public interest because ii s double role
as a businessman and sovereign may be ignored. O n the other
hand, public expediency may lead the court to save the government
by taking the position t h a t there is no contract at all to the utter
dissatisfaction of the other party.
C. Standard-Form Contracts and Government

Considering the advantages offered by using standard-form contracts
and the large number of contracts which the government has to
make, it is very natural to find the increasing use of standard-form
contracts by the government for its multifarious business and commercial
purposes. Ram Lai v. Punjab State9^ involved the question of
interpretation of the arbitration clause (which did not expressly
refer to arbitration) inserted by the government in a standard-
form contracts. The Union of India v. Maddola Thathaiah9* involved
a standard-form contract for the supply of goods, in which was
inserted the condition giving to the government the right to terminate
the contract at any time the case will be discussed at another place.
T h e third case of S. Rajam v. Indian Union95 contained a condition
giving discretion to the government to fix the rate of commission
to be given to the auctioneer as it thought fit. T h e Court, however,
construed the clause as providing for the payment of fair and
reasonable rate of commission and avoided the invalidity or
enforceability of the contracts. These cases are here referred to for
the purpose of pointing out the slow and gradual emergence of a new
problem, namely, the problem of standard form-contracts used by the
government. T h e problem is serious, because the sovereign power of
the government is here added to the monopolistic power which the
government increasingly enjoys, and calls for a bold and courageous
attitude on the part of the judges to strike down the unreasonable, harsh,

93. A.I.R. 1966 Punj. 430.
94. A.I.R. 1966 S.G. 1724.
95. A.LR. 1966 Mad. 235.

LAW OF CONTRACT 257
unjust and oppressive conditions which the government may seek to

impose. This is more imperative, because the government contracts
operate more and more as an instrument for implementing the policy of
the state as an alternative to legislation and yet are immune from the
constitutional attack on the ground of the infringement of fundamental
rights. The functional analysis of such contracts will show that there
is not much difference between the legislation passed by the state and
contractual conditions imposed by the leviathan. Both of them serve
the same purpose. As W. Friedmann writes,
the increasing use of contracts as an instrument of economic state policy,
through the extension of government functions and the socialisation of
industry makes contract largely the legal expression of economic and social
policy.96
If, therefore, these government contracts are treated like any other
private contracts, as public corporations and government companies are
treated like private corporations, the danger is that the capacity of the
state to destroy or damage the fundamental liberties of the citizens will
enormously increase. If the courts are inhibited by conceptual difficulties
from applying constitutional limitations, that is, the greater reason for
using the concept of reasonableness and justice dynamically, and
purposefully in order to check the arbitrariness and wide discretionary
authorities of the state.
VII. TENDERS
The construction of tenders continues to give rise to difficulties.

There are three possible interpretation of the acceptance of a tender
from the legal point of view, which were lucidly explained by Lord
Atkin in Percival Limited v. L.C.C. Asylums Committee.97 These tend to
produce uncertainty in many commercial transactions where these
uncertainties destroy the function of contracts as an insurance against
future risk.
The case of Union of India v. M. Thathaiah98 decided by the
Supreme Court is the classic example of these uncertainties. In this case,
the Dominion of India as the owner of the M. & S. M. Railway
invited tenders for the supply of 14,000 imperial maunds of jaggery,
and the plaintiff-respondents submitted the tender which was accepted
by the government. The respondent was then asked to remit a sum of
Rs. 7,900 as security which he did and the deputy general manager on
behalf of the railways reiterated the acceptance of the tender subject to
96. W. Friedmann, Law in a Changing Society 125 (1959).
97. (1918) L.J.K.B. 677 at 678 - 79. These three possible interpretations are:
(1) Where the acceptance of a tender gives rise to a contract; (2) where the
tender is only a standing offer which when accepted by a specific order, creates a
contract and (3) where the parties are not bound to any specified quantity and yet
bend themselves to buy and pay for all goods that are in fact needed by them.
98. A.I.R. 1966 S.G. 1724.

the respondent's acceptance of the terms and conditions printed on the

reverse of the letter. The goods were to be delivered in four instal-
ments. The programme of delivery was subsequently altered and the
respondent had delivered the first instalment also. Thereafter the deputy
general manager informed the respondent that the balance quantity of
jaggery outstanding be treated as cancelled and the contract closed, in
accordance with the clause reserving to the government the right to
terminate the contract. The High Court held that there was a
concluded contract but the clause in question was void, and remanded
the suit for disposal about damages*
Before the Supreme Court, the government contended that there
was no enforceable obligation to purchase the entire quantity, and that,
in the alternative, the government could terminate the contract in
accordance with the contract."
The Supreme Court considered the various terms and conditions
of the tender, especially, the provisions of the paragraphs 8 and 9 of
the tender requiring a deposit of security and the placing of the formal
order. The Court referred to the distinction drawn by Cheshire and
Fifoot100 between a case where the acceptance of a tender would create
legal obligations and a case where the tender is nothing but a standing
offer which create a binding obligation only when a specific order is
made and held that the contract between the parties was of the latter
type and that the clause giving the right to the government to terminate
the contract referred to a right to cancel the agreement for such
supplies of jaggery about which no formal order had been placed by
the deputy general manager and did not apply to such supply of
jaggery about which a formal order had beeri placed.101
Thus the Supreme Court, on the one hand, construed the tender
as a standing offer, rejecting the contention of the respondent that it
was a concluded contract for the supply of the entire quantity and, on
the other hand, narrowly construed the clause in the tender, reserving
the government's right to terminate the contract as not applicable to
the supply of jaggery for which a specific order was already placed,
and so the Court avoided the question of deciding the question of the
validity of the clause.102
The case shows the difficulty of interpreting the different kinds of
tenders and the harmful consequences of using vague and ambiguous
foims of tenders. In this very case, the respondent sincerely believed
in the existence of a concluded contract and invested more than a lakh
of rupees to perform the contract. One main function of long term
contracts is to ensure against the future uncertainties and to secure the
99. Id. at 1725.
100. Cheshire and Fifoot, Law of Contract 37-38 (6 th ed. 1964).
101. Supra note 98 at 1727-28.
102. For this see the discussion under § VIII infra at 259.

LAW OF CONTRACT 259
smooth supply or sale of goods. O n the basis of such security, both

the parties plan their future economic activities. T h e very function
of the contracts and the plans for the future are frustrated by such
uncertainties as to the precise nature of such contracts. T h a t uncertainty
in the very case was such that the best minds represented by the Judges
of both the H i g h Court and the Supreme Court came to different
conclusion, then what to say of the ordinary contracting parties ?
Moreover, such uncertainties may encourage either party who is not
willing to perform the contract to evade his contractual obligations by
such devices. Certainly, the purpose of such tenders is not to outwit
each other. I t is absolutely essential for the sake of certainties and
security in business transactions and the efficient utilization of resources
that these two classes of tenders should be standardized, so t h a t the
parties know what they are doing at very time they are entering into
relations with each other.
VIII. UNILATERAL RIGHT TO TERMINATE

THE CONTRACT
In the case, previously discussed 103 a very important and interest-

ing question, namely, whether the clause in a contract which gives one
party right to terminate a contract is valid or not, was avoided by the
Supreme Court by narrowly construing the clause. However, the
M a d r a s High Court in M. Thathiah v. Union of India10* fully discussed
the question and held that such a clause was void. This judgment
deserves notice.
T h e M a d r a s High Court argued that there was a distinction
between a concluded contract for the sale or purchase of goods and a
continuing contract such as the contract of service or the contract of
partnership. T h e latter type of contract may contain such a clause
giving unilateral right of termination, while the former type of contract
cannot. Considering the reasons for this, the Court discussed the
question of repugnancy between two clauses, in which case the latter
repugnant clause should be rejected. But when the latter clause does
not destroy, but only qualifies the earlier clause, the two clauses must
be read together. T h e question therefore, the Court said, is : whether
the right to terminate the contract has the effect, actually or possibly,
of destroying a contract altogether or only provides for contingencies
subject to which the covenant is enforceable. In all cases involving
contracts subject to such contingencies, these contingencies are certain
and objective and do not include a condition which is no more than
the whim and fancy of a party ; while, in this case, the effect of the
clause would be that there is an enforceable contract subject to the
condition that it is open to one of the parties to say t h a t it is not
enfoiceable.
103, Union of India v. M. Thatkaiah, A.I.R. 1966 S.C, 1724.

104. A.I.R. 1957 Mad. 82.

T h e Court, next, considered two cases, Chunilal Dahyabhai & Co.

v. Ahmedabad Fine Spinning and Weaving Co. Ltd.105 and Chhotalal v.
Champsay Umersay & Co.,106 in which the Gourt construed such a clause
as giving the right to one of the parties to terminate the contract only
for good reasons, while the clause in the case under consideration was
absolute in its terms, giving unlimited and arbitrary powers to one of
the parties to terminate the contract. Such a clause, the Court said, is
clearly repugnant to the assumption of contractual obligations under
the contract and, therefore, must be declared to be void. 107
T h e nature of such a clause calls for clear analysis. Is it a condi-
tion providing for one mode of discharge of contract or is it a
limitation or exception clause ?
In this connection, a distinction must be drawn between a cotract
which is of a continuing nature, like a contract of service or a contract
of agency and a contract which is not, such as a contract of the supply
of a specific quantity of goods or a contract for repairing a watch or
motor vehicle. In the case of a continuing contract, the clause giving
right to one party to terminate the contract really provides for one
mode of discharge of contract. W h e n this right is exercised, it puts an
end to the contractual relations between the two parties, without
affecting their previous rights and obligations already accrued.
In the other type of contract, the nature of the clause is difficult
to analyze. T a k e the case of M. Thathiah v. Union of India as an
instance. If we accept the judgment of the M a d r a s High Court that
t h e r e was a concluded contract between the government and the other
party under which the former was bound to accept and the latter was
bound to deliver the specific quantity of jaggery. W h a t will be the
effect of the exercise of the right by the government to terminate the
contract ? T h e result would be that the government would not be
bound to accept the delivery of the goods. In other words, the govern-
ment would not be liable for non-acceptance of the delivery. This clause
therefore, is not, in fact, a mode of discharge of contract, but it is an
exception or exemption clause in a disguised form. It amounts to saying
" I promise to do this, but I may not do it and I will not be liable if
I do not do i t . "
Such a clause may, therefore, be construed in one of the two
ways. T h e clause, read together with the other terms and condi-
tions of the alleged contract, may go to show that the alleged contract
is intended to be binding in honour only. 1 0 8 T h e r e is not in law a
contract at all. T h e Supreme Court, after considering all the terms
105. A.I.R. 1922 Bom. 44.

106. A.I.R. 1923 Bom. 75.
108. See Brian Corte, Execution Clauses (1964) for a detailed discussion of this
aipect.

LAW OF CONTRACT 261
a n d conditions of the tender, came to this conclusion. 109 O r , the clause

may be construed as purely a limitation or exception clause exempting
the government from liability for non-performance. T h e n , it should be
dealt with as such. T o apply the doctrine of repugnancy and to strike
it down involves the application of what D r . G. Williams calls,
*'spurious doctrine of repugnancy." 1 1 0 T h e correct approach should be
as suggested above, to apply the doctrine of public policy as embracing
the principle of fairness between the two parties, to deal with such
clauses. As an exception clause, such a condition is clearly inconsistent
with one of the main functions of contract, namely, to insure against
the future economic risks and to enable a party to plan his future
economic activities.
IX. SECTION 70 OF T H E C O N T R A C T A C T
T h e decision of the A n d h r a Pradash High Court in Kanak Rao v.
Sriranga Venkata111 examples many of the difficulties in the application
of section 70 of the Indian Contract Act. 1 1 2 T h e facts were that the
plaintiff-appellants who were the co-owner of a rice mill gave the mill
on lease under a registered deed to the defendant-respondent for a
certain period. It was agreed at the time of the execution of the lease
deed that the expenditure of R s . 1,200 should be borne by the owners
by way of repairs. T h e defendant was, therefore, permitted to spend
t h a t amount and get the repairs done. According to clause 5 of the
lease deed, the defendant was required to obtain of all the co-owners if
he was required to spend in carrying out repairs an amount exceeding
Rs. 150. However, the defendant over and above the permitted
repairs, claimed to have carried on certain other repairs and incurred
an expenditure of Rs. 4,888. I n a suit by the plaintiffs for accounts of
the amount due to them, the plaintiffs contended that the defendant
was not entitled to claim this amount because no permission in accord-
ance with the lease deed was taken from the plaintiffs. T h e trial
court allowed the re-imbursement on the ground that consent was
obtained, while the subordinate judge held that no consent was obtained
but allowed the re-imbursement under section 70 of the Contract Act.
T h e question before the High Court arose as to whether on the
face of an express contract governing the relations of the parties, could
re-imbursement be claimed under section 70 of the Act violation of a
t e r m of the contract ? T h e High Court held that where the entire
109. Union of India v. M. Thathaiah, A.I.R. 1966 S.G. 1724.

110. G. Williams, "The Doctrine of Repugnancy," 59 L.Q. Rev. 343 (1943) and
60Z,.Q.. Rev. 69 and 190 (1944).
111. A.I.R. 1966 A.P. 297.
Where a person lawfully does anything for another person, or delivers any-
thing to him not intending to do so gratuitously, and such other person enjoys
the benefit thereof, the latter is found to make compensation to the former in
respect of, or to restore, the thing so done or delivered.

relationship of the parties was governed by express terms of the

contract, section 70 could not be pressed into service ignoring the terms
of the contract. T o grant q u a n t u m meruit under section 70 would
be tantamount to violating an express terms of a contract. T h e Court,
therefore, disallowed the claim of reimbursement of the defendant.
T h e important question is : can an obligation arise under sec-
tion 70 when t h e relation between the two parties is governed by the
terms of the contract ? T h e question does not appear to be difficult
when such obligation is not inconsistent with the contractual relation
or where such contract is invalid. T h e difficulty arises when there is a
breach of the contract and the claim of reimbursement is m a d e under
section 70.
T w o cases must be distinguished: Fisst, where the party in default
has only incompletely performed his side of the obligation; in other
words, where t h e breach consists in the partial performance of t h e
contract, the normal rule is that he cannot recover in respect of this
partial performance, but a claim to remuneration may arise where the
other party has accepted such partial performance on the basis of
quantum meruit. But this is possible only where the party not in
default has the option whether to accept or to refuse the partial
performance. 1 1 3 Second, where the claim of reimbursement arises from
the violation of an express term of the contract itself. I n such a case,
it is not proper to discuss the question, as the High Court has discussed.
It can be settled within the framework of section 70 itself.
Section 70 requires that t h e act must have been done
lawfully. Is it possible to say that t h e party who has spent money on
repairs in express violation of a valid contract has done the act
lawfully? Is it not possible to regard the terms of a valid contract as
law for this purpose? O r , in the alternative, it is possible to solve it
by inquiring into whether the other party has accepted and enjoyed
the benefit given by the party in default. What is necessary is that
the party not in default must have the option to accept or reject the
benefit. In the present case, it is difficult to say that the plaintiff
enjoyed the benefit of the repairs or had the option of rejecting the
benefit because the repairs could not be undone.
X. CONCLUSION
A. Evaluation
An analysis of the cases reported during 1966 on the law of contract
indicates that except a very few cases from which glimpses of a func-
tional and evaluative approach are visible, most of the cases show that
the approach of the Indian courts in the field of the law of contract still
suffers from the vice of conceptualising T h e discussion in many cases
113. See Anson, Principles of the English Law of Contract 431 (22nd edn. Guest
edn. 1964).

LAW OF CONTRACT 263
is uniliuminating, because the content analysis of any decision will show

that it consists of some reference to the language of the sections of the
Indian Contract Act, some paragraphs from the English judgments and
mechanical references to the Indian decisions. Mostly, the policy
considerations involved in the solution of the problems thrown up by
these cases are generally ignored or sometimes left concealed.
It seems that the new value-judgments embodied in the Constitu-
tion of India do not still exercise much influence on the decisions of
the cases. The most glaring exception to this is Mr. Justice Bhagwati's
judgment in Lalbhai D. & Co. v. Chitaranjan.11*
The approach of the courts has mainly remained traditional,
uninfluenced by the fundamental transformation in the nature and
functions of contract in the modern society.
B. Trends and Tasks Ahead

(1) An increasingly large proporation of the cases involve the
question of illegality and public policy, as a direct result of the gradual
transformation of the laissez-faire economy into the mixed economy.
This calls for a greater consciousness in the judiciary of its proper role
of the adjustment of the conflicting value-judgments involved in the
relations between freedom of contract and public policy. A delicate
balancing of these conflicting interests is the need of the times.
(2) The courts are more and more called upon to examine the
content of the actual terms and conditions in the contract from the
point of view of reasonablenss or fairness or justice as between the two
parties. It is here that the future task of the judiciary lies •— to
develop the concept of public policy so as to embrace the idea of
fairness or justice between the two contracting parties.
(3) An urgent analysis of the various aspects of the government
contracts whose number every year is fast increasing is the imperative
necessity. The courts appear to be indifferents to the complex nature
and functions of government contracts, and are unnecessarily obsessed
with the idea of applying the principles of purely private law to
them.
(4) The modernization and industrialization of the country is
rapidly giving birth to the standard-form contracts in various
spheres of trade and commerce. It is highly surprising and unfortunate
that the courts arc completely unaware of this new challenge. Their
decisions seem to be completely outdated, showing complete indifference
of the efforts made and techniques developed by the English courts
which are, in essence, of the nature of private legislation.
114. A.I.R. 1966 Guj. 189.

The law of contract with its preconceived ideas and nineteenth

century doctrines must change in response to the socioeconomic
changes in India and the idiological revolution which is engulfing the
entire nation, otherwise it will collapse under the strain and stresses of
the modern social and economic pressure. Herein lies the important
task of the judiciary, viz* (let us again quote Mr. Justice Bhagwati) :
We must remember that the law must adopt itself to the changing needs of
society and whenever it is possible we must not hesitate to adopt new principle
for otherwise law will become "antiquated straight jacket and then dead
letter" and "the judicial hand would stiffen in mortmain if it had not part in
the work of creation."115
Of course we must be prepared to pass through the travails of the

emergence of the modern law of contract.
115. Lalbhai D. &< Co. v. Chittaranjan, A.I.R. 1966 Guj. 189 at 197.

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LAW OF CONTRACT

T H E LAW OF CONTACT is the meeting point and common ground of

*LL.M. (Guj.) LL.M. (Harvard), Principal, New Law College, Ahmedabad.

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parties became an instrument of oppression and injustice in the face of

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T h e ideal of the welfare state has necessarily led to the expansion

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of contract with public policy. This section, therefore, is destined to

However, the second question before the Court was more

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their violation. If the agreement affects the second class of provisions

15. A.I.R. 1966 J. &K. 89.

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The Court, first of all, referred to the difference of opinion

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22. A.I.R. 1966 M.P. 13.

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admitted one partner in his business. U n d e r the agreement, the profits

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Does it especially insist upon certain personal qualifications, such as

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In Nizamul Hague v. Begam Noorjehan21 the question arose as to

27. A.I.R. 1966 Cal. 465.

defeating the provisions of any law. As a matter of fact, maintenance of

T h e decision is very significant for its enlightened approach in

31 Supra note 29 at 164.

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In Gulabchand v. Kudilalm the appeal arose out of a suit instituted

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it appears to be. A number of querries crops up in our minds. What

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of the fundamental breach of contract or the doctrine of the

H i g h Court in Lalbhai D. & Co. v. Chittaranjan.*5 I t provides a very

45. A.I.R. 1966 Guj. 189.

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Moreover, the distinction is functionally also justifiable, because

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51. Supra note 45 nt 197.

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Once the court holds that the particular negative covenant is

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of damages (which we have considered elsewhere). (3) It is only

Moreover, the freedom of occupation must be considered as a

T h e decision rightly emphasizes the need for the proper evaluation

T h e decision is based upon the keen awareness of the socio-

52. Quoted from 2 Pound, Jurisprudence 429-30 (1959).

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contract, inequality in t h e bargaining position, between the two

T h e judgment rightly emphasizes the true function of the judiciary

IV. CONTRACTS IN R E S T R A I N T OF L E G A L PROCEEDINGS

A recurrent question in connection with the contracts in restraint

56. Bhagwati, J . said,

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days after the arrival of train at distination and no liability would

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65a. E.g. some exemption clause a r e :

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