The Impact of Indian Contract Law on the Development of Common Law Contract Damages and Sale of Goods Law

Prof. (Dr.) Katy Barnett |

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Readers may wonder why an Australian professor is writing a post about the comparative importance of Indian contract law, and why she has a passion for Indian private law. First, it is important for common lawyers to understand the importance of the Indian Contract Act 1872 to common law development. Secondly, it is important to encourage private law scholarship globally, including in India and the subcontinent. Unfortunately, in most jurisdictions, while private law subjects are compulsory and essential for practice, universities often struggle to attract scholars to teach and research in those areas, given the attractions of private practice, or of other areas of law. I have discovered that this problem is as pressing in India as it is in Australia, if not more so. Consequently, I commend the editors of this publication for their dedication to a critical area of research. It is an honour to contribute.

In this piece, I want to focus on one of my particular areas of interest, the damages for breach of contract available under s 73 of the Indian Contracts Act 1872, and how the discussion of this provision by contract treatise authors—most critically, Sir Frederick Pollock and Sir Dinshah Fardunji Mulla, with their 1905 text The Indian Contract and Specific Relief Acts—fed back into the development of the common law more generally, particularly the reception of rules for measurement of damages and remoteness rules. Indian law, and more particularly, the commentary on Indian law, has shaped global common law developments in ways not hitherto fully appreciated.

This piece also underlines the ongoing importance of treatises in the development of the common law. Ideally, treatises provide practitioners and judges with a map which helps to guide them in the coherent application and development of the law.

Section 73, Indian Contracts Act 1872

The Indian Contracts Act 1872 had a long gestation, and in the end, as Warren Swain has discussed in the linked chapter, represented a compromise. The section governing damages for breach of contract was not controversial, but for political reasons, the provisions governing specific relief were delayed until the enactment of the Indian Specific Relief Act 1877 (later replaced by the Specific Relief Act 1963 in India).

The section governing damages for breach of contract in Indian law is as follows:

When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss of damage sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract: When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.

Explanation: In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by non-performance of the contract must be taken into account.

Common lawyers from across the globe will recognise that many of the phrases in the section have been derived from the wording of English case law, although as M.V. Swaroop has noted, the section makes “certain beguiling departures” from the common law (see MV Swaroop, ‘Performance Interest and Money Awards in India’ in M Chen-Wishart, A Loke, and B Ong (eds), Studies in the Contract Laws of Asia I: Remedies for Breach of Contract (OUP 2016) 84, 85). The section is followed by eighteen “Illustrations”, in random order, mostly dealing with contracts for sale of goods.

As for the departures from common law wording, Swaroop notes the following, in the chapter referenced above: the wording of the remoteness rule is subtly different from Hadley v Baxendale (1854) 9 Ex Ch 341, 156 ER 145. The former imposes liability for all special losses “such as may be reasonably supposed to have been the in the contemplation of both the parties”; but in s 73, it seems that the parties must actually know of the special loss. Moreover, the requirement in the Explanation to take into account “the means which existed of remedying the inconvenience” might also be taken to include not just reasonable mitigatory measures, but all measures, including cost of cure. Finally, Illustration (f) to section 73, dealing with defective repairs to a house, does not seem to import a qualification of reasonableness, although perhaps the mitigation requirement just mentioned could provide a suitable limitation.

I have hypothesised in a yet-unpublished piece that the development of a global market for British goods and textiles in the wake of the end of the Napoleonic Wars was pivotal to the development of contract damages as the ‘default’ remedy for breach of contract at common law. Indeed, over the 1830s, India moved from a net exporter of textiles to Britain to a net importer of textiles and other commodities from Britain, as British technological advances gave their textile industries a comparative advantage. However, Britain still had to import raw materials from its colonies. India was an important source of raw materials such as cotton, opium, jute, indigo, madder, and tea. Hence trade from colonial outposts to Great Britain was as significant as trade from Great Britain to other countries.

Of course, the Indian Contract Act 1872 had some immediate visible impacts on the law of the region. It was used as a template for the Malaysian contract law codification, and then, when the colonies in the region regained independence from colonial rule in 1947, modern-day India, Pakistan and (later) Bangladesh retained it (with regional amendments in some cases).

However, I argue here it also had a “slow-release” influence upon the broader common law. At first, there was no reason for English judges and lawyers to consult Indian law. This changed when treatise writers brought Indian law to the attention of English lawyers, through their efforts to produce coherent roadmaps of the English common law principles. An already codified jurisdiction provided a fine point of comparison.

English lawyers begin to consider Indian law: the influences of treatise writers and sale of goods legislation

In 1876, Sir Frederick Pollock published Principles of contract at law and in equity. While the treatise dealt with English common law, the subheading stated that it was “a treatise on the general principles concerning the validity of agreements, with a special view to the comparison of law and equity, and with references to the Indian Contract Act, and occasionally to Roman, American, and continental law” (emphasis added). Although the text did not discuss damages, it meant that the attention of English lawyers had now been drawn to the Indian Contract Act 1872, in the context of a text which dealt with common law principles of contractual validity more generally.

A second very practical problem caused the English to turn to Indian law, related to their continuing trade in goods. The English codified the principles governing sale of goods in what was then Chapter VII of the Indian Contracts Act 1872, the first codification of these principles in the common law world. These included principles governing an entitlement to damages in a variety of circumstances.

The continuing uncertainty about the principles governing sale of goods in England produced their own statute codifying the common law rules in the Sale of Goods Act 1893 (Vict. 56 & 57, c. 71). In 1930, Chapter VII of the Indian Contracts Act 1872 was repealed and replaced by the Indian Sale of Goods Act 1930 (equivalent to the UK Sale of Goods Act 1893). Hence, we see a process of back-and-forth inspiration between the different jurisdictions. The English were compelled to consider and distill the principles governing sale of goods in order to effect codification in an Indian context first, then adapted these principles for their own jurisdiction, and then fed that adaptation back into Indian law with the 1930 Act.

Then, in 1905, as noted in the introduction, Sir Frederick Pollock and Sir Dinshah Fardunji Mulla published a treatise entitled The Indian Contract and Specific Relief Acts. Among other things, this treatise had a seventeen-page long discussion of s 73 of the Indian Contracts Act 1872.

By the early twentieth century, Indian law and disputes arising from the areas governed by the Raj had begun to visibly influence English law. We still use the case of A.K.A.S. Jamal v Moolla Dawood, Sons & Co [1916] AC 175 as authority across the entire common law world, when discussing measuring damages as at date of breach, and the obligation to mitigate, and the Privy Council in that case confirmed that s 73 was simply a codification of common law principles (notwithstanding Swaroop’s observation that the wording of s 73, and at least one of the Illustrations, might be thought to create different rules).

Indian law becomes influential

By 1925, the fifth edition of Pollock and Mulla on the Indian Contract Acts and Specific Relief Acts could receive the following encomium, in a book review in second volume of the Cambridge Law Journal:

This work, first published in 1905, has now reached its fifth edition. The Indian Contract Act, 1872, is in substance a code of the English law of contract as it was understood to be at that date. A commentary upon it, in addition to being indispensable to the Indian lawyer, will afford instruction to the English student who seeks to contrast the lines of development followed in the English and the Indian jurisdictions respectively. Moreover, the English practitioner will not infrequently be able to find in it a suggestive line of argument upon points with which the Indian Courts have been called upon to deal, but which have so far escaped the attention of the English Courts.

Consequently, it seems fair to suppose that by this time, the Indian law had indeed exerted some influence on the development of English law. There are two influences I want to talk about here, both of which are inter-related.

The ascendancy of Hadley v Baxendale across the common law world

First, I have argued elsewhere that I believe that s 73 of the Indian Contracts Act 1872 contributed to the entrenchment of Hadley v Baxendale as the remoteness rule in the common law world more widely. This piece is an extension of that work. As V Niranjan has argued, at the time of codification, Hadley v Baxendale was not necessarily the obvious solution for legislative drafters, and was initially regarded as controversial (V Niranjan, “The Contract Remoteness Rule: Exclusion, Not Assumption of Responsibility” in A Dyson, J Goudkamp and F Wilmot-Smith, Defences in Contract (Oxford, 2017) 187, 198).

However, the general normative principle behind the Indian Contract Act 1872, as Swain has argued in the chapter cited earlier, was Will Theory, drawing on the theories of Robert Joseph Pothier, the French jurist. The rule in Hadley v Baxendale was derived from Pothier’s writings, and reflected a notion that the parties must be given an opportunity to have a meeting of the minds, and to disclose any special losses they might suffer, otherwise it would not be fair for the breaching party to be liable. As a result, it was a good fit for general approach of the codifiers. In fact, the principles behind Pothier’s writings had a more ancient history, dating back to Roman times.

The importance of Hadley v Baxendale can be seen from Pollock and Mulla’s treatise, the first edition of which contained including a long discussion of Hadley v Baxendale and the English Sale of Goods Act 1893 from pages 258 to 262. The learned authors say at page 259, “The Court which gave judgment in Hadley v. Baxendale was a very strong Court; and the rule laid down by it is in harmony with many other rules in our law which fix the measure of liability by the standard of what was known to the defendant, or ought to have been then and there known to a reasonable man in his circumstances.”

A more coherent approach to damages for breach of contracts for sale of goods

As I have already noted, many of the Illustrations to s 73 deal with sale of goods or carriage contracts, and it is submitted that these Illustrations, and the later repealed Chapter VII, had an influence on sale of goods law in England and across the Commonwealth, where other jurisdictions passed legislation equivalent to the English legislation. Moreover, as Pollock and Mulla observe in their first edition, in the Illustrations, the “intention was plainly to affirm the rule of the Common Law as laid down by the Court of Exchequer in the leading case of Hadley v Baxendale….” (pages 258–259). Hadley v Baxendale-style remoteness problems permeate the Illustrations, and the Illustrations provide startlingly accurate predictions as to how later English cases were in fact decided.

Failure to deliver goods

First, five Illustrations deal with a failure to deliver goods. The principles espoused for the measurement of damages are consistent with the later s 57 of the Indian Sale of Goods Act 1930, which states: “Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery.”

The basic measure for this kind of breach is established by Illustration (a).

(a) A. contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price, to be paid on delivery. A. breaks his promise. B. is entitled to receive from A., by way of compensation, the sum, if any, by which the contract price falls short of the price for which B. might have obtained 50 maunds of saltpetre of like quality at the time when the saltpetre ought to have been delivered.

Knowledge of the breaching party is particularly relevant to liability, as shown in Illustration (j), where knowledge of potential loss of profits causes the breaching party to be liable to the non-breaching party.

(j) A., having contracted with B. to supply B. with 1,000 tons of iron at 100 rupees a ton, to be delivered at a stated time, contracts with C. for the purchase of 1,000 tons of iron at 80 rupees a ton, telling C. that he does so for the purpose of performing his contract with B. C. fails to perform his contract with A., who cannot procure other iron, and B., in consequence, rescinds the contract. C. must pay to A. 20,000 rupees, being the profit which A. would have made by the performance of his contract with B.

Conversely, lack of knowledge creates a different result in Illustration (k):

(k) A. contracts with B. to make and deliver to B., by a fixed day, for a specified price, a certain piece of machinery. A. does not deliver the piece of machinery at the time specified, and, in consequence of this, B. is obliged to procure another at a higher price than that which he was to have paid to A., and is prevented from performing a contract which B. had made with a third person at the time of his contract with A. (but which had not been then communicated to A.), and is compelled to make compensation for breach of that contract. A. must pay to B., by way of compensation, the difference between the contract price of the piece of machinery and the sum paid by B. for another, but not the sum paid by B. to the third person by way of compensation.

Illustration (p) comes to a similar conclusion to Illustration (k):

(p) A. contracts to sell and deliver 500 bales of cotton to B. on a fixed day. A. knows nothing of B.’s mode of conducting his business. A. breaks his promise, and B., having no cotton, is obliged to close his mill. A. is not responsible to B. for the loss caused to B. by the closing of the mill.

Finally, in Illustration (o), the question of the relevance of resale price is considered: resale price is generally irrelevant to the calculation of market value if it is not within the contemplation of the parties:

(o) A. contracts to deliver 50 maunds of saltpetre to B. on the first of January at a certain price. B. afterwards, before the first of January, contracts to sell the saltpetre to C. at a price higher than the market price of the first of January. A. breaks his promise. In estimating the compensation payable by A. to B., the market price of the first of January, and not the profit which would have arisen to B. from the sale to C., is to be taken into account.

This is consistent with the results of the later well-known English cases of Rodocanachi Sons & Co v Milburn Bros (1886) 18 QBD 67 and Williams Brothers v Ed T Agius Ltd [1914] AC 510, both of which hold that which hold that the resale price (whether higher or lower) is generally irrelevant to calculating market value if it is not within the contemplation of the parties. Both cases post-date the enactment of the Indian Contract Act.

Failure to take delivery

Secondly, three illustrations to s 73 of the Indian Contract Act 1872 deal with a failure to take delivery by the buyer. These are all consistent with s 56 of the Indian Sale of Goods Act 1930, which holds that if a buyer refuses to take delivery of goods, the seller may sue for damages for non acceptance: “Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for non-acceptance.”

The basic measure is set out in Illustrations (c), (d) and (h) as the difference in value between what the buyer would have paid and what price the seller could obtain on the market at the time when the buyer refuses to take delivery:

(c) A. contracts to buy of B., at a stated price, 50 maunds of rice, no time being fixed for delivery. A. afterwards informs B. that he will not accept the rice if tendered to him. B. is entitled to receive from A., by way of compensation, the amount, if any, by which the contract price exceeds that which B. can obtain for the rice at the time when A. informs B. that he will not accept it.

(d) A. contracts to buy B.’s ship for 60,000 rupees, but breaks his promise. A. must pay to B., by way of compensation, the excess, if any, of the contract price over the price which B. can obtain for the ship at the time of the breach of promise.

(h) A. contracts to supply B. with a certain quantity of iron at a fixed price, being a higher price than that for which A. could procure and deliver the iron. B. wrongfully refuses to receive the iron. B. must pay to A., by way of compensation, the difference between the contract price of the iron and the sum for which A. could have obtained and delivered it.

This is consistent with the later case of Jamal v Moolla Dawood, mentioned above.

Delay in delivery

There are two Illustrations dealing with delay in delivery (and no specific provision in the later Sale of Goods Act 1930). Illustration (e) provides that a carrier (or a seller) must compensate for the amount the recipient would have received if the jute had arrived on time and the market price at the time it in fact arrived:

(e) A., the owner of a boat, contracts with B. to take a cargo of jute to Mirzapur for sale at that place, starting on a specified day. The boat, owing to some avoidable cause, does not start at the time appointed, whereby the arrival of the cargo at Mirzapur is delayed beyond the time when it would have arrived if the boat had sailed according to the contract. After that date, and before the arrival of the cargo, the price of jute falls. The measure of the compensation payable to B. by A. is the difference between the price which B. could have obtained for the cargo at Mirzapur at the time when it would have arrived if forwarded in due course, and its market price at the time when it actually arrived.

Illustration (q) confirms that if a late delivery results in a loss of profit, follow-on profits are not recoverable, nor are expenses in preparing to manufacture a particular item.

(q) A. contracts to sell and deliver to B., on the first of January, certain cloth which B. intends to manufacture into caps of a particular kind, for which there is no demand, except at that season. The cloth is not delivered till after the appointed time, and too late to be used that year in making caps. B. is entitled to receive from A., by way of compensation, the difference between the contract price of the cloth and its market price at the time of delivery, but not the profits which he expected to obtain by making caps, nor the expenses which he has been put to in making preparation for the manufacture.

Unlike non-delivery, failure to accept and defective goods, in delay cases, other common law courts in England and Australia consider the price that the buyer in fact received in on-sales. Hence, in Wertheim v Chicoutimi Pulp Co [1911] AC 30, a Privy Council case that post-dates the Indian Contract Act, it was relevant that fact the buyer managed to sell delayed goods at a higher price than the market price was considered. None of the Illustrations in the Indian Contract Act consider this issue, perhaps because it had not yet arisen, however, there seems no reason on the face of the wording of s 73 as to why Indian courts must follow Wertheim.

Defective goods

Section 59 of the later Sale of Goods Act 1930 provides as follows:

(1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may—

(a) set up against the seller the breach of warranty in diminution or extinction of the price; or

(b) sue the seller for damages for breach of warranty.

(2) The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does not prevent him from suing for the same breach of warranty if he has suffered further damage.

The question of whether a party can sue after they have on-sold defective goods to another and incurred liability is also dealt with by Illustration (m).

(m) A. sells certain merchandise to B., warranting it to be of a particular quality, and B., in reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be not according to the warranty, and B. becomes liable to pay C. a sum of money by way of compensation. B. is entitled to be reimbursed this sum by A.

This is consistent with the later English case of Bence Graphics International Ltd v Fasson UK Ltd [1998] QB 87, where the English Court of Appeal only awarded the costs of compensating customers for defective shipping container labels. Conversely, in another English Court of Appeal case, Slater & Co v Hoyle & Smith Ltd [1920] 2 KB 11, where it was found to be irrelevant that the non-breaching party managed to on-sell fabric pieces for the full price, despite the fact that they were defective.

Carriers

It is worth noting that Hadley v Baxendale itself was a case involving the liability of a carrier, and that the courts show a special tenderness towards carriers, not wanting them to be imposed with unexpected and disproportionate liability for which they did not bargain.

The basic measure is difference in value, as made clear in Illustration (g):

(g) A. contracts to let his ship to B. for a year, from the first of January, for a certain price. Freights rise, and on the first of January the hire obtainable for the ship is higher than the contract price. A. breaks his promise. He must pay to B., by way of compensation, a sum equal to the difference between the contract price and the price for which B. could hire a similar ship for a year on and from the first of January.

In Illustration (b) the concern is that the non-breaching party is compensated for consequential losses resulting from the need to hire a new carrier:

(b) A. hires B.’s ship to go to Bombay, and there take on board, on the first of January, a cargo which A. is to provide, and to bring it to Calcutta, the freight to be paid when earned. B.’s ship does not go to Bombay, but A. has opportunities of procuring suitable conveyance for the cargo upon terms as advantageous as those on which he had chartered the ship. A. avails himself of those opportunities, but is put to trouble and expense in doing so. A. is entitled to receive compensation from B. in respect of such trouble and expense.

Illustration (i) is fascinating, as it raises the question of special government contracts:

(i) A. delivers to B., a common carrier, a machine to be conveyed, without delay, to A.'s mill, informing B. that his mill is stopped for want of the machine. B. unreasonably delays the delivery of the machine, and A., in consequence, loses a profitable contract with the Government. A. is entitled to receive from B., by way of compensation, the average amount of profit which would have been made by the working of the mill during the time that delivery of it was delayed, but not the loss sustained through the loss of the Government contract.

In this way, it seems to anticipate the result in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949) 2 KB 528, Asquith LJ held that a launderer and dyer could recover ordinary lost profits, but not particularly lucrative government contracts.

Finally, in Illustration (r), the question of consequential losses as a result of the late arrival of a carrier is raised:

(r) A., a shipowner, contracts with B. to convey him from Calcutta to Sydney in A.'s ship sailing on the first of January, and B. pays to A., by way of deposit, one-half of his passage-money. The ship does not sail on the first of January, and B., after being, in consequence, detained in Calcutta for some time, and thereby put to some expense, proceeds to Sydney in another vessel, and in consequence, arriving too late in Sydney, loses a sum of money. A. is liable to repay to B. his deposit with interest, and the expense to which he is put by his detention in Calcutta, and the excess, if any, of the passage-money paid for the second ship over that agreed upon for the first, but not the sum of money which B. lost by arriving in Sydney too late.

This anticipates the taxi driver problem raised by Harris, Halson and Campbell, where they say that Hadley v Baxendale is not sufficient to deal with the problem of a taxi driver who accepts a passenger who informs him when he gets into the taxi that he must reach his destination on time, or lose £1 million (see Donald Harris, Roger Halson and David Campbell, Remedies in Contract & Tort (2nd edn, CUP, 2005) 97). The taxi driver is late, and Harris, Halson and Campbell say that the potential liability of the taxi driver under Hadley v Baxendale (which arises because the risk has been communicated) establishes that an “assumption of responsibility test” should be adopted. However, the wording of Illustration (r) suggests that even back at the time when Hadley v Baxendale was decided, the taxi driver would never have been liable for the loss of the valuable opportunity. In any case, there is nothing in the wording of s 73 to prevent an assumption of responsibility test being adopted by Indian courts, although the hesitance of the English courts to pick up on Lord Hoffmann’s formulation in Transfield Shipping Inc v Mercator Shipping [2009] 1 AC 61, [2008] UKHL 48 (‘The Achilleas’) may give pause.

Notwithstanding the subsequent reticence of the English courts, the Supreme Court of India has mentioned The Achilleas with apparent approval in Kanchan Udyog Ltd v United Spirits Ltd (2017) 8 SCC 237 at [26].

Conclusion

This piece argues that first, the Indian Contract Act 1872 was an important influence upon the way in which contract damages developed across the common law world, and particularly influenced the way in which damages for contracts for goods, carriers and the principles of remoteness pursuant to Hadley v Baxendale were developed. Many of the Illustrations in the Indian Contract Act 1872 with regard to remoteness anticipate the later decisions of superior common law courts, and the careful working out of the principles applying to sale of goods, carriers and remoteness in s 73 of the Indian Contract Act eventually flowed through to other common law jurisdictions, through enactments such as Sale of Goods Acts 1893, or through the discussion and adoption of Hadley v Baxendale by other common law courts. Indian contract law, therefore, can give us a deeper understanding of the way in which a global common law developed, and the way in which a global market in goods contributed to this.

Secondly, one of the reasons that the Indian Contract Act 1872 had an impact was because it was picked up by treatise writers, both from India and England, and it was used to illustrate important developments in the law. This is why it is important to continue to encourage legal treatises and to encourage the study of comparative law and private law across the globe.