DEFAULT, MANDATORY AND ALTERING RULES IN CONTRACT LAW: NEED FOR A SYSTEMATIC APPROACH IN INDIA

Abstract

The view that contract law can be looked at as default, mandatory and altering rules (Default Rules Doctrine) has been in vogue for more than three decades. The evolution of contract law in the West can be seen in three stages from the perspective of the Default Rules Doctrine. In the first stage, the question was whether a rule should be mandatory or not. Contract law scholars (and practitioners) engaged in a discussion as to whether a particular rule should be designed as a mandatory rule or freedom should be given to parties to contract around it. At the cost of reductionism and generalisation, if a period could be pointed out, contract law scholars engaged in this debate up to 1989. The inflection point was the paper penned by Ian Ayres and Robert Gertner and published in 1989 in the Yale Law Journal.

Thereafter, contract theory was occupied with the question that if a rule should not be mandatory how should it be designed? Several hundreds of articles were written on how default rules should be designed. The third stage, being the current one, is concerned with how contract parties should contract around the default rule. This stage was concerned with the question as to the design of altering rules. The inflection point was Ian Ayres’ paper “Regulating Opt-Out; An Economic Theory of Altering Rules” published in 2012.

This trifurcation has immense practical significance is clear in the amount of literature it has produced in these thirty five years and the way statutes have been drafted in the recent past.

Unfortunately, the Default Rules Doctrine has not permeated contract law in India, either in policy or judicial discourse or in legal education. In fact, the term “default rule” has been used for the first time, and that too in the passing recently, in Dyna Technologies v. Crompton Greaves, 2019 SCC OnLine SC 1656. The impact of failure to view contract law in terms of the Default Rules Doctrine has made Indian lawyers (judges, counsels, law academicians and law students) view contract law as a black-letter legal instrument and without the sophisticated understanding of contract law and the legal system that the Default Rules Doctrine offers. To the extent the theory is used, it is employed by academicians in an ad hoc manner. Therefore, there is a lack of systematic analysis of contract law through the lens of the Default Rules Doctrine. Empirical evidence suggests that legal educational institutions to not teach default rules systematically and lawyers, law academicians and law students in India are not aware of the Default Rules Doctrine.

vi

The failure to appreciate this view of contract law has resulted in a not-so-sophisticated view of the field of law that could be classified as contract law. Another problem is the lack of certainty in contract law. Some of the typical examples include the law regarding time being the essence in construction contracts, the relevance of time-as-contractual-essence for determination of liquidated damages, disability of unregistered partnerships vis-à-vis arbitrations, and the law regarding enforceability of standstill agreements. Using these examples various insights in the Default Rules Doctrine were highlighted.

The larger point is that asking the questions whether a rule was a default or a mandatory rule and if, it was a default rule, what are the conditions for contracting around the default, provide considerable insight on the nature of the rule, and failure to ask those questions could lead to misunderstanding of the real purport of the rule.

The absence of a systematic use and analysis of Default Rules Doctrine in India and the adverse consequences thereof can be looked at two ways: one approach is to look at the negative consequences of the lack of integration of the Default Rules Doctrine in India and the other approach is to look, given the absence of the theory, at the potential of the theory in contributing to developing the Indian legal system. The aforesaid four examples looked at it from the negative perspective. From a positive angle, there are several benefits that could be reaped by the legal system.

Key areas where the theory could contribute to the legal industry were also noted, such as:

• Default Rules Doctrine provides insights on when and how parties could validly contract around a particular rule and this skill is important both for transactional and dispute resolution lawyers. • The theory enables a finer understanding of various rules in contract law. • It creates a duty on courts to guide future contracting parties as to how to contract around a default rule. • Faulty design of rules could be identified through the theory to reorient such rules towards better effectiveness and efficiency.

vii

• The role of academia becomes critical in analysing various contract law rules and critique the laws, whether legislature or judge made, and recommend remedial measures. This role of academia is considerably furthered through the use of the theory. • The theory also helps law teachers focus not only on the ratio decidendi of a particular decision but also on facts, which are crucial for understanding various contract law doctrines and for law practice. • By reorienting the focus to facts, the theory enables law students gain practical understanding on the contractual clauses in dispute in a decision and helps them better understand the practicalities of drafting contracts.

The entire legal system stands to benefit by the systematic use of the Default Rules Doctrine. An empirical study conducted points out at the lack of awareness of the Default Rules Doctrine and that the theory is not taught either in undergraduate or postgraduate law courses in most law schools in India. This needs to change. Further, most respondents were of the view that if Default Rules Doctrine is employed, the legal system would stand to benefit. This is applicable in several spheres of the legal industry- be it law-making, legal education, transactional lawyering, or adjudication.

All these aspects led to the conclusion that effective utilisation of the Default Rules Doctrine in law practice and legal education would considerably improve clarity and certainty in Indian contract law.