India Contract Act

THE INDIAN CONTRACT
ACT (ICA), 1872: Module 1-

Part: 1
DGPIMRMBAIISEMIIILAB 1
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Presentation by: Dipak S Gaywala
Associate Professor
Parul Institute of Management & Research
2 DGPIMRMBAIISEMIIILAB
What is a contract?
Section 2(h)
An agreement enforceable by law is a contract.
Thus,
Contract = Agreement + Enforceability at Law
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Agreement?
Section 2(e)
Promise/(s) Promise/(s)
= Agreement
(in exchange for)
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Promise?
Section 2(b)
Promise = Proposal/Offer + Acceptance
Proposal?
Section 2(a)
Expression of willingness
With a view to seek the assent of the other
Thus, mere expression of willingness doesnt constitute
offer/proposal.
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Acceptance
Section 2(b)
Giving of assent to the proposal.
Enforceability by Law
Agreements which are not enforceable
Illegal/unlawful agreements, e.g., to smuggle/to
kill
Social Agreements (Balfour vs. Balfour)
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Agreements Declared Void under ICA
e.g.
Agreement with or by a minor
Agreement in restraint of trade
Marriage brokerage contract
Wagering/Betting Agreements
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Kinds of Contracts
From the point of view of
Enforceability
Void
Voidable
Valid
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Void Agreement vs. Void Contract
Void Agreement
i.e., void-ab-initio i.e. unenforceable from the very beginning
Becomes void (Void Contract)
Voidable
i.e., void + able
i.e., capable of being declared void
(unenforceable) at the option of one of the parties to the
contract but not at the option of the other.
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Valid Contract
Section 10
To be a valid contract, it must satisfy the following:
1. Offer and Acceptance
2. Consensus-ad-idem (Meeting of minds) i.e., persons
must agree to the same thing in the same sense and at the
same time.
3. Intention to create legal relationship as against social
relationship or illegal/unlawful relationship.
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4. Free and Genuine Consent, i.e., free from
coercion
undue influence
fraud
misrepresentation
mistake
5. Parties competent to contract
6. Lawful consideration and object, i.e., something in return
and that must be lawful.
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Valid Contract
(Object and Consideration usually overlap. However,
there may be difference at times e.g., object may be to kill
competition and for that purpose in view, a senior manager
of the competitor may be paid a certain amount to give
unrealistically high quotation.)
Here: Object is to kill competition.
Consideration is :
(i) payment of money
(ii) giving high quotations
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Valid Contract
7. Agreement not declared void.
8. Certainty of Meaning: e.g. sale and purchase
of 100 tonnes of oil. But which oil? Thus,
agreement being uncertain not valid.
But, if the seller deals only in one kind of oil
and one variety, then it shall be valid since it is
capable of being made certain.
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Valid Contract
9. Possibility of performance: Impossibility
whether known to the parties or not, renders a
contract invalid.
10. Necessary legal formalities: e.g. sale-deed of
immovable property.
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Void vs. Illegal Agreements
Void Agreement Illegal Agreement

1. Unenforceable 1. Unenforceable
2. Not Punishable 2. Punishable (fine or
3. Collateral imprisonment or
transactions both)
unaffected. 3. Collateral
transactions are
also void.
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Specific and General Offer
Specific Offer:
made to a specified person or a group of persons.
can be accepted only by the person to whom made.
Thus, if offer is addressed to A, B cannot
accept it.
Case Law: Boulton vs. Jones
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Specific and General Offer
General Offer:
which is not a specific offer.
made to the world at large.
can be accepted by anyone by complying with the
terms of the offer.
Case Law: Carlill vs. Carbolic Smoke Ball Co.
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Offer vs. Invitation to offer
Illustrations of Invitation to Offer:
Prospectus issued by a college.
Prospectus issued by a company.
Invitation of bids in an auction.
Price-catalogues, price lists, quotations
Display of goods with a price-tag in a shop
window.
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Special Terms in a Contract
Examples: Dry cleaners receipt, couriers receipt, shipment
receipt, insurance policy, etc.
Binding if communicated or attention drawn to the fact that
there are certain special terms and conditions.
Not binding if attention is not drawn and the other party not
aware of.
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Cross Offers & Counter Offers
Cross Offers
Identical offers cross each other and none of the parties is
aware of the same. Doesnt result in a contract unless one of
them is accepted.
Counter Offer
Instead of accepting an offer, the offeree makes a counter
offer, i.e., accepts the same subject to certain conditions or
qualification.
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Contracts through Post
Communication of Offer
is complete when the offeree has the knowledge
of the same.
Communication of Acceptance
It has two aspects, viz.,
As against the proposer
As against the acceptor
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As against the proposer
Communication is complete as soon as a duly addressed
letter of acceptance is put into the course of transmission.
Whether the same reaches the proposer or not.
As against the acceptor

Communication is complete only when the proposer has
received the letter and learnt the contents thereof.
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Communication of Revocation
Communication of revocation (of offer or
acceptance) is complete:
As against the person who makes it when it is put
into the course of transmission.
As against the person to whom it is made, when it
comes to his knowledge.
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Comparing offer to a train of
gunpowder and acceptance to a lighted
match stick How far correct?
William Ansons observation though valid in the
English context doesnt hold good in India since
in India acceptance is revocable.
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Capacity to Contract
Capacity to Contract means competence of parties to enter into a
valid contract.
An agreement is valid contract if it is entered into between the
parties who are competent to contract.
The following parties are incompetent to contract:
1. 1.Minors.
2.Persons of Unsound mind.
3.Persons disqualified by any law to which they are subject.
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1. Minors
1.1 Who is minor?
A minor is a person who has not completed eighteen years of age.
In the following two cases, he attains majority after twenty one years
of age.
1. Where a guardian of minor person or property has been
appointed under the Guardians and Wards Act, 1890
OR
2. Where the superintendence of a minors property is assumed by a
court of wards.
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1.2 Fundamental rules governing Minors agreements:
1. To protect minors again their own inexperience as against the
possible designs of those experienced.
2. To avoid unnecessary hardship to persons who deal with
minors.
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1.3: Legal position of Minors Agreements:
1. An agreement with or by minor is void and inoperative i.e.
void ab initio.
2. He can be promisee or beneficiary.
3. His agreement cannot be ratified by him on attaining the age
of majority.
4. He cannot be asked to compensate or pay for any benefit
received by him under void agreement.
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5. He can always plead minority.
- Even if by misrepresenting his age, he induced other party to
contract with him. He cannot be sued either in Contract or
in tort for a fraud.
- If minor is still in possession of property obtained by his
fraud, he will be made to restore it to its former owner. But
he cannot be made to repay money which he has spent even if
such money is received under a contract induced by his fraud.
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6. There can be no specific performance of the agreements
entered in to by him as they are void ab initio.
A contract entered into on his behalf by his parent/guardian or
the manager of the estate can be specifically enforced by or
against the minor provided the contract is:
- Within the scope of authority of the
parent/guardian/manager and
- For the benefit of the minor.
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7. He cannot enter in to a contract of partnership. But he may
be admitted for the benefit of an already existing partnership
with the consent of other partners.
8. He cannot be adjudged as insolvent.
9. He is liable for necessaries supplied or necessary services
rendered to him or any one who is legally bound to support
him.
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Even in such cases it is only the property of the minor which is
liable for meeting the liability arising out of such contracts.
He is not personally liable.
The term Necessaries is not defined in the Indian Contract Act.
The English law defines u/s 2 of the Sale of Goods Act as
goods suitable to the condition of life of such infant or other
person, and to his actual requirement at the time of Sale and
Delivery.
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Necessaries include:
1.Necessary of Goods.
2. Services Rendered which include education, training for a
trade, medical advice.
A loan taken by a minor to obtain necessaries also binds him
and is recoverable by the lender as if he himself had
supplied the necessaries. But minor is not personally liable.
It is only his estate which is liable for such loans.
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10. He can be an agent.
11. His parents/guardian are/is not liable for the contract
entered in to by him.
12. A minor is liable for a tort (a civil wrong) if it is not arising
out of a contract.
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2. Persons of Unsound mind
2.1 Who can be considered as Persons of Sound mind?
A person is said to be of sound mind for the purpose of making
a contract if, at the time when he makes it, he is capable of
understanding it and of forming a rational judgment as to its
effects upon his interests.
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2.2 Who can be considered as Persons of Unsound mind?
There are two categories:
1. A person who is always in the state of unsound mind e.g.
Idiot cannot enter in to valid contract.
2. A person who is usually of unsound mind but occasionally of
sound mind, may make a contract when he is of sound
mind.
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A person who is usually of sound mind, but occasionally of
unsound mind may not make a contract when he is of
unsound mind.
Lunatics, Drunken or intoxicated persons are covered under
these rules.
2.3 Whether a party to a contract is of sound mind or not is a
question of fact to be decided by the court. There is a
presumption in favor of sanity.
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2.4 Agreements entered in to by persons of unsound mind are
void.
2.5 The persons of unsound mind are liable for necessities
supplied to them or to any one to whom they are legally
bound to support. But even in such cases, no personal
liability attaches to them. It is only their estate which is
liable.
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3. Other Persons
1. Alien enemies: Contracts with alien enemy may be studied
under the two heads:
- Contracts during the war: During continuation of the war,
alien enemy can neither contract with an Indian subject nor
can he sue in an Indian court. He can do so only after he
receives a license from the central government.
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Contracts made before the war: may either be suspended or
dissolved. They will be dissolved if they are against the public
policy or if their performance would benefit the enemy.
2. Foreign sovereigns, their diplomatic staff and accredited
representatives of foreign states.
They have some special privileges and generally cannot be sued
unless they of their own submit to the jurisdiction of our law
courts.
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An Indian citizen has to obtain a prior sanction of the central
government in order to sue them in our law courts.
3. Corporations: A Corporation is an artificial person created
by law, having a legal existence apart from its members.
It may come in to existence by a special Act of legislature or by
registration under the companies Act, 1956.
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Corporations cannot enter in to contracts of a strictly personal
nature as it is an artificial and not a natural person.
4. Insolvents: When a debtor is adjudged insolvent, his property
vests in the official receiver or official assignee.
As such insolvent is deprived of his power to deal in that
property.
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It is only the official receiver or official assignee who can enter in to
contracts relating to his property and sue and be sued on his
behalf.
5. Convicts: A convict undergoing imprisonment is incapable of
entering in to a contract unless permitted lawfully.
This incapacity to contract or to sue on contract comes to an end
when the period of sentence expires or when he is pardoned.
Law of limitation is held in abeyance during the period of his
sentence.
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Free Consent
1. What is Consent?
It means an act of assenting to an offer. Two or more persons are said
to consent when they agree upon the same thing in the same
sense.
2. What is Free Consent?
Consent is said to be free when it is not caused by:
1.Coercion.
2. Undue influence.
3. Fraud.
4. Misrepresentation.
5. Mistake.
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3.3 Effect of Coercion: When the consent to an agreement is
caused by coercion, fraud or misrepresentation, the
agreement is a contract voidable at the option of the party
whose consent was so obtained.
3.4 Threat to commit suicide amounts to coercion.
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3. Coercion:
3.1 Meaning: When a person is compelled to enter in to a contract
by use of force by other party or under a threat, coercion is said to
be employed.
3.2 Definition: Coercion is the committing, or threatening to
commit, any act forbidden by the Indian Penal Code, 1860 or the
unlawful detaining, or threatening to detain, any property, to the
prejudice of any person whatsoever with the intention of causing
any person to enter in to an agreement.
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4. Undue influence:
4.1: Meaning: A contract is said to be induced by undue influence
where the relations subsisting between the parties are such that
one party is in a position to exercise undue influence over the
other.
4.2: Definition: A contract is said to be induced by undue influence
where the relations subsisting between the parties are such that
one of the parties is in position to dominate the will of the other
and uses that position to obtain unfair advantage over the other.
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A person is deemed to be in a position to dominate the will of
the another:
1. Where he holds a real or apparent authority over the other.
2. Where he stands in fiduciary relation
( relation of trust and confidence) to the other.
3. Where he makes a contract with a person whose mental
capacity is temporarily or permanently affected by reason
of age, illness or mental or bodily distress.
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4.3: Effect of undue influence: When consent to an agreement
is obtained by undue influence, the agreement is a contract
voidable at the option of the party whose consent was so
obtained.
4.4: Relationship which raise presumption of undue influence:
The following relationships usually raise a presumption of
undue influence viz.
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1. Parent and Child.
2. Guardian and Ward.
3. Trustee and Beneficiary.
4. Religious advisor and disciple.
5. Doctor and Patient.
6. Solicitor and Client.
7. Fianc and Fiance.
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4.5: There is however no presumption of undue influence in
the relationship of
1. Landlord and Tenant.
2. Creditor and Debtor.
3. Husband and Wife.
4.6: Burden of Proof: Burden of Proof that contract is entered
in to by recourse to undue influence lies on a plaintiff (
Person aggrieved).
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4.7: For proving undue influence, the plaintiff has to prove that:
1.The other party was in a position to dominate his will.
2. The other party actually used influence to obtain plaintiffs
consent to contract.
3. The transaction is unreasonable.
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4.8: The presumption of undue influence can be rebutted by
showing that:
1.Full disclosure of facts was made.
2.The price was adequate.
3. That the party was in receipt of independent advice.
4.9: A contract with a pardanashin woman is presumed to have
been induced by undue influence.
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5. Misrepresentation and Fraud:
5.1: What is representation?
A statement of fact which one party makes in the course negotiations
with a view to inducing other party to enter in to a contract is
known as representation.
It must relate to some fact which is material to the contract.
It must be expressed by words spoken or written or implied from
the acts and conduct of the parties.
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5.2: What is misrepresentation?
A representation, which wrongly made, innocently, is
misrepresentation.
5.3: What is Fraud?
A representation, which wrongly made, intentionally, is fraud.
5.4: Requirements of misrepresentation: The followings are the
requirements of misrepresentation.
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1. It must be a representation of a material fact.
2. It must be made before the conclusion of the contract with a
view to inducing the other party to enter in to the
contract.
3. It must be made with the intention that it should be acted
upon by the person to whom it is addressed.
4. It must have been acted upon and must have induced the
contract.
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5. It must be wrong but the person who made it believed it to
be true.
6. It must be made without intention to deceive the party.
7. It need not be made directly to the plaintiff.
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5.5: Consequences of misrepresentation:
The aggrieved party, in the case of misrepresentation by the
other party can:
1.avoid or rescind the contract.
2. accept the contract but insist that he shall be placed in the
same position which he would have been if the
representation made had been true.
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5.6: Fraud: Fraud exists when it is known that:
1.a false representation has been made
- Knowingly or
- Without belief in its truth or
-recklessly,
not caring whether it is true or false, and the maker induced
the other party to act upon it.
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2. There is concealment of a material fact or there is a partial
statement of fact in such a manner withholding of what is not
stated makes that which is stated false.
The intention of the party making fraudulent representation
must be to deceive the other party to the contract or to
induce him to enter in to contract.
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5.7 Essential Elements of Fraud:
1.There must be a representation or assertion and it must be
false.
2. The representation must relate to a material fact which exists
now or existed in the past.
3. The representation must have been made before the
conclusion of the contract with the intention of inducing
the other party to act upon it.
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4. The representation of a statement must have been made with a
knowledge of its falsity or without belief in its truth or recklessly
not caring whether it is true or false.
5. The other party must have been induced to act upon
representation or assertion.
6. The other party must have relied upon the representation and
must have been deceived.
7. The other party, acting on the representation or assertion must
have subsequently suffered some loss.
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5.8: Consequences of fraud: A contract induced by the fraud is
voidable at the option of the party defrauded. The party
defrauded has following remedies:
1. He can rescind the contract. He must act within reasonable
time. If in the interval period, an innocent third party has
acquired interest in the property for value, he cannot rescind
the contract.
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2. He can insist on performance of the contract on the
condition that he shall be put in the position in which he
would have been if the representation made had been true.
3. He can sue for demages.
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5.9: Loss of right of recession of contract in case of either
misrepresentation or fraud:
The aggrieved party loses right to rescind or avoid the contract in the
following cases:
1. If he, after becoming aware of the misrepresentation or fraud,
takes a benefit under a contract or in some other way affirms it.
2. If restoration to the original position of the parties is not
possible, e.g. the subject matter of the contract has been
consumed or destroyed.
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3. If a third party has acquired rights in the subject matter of
the contract in good faith and for value.
5.10: Exceptions to the rule that contracts caused by
misrepresentation or fraud are voidable at the option of
aggrieved party:
In the following cases contracts caused by misrepresentation or
fraud are not voidable at the option of the aggrieved party.
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1. When the consent of the party to a contract was caused by
misrepresentation or fraud and that other party could discover
the truth by ordinary diligence.
2. Where a party enters in to a contract in ignorance of
misrepresentation or fraud.
3. Where a party to a contract, whose consent was caused by
misrepresentation or fraud, cannot be put in the position in
which he would have been if the representation made had been
true.
4. Where before the contract is avoided, the interest of third party
intervene.
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5.11: Effects of Silence as to facts:
The general rule is that a person before entering in to a
contract need not disclose other party material facts which
he knows, but he must refrain from making active
concealment.
This means mere silence is not fraud.
There are certain exceptions to the above rule:
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1. Where the circumstances of the case are such that, regard
being had to them, it is the duty of the person keeping
silence to speak.
2. If the seller fails to inform buyer as to latent defect.
3. If the trustee does not make disclosure of facts to the
beneficiary.
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5.13 Distinction between fraud and misrepresentation:
The distinction can be discussed under following heads:
1. Intention.
2. Belief.
3. Recession and damages.
4. Discovery of truth.
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Mistake
1.1: Meaning : Mistake may be defined as erroneous belief about
something.
1.2: Types of Mistakes:
- A mistake of law.
-A mistake of fact.
-Mistake of law is categorized as follows:-
1. Mistake of law of the country:
Rule: Ignorance of law is no excuse.
2. Mistake of law of the foreign country:
Treated as mistake of fact and the agreement in such case is void.
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- Mistake of fact is categorized as follows:
1. A Bilateral Mistake
2. A Unilateral Mistake
1.3: Bilateral Mistakes: Where both parties to an agreement are
not under an agreement as to matter of fact essential to the
agreement, there is a bilateral mistake. In such a case, the
agreement is void.
The followings are conditions of bilateral mistakes:
1. The mistake must be mutual.
2. The mistake must relate to a matter of fact essential to the
agreement.
1.4: The various cases of Bilateral Mistakes:
1. Mistake as to the subject-matter: covers following cases.
(i) Mistake as to the existence of the subject matter.
(ii) Mistake as to the identity of the subject matter.
(iii) Mistake as to the quality of the subject matter.
(iv) Mistake as to the quantity of the subject matter.
(v) Mistake as to the title of the subject matter.
(vi) Mistake as to the price of the subject matter.
2. Mistake as to the possibility of performing the contract:
Impossibility may be:
(i). Physical impossibility.
(ii). Legal impossibility.
1.4: Unilateral Mistakes: When in a contract, only one of the
parties is mistaken regarding the subject matter or in
expressing or understanding the terms of the legal effect of
the agreement, the mistake is a unilateral mistake.
An unilateral mistake is not allowed as defense in avoiding
contract unless the mistake is brought about by other partys
fraud or misrepresentation.
There are exceptions to this rule. In the following cases, even
though there is a unilateral mistake, the agreement is void.
1. Mistake as to the identity of the person contracted with.
This holds good only when the identity of the contracting party
is important.
2. Mistake as to the nature of contract.
Performance of Contract
1.1: When performance of a contract takes place?
Performance of a contract takes place when parties to the
contract fulfill their obligations arising under the contract
within the time and in the manner prescribed.
The parties to a contract must either perform or offer to
perform their respective promises.
1.2: What is an offer to perform?:
Attempted performance or tender is an offer of performance by the
promisor in accordance with the terms of the contract.
If the promisee does not accept performance, the promisor is not
responsible for non-performance, nor does he thereby lose his
rights under the contract.
Thus, a tender is equivalent to actual performance.
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1.3: Requisites of a Valid tender:
1. It must be unconditional.
2. It must be the whole quantity contracted for or of the whole
obligation.
3. It must be by a person who is in a position, and is willing to
perform the promise.
4. It must be made at proper time and place and in the manner
specified, and where these are not specified, it must be made in
a reasonable manner.
5. It must be made to proper person, that is, the promisee or his duly
authorized agent. It must also be in proper form.
6. It may be made to one of the several joint promisees. In such a
case, it has the same effect as a tender to all of them.
7. In case of tender of goods, it must give reasonable opportunity to
the promisee for inspection of the goods.
8. In case of tender of money, the debtor must make a valid tender in
the legal tender money.
1.4: Reciprocal promises:
Promises which form the consideration or the part of
consideration for each other are called reciprocal promises.
Reciprocal promises are classified as follows:
1. Mutual and independent.
2. Conditional and dependent.
3. Mutual and concurrent.
1.5: Rules regarding performance of reciprocal promises:
1. When reciprocal promises have to be simultaneously
performed, the promisor is not bound to perform, unless the
promisee is ready and willing to perform his promise.
2. The reciprocal promises must be performed in the order fixed
by the contract.
3. When a contract contains reciprocal promises and if one party
to the contract prevents the other party to the contract from
performing his promise, then the contract becomes voidable at
the option of the party so prevented.
Further he is entitled to compensation from the other party for
any loss he may sustain in consequence of the non-
performance of the contract.
4.Where the nature of reciprocal promises is such that one
cannot be performed unless the other party performs his
promise in the first place, then if the later fails to perform he
cannot claim performance from the other, but must make
compensation to the first party for his loss.
1.6: By whom must contract be performed?:
1. By promisor himself.
2. By agent.
3. By legal representatives in case of death of the promisor.
4. By joint promisors- When two or more persons have made
joint promise, then unless contrary intention appears from
the contract, all such persons must jointly fulfill the
promise.
If any one of them dies, his legal representative must, jointly
with surviving promisors, fulfill the promise. If all the
promisors die, the legal representatives of all of them must
fulfill the promise jointly.
1.7: Who can demand performance?
It is only the promisee, and in case of his death, his legal
representatives, who can demand performance.
When a person has made a promise to several persons, then,
unless a contrary intention appears from the contract, the
right to claim performance rests with all of them. When one
of the promisee dies, it rests with his legal representatives
jointly with the surviving promisees. When all the promisees
die, it rests with legal representatives jointly.
1.8: Time and place of performance:
Time and place of performance of a contract are matters to be
determined by the agreement between the parties
themselves.
Where no time for performance is specified, the promisor must
perform the promise within a reasonable time.
If no time and place is fixed for the performance of the
promise, the promisor must fix the day and time for
performance.
1.9: Time as the essence of contract:
Time for the performance of a contract may be fixed in the contract
itself. In that case the contract must be performed within that time
when the time is the essence of the contract.
The general rule is that in commercial contracts time is of the
essence of contract.
In other contracts stipulations as to time are, in the absence of
express or implied evidence to the contrary, presumed not to be
the essence of the contract.
Time may be made the essence of a contract by a subsequent
notice.
Any subsequent notice making time as the essence of the
contract ought to fix a reasonably long time requiring other
party to perform his contract.
1.10: Appropriation of payments:
The debtor has, at the time of payment, right of choice of
appropriating the payment.
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In default of the debtor, the creditor has right to appropriate.
In default of either, the law will allow appropriation of debts in order
of time.
Rule in Claytons Case:
Where the parties have a current account between them,
appropriation impliedly takes place in the order in which the
receipts and payments take place and are entered in the account.
The first item on the debit side of the account is discharged or
reduced by the first item on the credit side.
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Whether a part payment should be treated towards principle or
interest?
On this question, the general principle, subject to any contract
to the contrary, is that payment should first be applied to
interest and after the interest is fully paid off, to the
principal. 92
1.11: Assignment of Contracts:
Assignment of a contract means transfer of contractual rights
and liabilities under the contract to a third party with or
without the concurrence of the other party to the contract.
It may take place by:
1. Act of the parties: This is subject to the following rules:
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1. Contracts involving personal skill or ability or personal
qualifications cannot be assigned.
2. A promisor cannot assign his liabilities or obligations under a
contract.
3. The rights and benefits under a contract may be assigned if the
obligation under the contract is not of a personal nature.
4. An actionable claim can always be assigned but the assignment to
be complete and effectual must be effected by instrument in
writing. Notice of such assignment must also be given to the
debtor. 94
2. Operation of law:
This takes place in the case of death or insolvency of a party to the
contract.
Upon death of a party to a contract, his rights and liabilities under a
contract except in the case of contracts requiring personal skill or
services devolve upon his heirs and legal representatives.
In the case of insolvency of a person, his rights and liabilities
incurred previous to adjudication pass to the Official Receiver or
Assignee, as the case may be.
95
1.12: Effect of refusal of a party to perform promise wholly:
1. When party to a contract refuses to perform, or disables
himself from performing his promise entirely, the promisee
may put an end to the contract. But if the promisee has
signified by words or conduct, his tacit assent in the
continuation of the contract, he cannot repudiate it.
96
2. When promisee puts an end to a contract, being rightly
entitled to do so, it shall be deemed as if he has rescinded a
voidable contract and shall be bound to restore to the other
party all benefits that he may have received under the
contract.
97
1.13: Contracts which need not be performed:
A contract need not be performed:
1.When its performance becomes impossible.
2. When the parties to it agree to substitute a new contract for
it or to rescind or alter it.
3. When the promisee dispenses with or remits, wholly or in
part, the performance of the promise made to him or
extends the time for such performance or accepts any
satisfaction for it.
4. When the person at whose option it is voidable rescinds it.
5. When the promisee neglects or refuses to afford promisor
reasonable facilities for the performance of his promise.
6. When it is illegal.
Discharge of Contract
1.1: Meaning: Discharge of contract means termination of the
contractual relationship between the parties.
A contract is said to be discharged when it ceases to operate,
i.e. when rights and obligations created by it comes to an
end.
1.2: A contract may be discharged-
1. By performance.
2. By agreement or consent.
3. By impossibility.
4. By lapse of time.
5. By operation of law.
6. By Breach of contract.
101
1. Performance:
- Actual performance.
- Attempted performance,
2. By agreement or consent:
- By express consent.
- By implied consent.
Implied consent may by any of these forms.
(a). Novation: Novation takes place when:
- A new contract is substituted for an existing one between the
same parties. or
- A contract between two parties is rescinded in consideration
of a new contract being entered in to on the same terms
between one of the parties and a third party.
Novation should take place before expiry of time of the
performance of the original contract.
103
(b). Recession: Recession of a contract takes place when all or
some of the terms of the contract are cancelled. It may occur
by-
(i). By mutual consent of the parties or
(ii). When one party fails in the performance of his obligation.
In such a case other party may rescind the contract without
prejudice to his right to claim compensation for the breach of
contract. 104
Mode of communicating or revoking recession:
Same rules as apply to the communication of revocation of a
proposal.
Any benefit accruing to a party where contract is rescinded at
his option should be refunded by such party.
(c). Alteration: Alteration of a contract may take place when
one or more of the terms of the contract is/are altered by
the mutual consent of parties to the contract. In such a case,
old contract is changed.
(d). Remission: Remission means acceptance of a lesser
fulfillment of promise made e.g. acceptance of a lesser sum
than what is contracted for in discharge of the whole of the
debt. 106
(e). Waiver: Waiver takes place when parties to a contract agree
that they shall not be bound by the contract. This amounts
mutual abandonment of the rights by the parties to the
contract. Consideration is not necessary for waiver.
(f). Merger: Merger takes place when an inferior right accruing
to a party under a contract merges into superior right
accruing to the party under the same or some other contract.
3. Discharge by impossibility of performance:
If an agreement contains an undertaking to perform an
impossibility, it is void ab initio.
This rule is based on following legal principles:
1.The law does not recognize what is impossible.
2. What is impossible does not create an obligation.
Impossibility of performance may fall into either of the
following categories.
1. Impossibility existing at the time of agreement:
This is known as pre-contractual or initial impossibility.
This can be further classified in to:
i. Known to parties.
This is also known as absolute impossibility. In the case of
absolute impossibility, the agreement is void ab initio.
ii. Unknown to parties.
If at the time of making the contract, both the parties are
ignorant of the impossibility, the contract is void on the
ground of mutual mistake. If, however, the promisor alone
knows of the impossibility of performance at the time of
making contract, he shall have to compensate the promisee
for any loss which such promisee sustains through non-
performance of the promise. 110
2. Impossibility arising subsequent to the formation of the contract:
Impossibility which arises subsequent to the formation of the
contract is called post-contractual or supervening impossibility. In
such a case, the contract becomes void when the act becomes
impossible or unlawful.
This impossibility is caused by the circumstances beyond the control
of the parties, the parties are discharged from further
performance of the obligation under the contract.
A Contract is discharged by supervening impossibility in the
following cases: 111
1. Destruction of a subject-matter of contract.
2. Non-existence or non-occurrence of a particular state of
thing.
3. Death or incapacity for personal service.
4. Change of law or stepping in of a person with statutory
authority.
5. Outbreak of war.
3.1: Impossibility of performance- not an excuse:
Impossibility of performance is, as a rule, not an excuse for non-
performance.
Ordinarily when a person undertakes to do something, he must do it
unless performance becomes absolutely impossible due to any of
the circumstances already discussed.
In the following cases, a contract is not discharged on the ground of
supervening impossibility.
1. Difficulty of performance.
2. Commercial impossibility.
3. Impossibility due to failure of a third person.
4. Strikes, lock-outs and civil disturbances.
5. Failure of one of the objects.
3.2: Effects of supervening impossibility:
1. When the performance of a contract becomes impossible or
unlawful subsequent to the formation, the contract becomes
void.
2. Where one person has promised to do something which he
knew or, with reasonable diligence, might have known, and the
promisee did not know to be impossible or unlawful, the
promisor must make compensation to the promisee for any loss
which the promisee sustains through the non-performance of
the promise.
3.Where 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 to the person from
whom he received it.
In England the doctrine of frustration is the parallel
concept of supervening impossibility.
4. Discharge by lapse of time: The Limitation Act, 1963 lays
down that a contract should be performed within a specified
period, called period of limitation. If it is not performed, and
if no action is taken by the promisee within the period of
limitation, he is deprived of his remedy at law. In other
words, we may say that the contract is terminated.
5. Discharge by operation of law: A contract may be discharged
independently of the wishes of the parties i.e. operation of law.
This includes discharge:
(a). By death.
(b). By merger.
(c). By insolvency.
(d). By unauthorized alteration of the terms of a written agreement.
(e). By rights and liabilities becoming vested in the same person.
6. Discharge by breach of Contract:
Breach of contract means breaking of the obligation which a
contract imposes. It occurs when a party to a contract
without lawful excuse does not fulfill his contractual
obligation or by his own act makes it impossible that he
should perform his obligation under it. It confers right of
action or demages on the injured party.
Breach of contract may be-
1. Actual breach of contract.
2. Anticipatory or constructive breach of contract.
6.1 Actual Breach of contract:
It may take place:
1. At the time when performance is due.
2. During the performance of the contract.
This refusal to perform may be by-
(a). Express repudiation (by word or act).
(b). Implied repudiation ( impossibility created by the act of a
party to the contract).
6.2: Anticipatory breach of contract: It occurs when a party to
an executory contract declares his intention of not
performing contract before the performance is due. He may
do so:
1. By expressly renouncing his obligation under the contract.
2. By doing some act so that the performance of his promise
becomes impossible.
6.3: Rights of the promisee (the party not in breach or the
aggrieved party) in the case of anticipatory breach are as
follows:
1. He can treat contract as discharged so that he is absolved of
the performance of his part of the promise.
2. He can immediately take a legal action for breach of contract
or wait till such time the act was to be done.
6.4: Anticipatory breach does not necessarily discharge the
contract unless the promisee (the aggrieved party) so
chooses.
If the promisee refuses to accept the repudiation of the contract
by the promisor and treats the contract as alive, the
consequences are as follows:
1. The promisor may perform his promise when the time for
its performance comes and the promisee will be bound to
accept the performance.
2. If, while the contract is alive, an event ( say, a supervening
impossibility) happens which discharges the contract
legally, the promisor may take advantage of such discharge.
In such a case, the promisee loses his right to sue for
demages.
6.5: Measure of demages in anticipatory breach of contract:
If the contract is ended by the promisee at once, he can sue the
promisor for demages. The amount of demages will be measured
by the difference between price prevailing on the date of breach
and the contract price.
If the contract is kept alive till the date of performance of the
contract, the measure of demages will be difference between the
price prevailing on the date of the performance and the contract
price.
Remedies for Breach of Contract
A remedy is the means given by law for the enforcement of a
right.
A contract gives rise to correlative rights and obligations.
A right accruing to a party under a contract would be of no
value if there was no remedy to enforce that right in a Law
Court in the event of its infringement or breach of contract.
When a contract is broken, the injured party (i.e. party who is
not in breach) has one or more of the following remedies:
1. Recession: When there is breach of contract by a party, the
injured party may sue to treat the contract as rescinded.
He is also absolved of all his obligations under the contract.
The Court may grant recession in certain situations. The Court
may also refuse to rescind the contract in certain situations.
2. Demages: Demages are monetary compensation awarded to
the injured party by court for the loss or injury suffered by
him.
The foundation of modern law of demages, both in India and
England, is to be found in the judgment in the case of Hadley
v Baxendale.
Section 73 of the Indian Contract Act which deals with
Compensation for loss or damage caused by breach of
contract is based on the judgment in the case of Hadley v
Baxendale.
Demages u/s 73 may be of four types:
1. Ordinary demages: These are demages which actually arise
in the usual course of things from the breach of a contract.
In a contract for sale of goods, the measure of demages on the
breach of contract is the difference between the contract
price and the market price of such goods on the date of the
breach.
Under Section 73, Compensation is not to be given for any
remote or indirect loss or damage.
Further Section 73 does not give any cause of action unless and
until damage is actually suffered.
If any promisee neglects or refuses to afford the promisor
reasonable facilities for the performance of his promise, the
promisor is excused by such neglect or refusal as to any non-
performance caused thereby.
2. Special damages: Damages which may reasonably be
supposed to have been in contemplation of both the parties at
the time when they made the contract as the probable result
of the breach of it, are known as special damages and may be
recovered.
These can be claimed only if the special circumstances which
would result in special loss in the case of breach of a contract,
are brought to the notice of the other party.
3. Vindictive or exemplary damages: These damages are allowed
in case of the breach of a contract to marry or dishonour of a
cheque by a banker wrongfully.
4. Nominal damages: where the party has not suffered any loss
by reason of the breach of a contract, the court may award a
very nominal sum as damages.
Damage u/s 74 may be of following type:
5. Liquidated damages and penalty:
Liquidated damages represent a sum, fixed or ascertained by
the parties in the contract, which is fair and genuine pre-
estimate of the probable loss that might ensue as a result of
the breach. A penalty is a sum named in the contract at the
time of formation, which is disproportionate to damage
likely to accrue as a result of the breach. The Courts in India
allow only reasonable compensation.
3. Quantum meruit: A right to sue on a quantum meruit (as
much as earned) arises where a contract, partly performed
by one party, has become discharged by the breach of the
contract by the other party. This right is funded on an implied
promise by the other party arising from the acceptance of a
benefit by that party.
4. Specific performance: In certain cases the court may direct the
party in breach a contract to actually carry out the promise,
exactly according to the terms of the contract. This is called
specific performance of the contract.
5. Injunction: Where a party is in breach of a negative term of a
contract ( where he is doing something which he promised not to
do), the Court may, by issuing an order, restrain him from doing
what he promised not to do. Such an order of the Court is known
as injuction.
Consideration
1. Meaning: Consideration means something in return. It is
the price for which the promise of the other is bought. It
must result in a benefit to the promisor and/or a
detriment to the promisee or both.
2. Definition: When at the desire of the promisor, the
promisee or any other person has done or abstained from
doing, or does or abstains from doing something, such an
act or abstinence or promise is called a consideration for
the promise.
3.Legal rules as to consideration:
1.It is essential to support every contract.
2.It must move at the desire of the promisor.
3.It may move from promisee or any other person.
4.It may be past, present or future.
5.It need not be adequate.
6.It must be real and not illusory.
7.It must not be something which the promisor is already legally or
contractually bound to do.
8. It must not be illegal, immoral or opposed to public policy.
4. Stranger to a Contract:
The general rule is that a stranger to a contract cannot sue.
Exceptions to this rule are as follows:
But he may sue where
1. A trust or charge is created in some specific immovable property in favor of
him.
2. A provision is made in a marriage settlement, partition or family
arrangement for his benefit.
3. There is an acknowledgement of a liability by the promisor or promisor
constitutes himself as agent.
4. He is assignee of rights and benefits under a contract not involving personal
skill.
5. He enters into a contract through an agent.
6. There are covenants running with the land.
5. An agreement without consideration is void:
The followings are the exceptions to this rule i.e. no
consideration is required in case of
1. A written and registered document based on natural love
and affection between parties standing in a near relation to
each other.
2. A promise to compensate, wholly or in part, a person who
has already voluntarily done something for the promisor.
3. A promise by a debtor to pay a time barred debt if it is made
in writing and is signed by the debtor or by his agent.
4. An agency.
5. A completed gift.
Legality of object and Consideration
1. An agreement is a contract if it is made for a lawful
consideration and with a lawful object.
Every agreement of which object or consideration is unlawful is
void.
2. When consideration or object is unlawful:
The consideration or object of an agreement is unlawful:
1. If it is forbidden by law.
2. If it is of such a nature that, if permitted, it would defeat
the provisions of any law.
3. If it is fraudulent.
4. If it involves or implies injury to the person or property of
another.
5. If the court regards it as immoral.
6. When the court regards it as opposed to public policy.
Contingent Contracts
1.A Contract may be:
(i). An absolute contract or
(ii). A Contingent contract.
An absolute contract is one in which the promisor binds himself
to performance in any event without any conditions.
A contingent contract is a contract to do or not to do
something if some event, collateral to such contract, does or
does not happen.
2. Characteristics of contingent contract:
1. Its performance depends upon the happening or non-
happening in future of some event.
2. The event must be uncertain.
3. The uncertain future event must be collateral to the
contract.
3. Rules regarding contingent contracts:
1. If a contingent contract is to be performed, if an uncertain
future event happens, it cannot be enforced until the event has
happened.
If it is to be performed if a particular event does not happen, its
performance can be enforced if the event becomes impossible.
2. If a contingent contract depends for its performance on doing of
an act by the promisor, the contract becomes void where the
promisor makes the performance impossible.
3. If a contingent contract contemplates doing of a thing if a
specified event happens within a fixed time, it becomes void
if the event does not happen within that time.
4. If a contingent contract contemplates to do anything if an
impossible event happens, it is void.
There is a difference between a wagering agreement
and a contingent contract.
Quasi-Contracts
1. Meaning: In certain cases the law imposes an obligation and
allows an action to be bought on it as if it arose out of an
agreement, though none was present in fact.
Such cases, strictly speaking are not contracts, but the law
recognizes them as certain relations resembling those
created by contracts. In English law, such relations are
called Quasi-Contracts.
2. Principle on the basis of which law considers certain
relations resembling those created by contracts as Quasi-
contracts :
Quasi contracts rest on the ground of equity that a person shall
not be allowed to enrich himself unjustly at the expense of
the other.
3. Kinds of Quasi-Contracts:
1. Supply of necessaries.
2. Payment by an interested person.
3. Obligation to pay for non-gratuitous acts.
4. Responsibility of Finder of the goods.
5. Liability of person to whom money is paid or thing delivered
by mistake or coercion.
4. Quantum meruit: means as much as earned.
This requires person to claim compensation from another
person in respect of work done by him till such time contract
was discharged.
The claim for quantum meruit arises only when the original
contract is discharged. If the original contract exists, the
party not in default cannot have quantum meruit remedy, he
has to take resort to remedy in damages.
It is a claim on the quasi-contractual obligation which the law
implies in the circumstances.
5. Compensation for failure to discharge obligation created by
quasi-contracts:
When an obligation created by a quasi-contract is not
discharged, the injured party is entitled to receive the
compensation from the party in default, as if the person had
contracted to discharge it and had broken his contract.
Assignment:1 Indian Contract Act,
1872- Module: 1
Q:1.Explain the following: (Marks)
1. Void and Voidable Agreement. (5)
2. Agreement without consideration (5)
3. Quasi Contract (5)
Q:2
(a). Explain the term consideration. A stranger to consideration
can sue upon the contract. Explain the statement in brief.
(5)
(b). When we can say that consent is not free?
(5)
(c). Explain the term Offer and invitation to offer &
Distinguish them. (5)
Q.3. Explain the types of contract and essentials of Valid
contracts. (10)
Q.4. Distinguish the following:
(a). Liquidated Damages and Penalty (5)
Q.5.
(a). Explain the term consideration. A stranger to
consideration can sue upon the contract. Explain the
statement in brief. (5)
Q.6. Explain the following:
(a). A contract of marine insurance is a contingent contract.
(5)
Q.7. What is meant by frustration of contract? Enumerate the
situations where a contract can get frustrated?
(5)
Q.8. Answer the following, giving reasons for your answer.
1. A lends his car to B to be driven by B only. B allows his
daughter C, who is an expert car driver to drive it. C
drives the car carefully but its axle suddenly breaks and the
car is damaged. Is B liable to A for the damage?
(5)
Q.9. Explain the following;
(a). Void Agreement. (4)
Q.10. Define agreement and discuss the types of agreements.
(10)
Q.11. Explain the rules regarding offer under the Indian
Contracts Act, 1872. (10)
Q.12.
(a). Who can enter in to a contract? Discuss.
(10)
(b). What do you know about free consent and when the
consent is not free? Explain. (10)
Q.13.
(a). X sold his business including goodwill to Y for
Rs.5,00,000/- by an agreement. The agreement provided
that X should not engage himself in the similar business in the
whole of India for next 10 years. X started the same business
in the same city after one month. State the legal position.
(10)
Q.14. X of Delhi agreed to sell 100 bales of cotton @ Rs.1,000
per bale and to deliver within a fortnight at buyers godown
at Lahore. X failed to supply these goods, State the legal
position in the following cases:
(a). If unknown to both the parties, the goods were destroyed
by fire at the time of agreement.
(b). If X knew that goods were destroyed by fire at the time of
agreement.
(c). If goods were destroyed by fire after the formation of
agreement.
(d). If war was declared between India and Pakistan.
(e). If goods were to be manufactured by Z who did not
manufacture those goods.
(f). If goods could not be delivered because of strike of transport
operators. (20)
Q.15. Write short note on:
(a). Consideration. (4)

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ACT (ICA), 1872: Module 1-

Void Agreement Illegal Agreement

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