INDIAN CONTRACT ACT 1872

INTRODUCTION:
 Law of contract – Foundation upon which the superstructure of modern business is built

 Business – promise made between parties – performance follows later

 Breaking of a promise – without incurring liability – endless complications

 Law of contract lays down legal rules relating to promises, their formation, performance and
enforcement.

 These rules are not only applicable to business community but others

INDIAN
SPECIAL GENERAL
CONTRACT
CONTRACTS RULES
ACT

Proposal:

 When one person signifies to another his willingness to do or abstain from doing anything with
a view to obtain his assent on such act or abstinence, he is making proposal.

 A goes to a hotel and orders tea. He is making proposal.

Acceptance:

 When one person signifies his assent thereto on the proposal made he is said to accept the
proposal.

 When A orders tea and B supplies tea it is understood that the proposal made by A is accepted
by B .
Promise:

 When a person to whom proposal is made signifies his assent thereto, the proposal is said to be
accepted.

 An accepted proposal is known as a promise.

 When A asks B to lend him a book and B gives his assent to lend him a book . This is a promise
i.e. Proposal by A to lend the book. Acceptance by B by lending the book.

Consideration:

 Something in return.

 A offers B to sell his car at Rs.1,00,000 /- B accepts the same. Now for A consideration is
Rs.1,00,000/- and for B consideration is a Car.

 Until and unless there is no consideration there cannot be an agreement.

Agreement:

 When the proposal is accepted it becomes promise and the promise, when accompanied with
consideration it becomes agreement.

 A offers to sell his car for Rs.1,00,000/- to B. B accepts his offer. This offer after acceptance
becomes promise and this promise is treated as an agreement between A & B.

Enforceability:

 An agreement is said to be enforceable by law if it creates legal obligation.

 Obligation is a legal tie which imposes upon determinate person or persons the necessity of
doing or abstaining from doing a definite act or acts

 If an agreement is incapable of creating a duty enforceable by law, it is not a contract.

CONTRACT ACT:
Contract Sec 2(h) : “An agreement enforceable by law is a contract”

 Proposal + Acceptance = Promise.

 Promise + Consideration = Agreement.

 Agreement + Enforceability = CONTRACT.

“All contracts are agreement but all agreements are not contracts”.

Agreements of moral, religious or social nature are not contracts.

 they are not likely to create a duty enforceable by law

 parties never intend to create a legal obligation.

Example;

1) X invites his friend Y to a dinner and Y accepts the invitation. If Y fails to turn up for the dinner.
Can he take his friend to Court????
- X cannot go to the court to claim his loss.
2) A father promises to pay his daughter Rs 1000 as pocket allowance. Later he refuses to pay. Can
the daughter recover the Amount???
- The daughter cannot recover as its is a domestic agreement and there is no intention on the
part of the parties to create legal relations.

DISTINCTION BETWEEN AN AGREEMENT AND A CONTRACT:

Agreement Contract
Offer and its acceptance constitute an agreement. Agreement and its enforceability constitute a Contract

An agreement may or may not create a legal
obligation.
Every agreement need not necessarily be a
contract.
Agreement is not concluded or binding contract.
A contract necessarily creates a legal obligation.
All contracts are necessarily agreements
Contract is concluded and binding on the concerned
parties.
CLASSIFICATION OF CONTRACT:
Enforceability Method of Creation Extent of execution

- Valid - Express - Executed

- Voidable - Implied - Executory
- Void
- Unenforceable
- Illegal

Contracts on the basis of ENFORCEABILITY:

1) Valid Contract: A contract which satisfies all the conditions prescribed by law is a valid contract.

Essential elements of a valid contract:

i. Proper offer and its proper acceptance

ii. Intention to create legal relationship

iii. Free Consent

iv. Capacity to contract

v. Lawful consideration

vi. Lawful object

vii. Agreement not expressly declared void

viii. Certainty of meaning

ix. Possibility of performance

x. Legal formalities

2) Void Contract: A contract which ceases to be enforceable by law becomes void when it ceases to
be enforceable.
3) Void Agreements: An agreement not enforceable by law is said to be void.
4) Voidable Contract: A voidable contract is one which can be set aside or repudiated or avoided at
the option of the aggrieved party.
5) Illegal Agreement: An illegal agreement is one the object of which is unlawful.
6) Unenforceable Contract: The contract which is actually valid but cannot be enforced due to
technical defect.
Contracts on the basis of CREATION:

1) Express contract: Express contract is one which is made by the words spoken or written.
2) Implied contract: An implied contract is one which is inferred from the conduct of a person or
circumstances of a particular case.

Contracts on the basis of EXECUTION:

1) Executed contract: It is a contract where both the parties to the contract have fulfilled their
respective obligations under the contract.
2) Executory contract: It is a contract where both the parties to the contract have still to perform
their respective obligations.
3) Partly executed & executory contract: It is a contract where one of the parties to the contract
has fulfilled his obligation and the other party has still to perform his obligation.

OFFER / PROPOSAL:

When one person signifies to another his willingness to do or abstain from doing anything with a view to
obtain his assent on such act or abstinence, he is making proposal.

UNDERSTANDING AN OFFER -- It must be made by one person to another person -- It must be an

expression of readiness or willingness to do (i.e., a positive act) or to abstain from doing something (i.e.,
a negative act) -- It must be made with a view to obtain the consent of that other person to proposed
Act or abstinence.

• Offeror – The person making the proposal is called the ‘offeror’ or ‘proposer’.

• Offeree – The person to whom the proposal is made is called the ‘offeree’ or the ‘proposee’.

TYPES OF OFFER:

1) Express offer –
a) Specific offer
b) General offer
2) Implied offer
LEGAL RULES AS TO OFFER:

1. Certain and unambiguous terms - If the terms of the offer are vague or indefinite, its acceptance
cannot create any contractual relationship.

2. Intention to create legal relationship - An offer must be such that when it is accepted it will create
a legal relationship.

3. Different from an invitation to offer - In an invitation to offer the person making an invitation
invites others to make an offer to him. It is prelude to an offer inviting negotiations or preliminary
discussions. Case – Pharmaceutical Society of Great Britain vs Boots cash chemists Ltd (1953) 1 QB
40. Harvey vs facey.

4. Proper communication - An offer must be communicated to the person to whom it is made. An

offer is complete only when it is communicated to the offeree. Acceptance is not possible unless
offer is brought to the knowledge of the offeree ie, One can accept the offer only when he knows
about it. Acceptance in ignorance of offer confers no right. ie, An offer accepted without its
knowledge does not confer any legal rights on the acceptor. Case: Lalman Shukla vs Gauri Dutt

5. No term of non-compliance of which amount to acceptance - The offer must not contain a term,
the non-compliance of which amount to acceptance. Ex: A offers by post to sell his horse to B for
Rs 2000. He writes, “ If you do not reply, I shall assume you have accepted the offer.” There
would be no contract even if B does not reply. While making the offer, the offeror cannot say that
if the offer is not accepted before a certain date, it will be presumed to have been accepted.

6. Communication of special terms or standard terms of contract - Special terms of the offer must
also be communicated along with the offer. If the special terms of the offer are not
communicated, the offeree will not be bound by those terms.

7. Different from a mere declaration of an intention - Mere declaration of intention indicates that
an offer will be made or invited in the future. A declaration of intention by a person does not give
right of action to another. Harrison vs Nickerson - An auctioneer advertised in a newspaper that a
sale of office furniture would be held. A broker came from a distant place to attend that auction,
but all the furniture was withdrawn. The broker thereupon sued the auctioneer for his loss of time
and expenses. Held - A declaration of intention to do a thing did not create a binding contract with
those who acted upon it, so that the broker could not recover.
ACCEPTANCE 2(b):

Acceptance means giving consent to the offer. It is an expression by the offeree of his willingness to be
bound by the terms of the offer. Acceptance is the consent given to offer.

Sec 2(b) – “ A proposal is said to be accepted when the person to whom the proposal is made signifies
his assent thereto. A proposal when accepted becomes a promise.”

Who can accept?

In case of a specific offer – To be accepted by that definite person or that particular group of persons to
whom it has been made and non else.

In case of general offer – An offer made to the world at large or public in general can be accepted by
any person having the knowledge of the offer by fulfilling the terms of the offer. (Carlil v. Carbolic Smoke
Ball Co.).

How to make acceptance?

Express acceptance – An express acceptance is one in which is made by words spoken or written.

Implied acceptance – An implied acceptance is one which is made otherwise than in words. It is inferred
from the conduct of the parties or the circumstances of a particular case.

Legal rules of valid acceptance:

1) Absolute and unqualified

2) Manner
3) Communication
4) By whom
5) To whom
6) Before the lapse of the offer

CAPACITY OF PARTIES:
Sec.11 says “Every person is competent to contract who is of age of majority according to the law to
which he is subject, And who is of sound mind, And who is not disqualified from contracting by any law
to which he is subject.” Thus, all the three tests must be applied to determine whether a person is
competent to contract or not.
Who is a MINOR?

A minor is a person who has not attained majority.

According to Section 3 of the Indian Majority Act,1875, a person is deemed to have attained majority as
under:

Where a guardian of a minor’s person or property On completion of 21 years

is appointed under the Guardian and Wards Act

Where minor’s property has passed under the On completion of 21 years

superintendence of the court of wards

In other cases On completion of 18 years

Who is a Person of Unsound Mind?

According to Sec 12 of the Indian Contract Act,

“A person is said to be of sound mind for the purpose of making contract, if at the time when he makes
it, is capable –

• To understand terms of contract

• To form rational judgment to its effect upon his interests”

Persons disqualified by law:

1) Insolvent
2) Convicts
3) Alien Enemy
4) Foreign sovereigns and ambassadors
5) Joint stock companies
CONSIDERATION:

Sec. 2(d) of the Indian Contract Act defines consideration as under :

“when at the desire of promisor, the promisee or any other person has done or abstained from doing,
or does or abstains from doing , or promises to do or abstain from doing something, such act or
abstinence or promise is called a consideration for the promise"

Essential elements of valid Consideration:

i. It must move at the desire of promisor

ii. It may move from any person

iii. It may be past, or present, or future

iv. It must be of some value

v. It must be real and not illusory

vi. Something other than promisor’s existing Obligation.

CONSENT:

Sec.13 says “Two or more persons are said to consent when they agree on same thing in same sense”

In English Law, this is called ‘consensus-ad-adem’

FREE CONSENT:

According to Sec.14 consent is said to be free when it is caused by

a) Coercion, or

b) Undue influence, or

c) Fraud, or

d) Misrepresentation, or mistake
a) COERCION - Coercion means compelling a person to enter into a contract under a pressure or a
threat. According to Section15, a contract is said to be caused by coercion when it is obtained
by—
i) Committing an act which is forbidden by the Indian Penal Code; or

ii) Threatening to commit any act which is forbidden by Indian Penal Code; or

iii) Unlawful detaining of any property; or

iv) Threatening to detain any property.

b) UNDUE INFLUENCE - The term ‘undue influence’ means dominating the will of other person to
obtain an unfair advantage over the other. Sec 16(1) says a contract is influence by undue
influence—
i) Where the relations subsisting between the parties are such that one of the is in
position to dominate the will of another, and
ii) The dominant party uses that position to obtain an unfair advantage over the other.

c) FRAUD - The term fraud means a false representation of fact made willfully with a view to
deceive the other party.

Essential elements of fraud :

i. By a party to a contract
ii. False representation
iii. Representation as to fact
iv. Actually deceived
v. Suffered loss

d) MISREPRESENTATION - The term ‘misrepresentation’ means a false representation of fact made

innocently or non-disclosure of a material fact without any intention to deceive the other party.
e) MISTAKE - A mistake is said to have occurred where the parties intending to do one thing by
error do something else.
VOID AGREEMENTS:
According to Sec2(g) of Indian Contract Act, 1872, a void agreement is an agreement which is not
enforceable by law.

The agreements which are not enforceable by law right from the time when they are made, are void -ab-
initio

Types of agreements expressly declared void:

1. Agreements by or with persons incompetent to contract

2. Agreements entered into through a mutual mistake of fact between the parties.

3. Agreement, the object or consideration of which is unlawful

4. Agreement, the consideration or object of which is partly unlawful

5. Agreement made without consideration.

6. Agreement in restraint of marriage

7. Agreement in restraint of trade

8. Agreements in restraint of legal proceedings

9. Wagering agreements

10. Impossible agreements

11. An agreement to enter into an agreement in the future.

WAGERING AGREEMENTS:
An agreement between two persons under which money or money’s worth is payable, by one person to
another on the happening or non-happening of a future uncertain event is called a wagering event.

Such agreements are chance oriented and therefore, completely uncertain.

CONTIGENT CONTRACTS:
Contingent contracts are a contract to do or not to do something if some events collateral to such
contract, does or does not happen.

Insurance contract provides best example of contigent contract.

Distinction between a wagering agreement and contingent contracts:
Basis of distinction Wagering agreement Contingent contract
Reciprocal promise It consist of reciprocal pronise It may or may not consist of
reciprocal promise
Void/ valid It is void It is valid
Main/ collateral future Future event is essential to Future event is collateral to
events contract contract
Nature It is always of contingent nature It may not be of a wagering nature
Interest of parties Its parties have no other interest in Its parties may have other interest
the subject matter of the as well
agreement except winning or losing
of wagering amount

BREACH OF CONTRACT:
A breach of contract occurs if any party refuses or fails to perform his part of contract or by his act
makes it impossible to perform his obligation under the contract.

In case of breach, the aggrieved party(i.e. the party not at fault) is relived from performing his obligation
and gets a right to proceed against the party at fault.

Types Of Breach:

1) Anticipatory Breach - Anticipatory breach occurs when the party declares his intention of non
performing the contract before the performance is due
2) Actual Breach - Actual breach may take place when – A) The party to the contract refuses or
fails to perform his part at the time fixed for performance. B) Party has performed a part of
contract and then refuses or fails to perform the remaining part of contract.

Remedies for Breach of Contract:

1) Recession of contract.

2) Suit for damages. 3) Suit for specific performance.

4) Suit for injunction. 5) Suit upon quantum merit.

QUASI CONTRACT:

A quasi contract is not a contract at all because one or other essential for the formation of a contract is
absent.

It is a law upon a person for the benefit of another even in the absence of a contract.

It is based on the principle of equity, which means no person shall be allowed to unjustly enrich himself
at the expense of another such obligations are called quasi contracts or implied contracts because the
outcome of such obligation resemble those created by a contract.

Kinds of Quasi Contracts:

1) Right to recover the price of the necessaries supplied.

2) Right to recover money paid for another person.
3) Right to recover for non-gratuitous act.
4) Responsibility of finder of goods.
5) Right to recover from person to whom money is paid or thing is delivered, by mistake or under
coercion.

MODES OF DISCHARGE OF CONTRACT :

 By performance – actual & tender.

 By mutual agreements – novation, rescission, alteration, remission
 By operation of law – death, insolvency, unauthorized material, identity of promisor and
promisee
 By lapse of time -
 By breach – actual & anticipatory
1) Discharge by Performance - A contract can be discharged by performance in any of the
following ways:
(a) By Actual Performance - A contract is said to be discharged by actual per-formance when the
parties to the contract perform their promises in accordance with the terms of the contract.
(b) By Attempted Performance or Tender - A contract is said to be discharged by attempted
performance when the promisor has made an offer of performance to the promisee but it has
not been accepted by the promisee.

2) Discharge by Mutual Agreement - Since a contract is created by mutual agreement, it can also
be discharged by mutual agreement. A contract can be discharged by mutual agreement in any
of the following ways:
a) Novation [Section 62] - Novation means the substitution of a new contract for the original
contract. Such a new contract may be either between the same parties or between different
parties. The consideration for the new contract is the discharge of the original contract.
(b) Rescission [Section 62] - Rescission means cancellation of the contract by any party or all the
parties to a contract.
(c) Alteration [Section 62] - Alteration means a change in the terms of a contract with mutual
consent of the parties. Alteration discharges the original contract and creates a new contract.
However, parties to the new contract must not change.
(d) Remission [Section 63] - Remission means acceptance by the promisee of a’ lesser fulfillment
of the promise made. According to Section 63, “Every promisee may dispense with or remit,
wholly or in part, the performance of the promise made to him, or may extend the time for such
performance, or may accept instead of it any satisfaction which he thinks fit.”

3) Discharge by Operation of Law - A contract may be discharged by operation of law in the

following cases:
(a) By Death of the Promisor - A contract involving the personal skill or ability of the promisor is
discharged on the death of the promisor.
(b) By Insolvency - When a person is declared insolvent, he is discharged from his liability up to
the date of his insolvency.
(c) By Unauthorised - Material Alteration If any party makes any material alteration in the terms
of the contract without the approval of the other party, the contract comes to an end.
 (d) By the Identity of Promisor and Promisee - When the promisor becomes the promisee, the
other parties are discharged.

4) Discharge by Lapse of Time - A contract is discharged if it is not performed or enforced within a

specified period, called period of limitation. The Limitation Act, 1963 has prescribed the
different periods for different contracts, e.g. period of limitation for exercising right to recover a
debt is 3 years, and to recover an immovable property is 12 years. The contractual parties
cannot exercise their rights after the expiry of period of limitation. Example On 1st July, 2001 X
sold goods to Y for Rs 1,00,000 and Y has made no payment till Aug. 2004. State the legal
position as on 1st Aug. 2004 if no credit period was allowed (b) if 2 months credit period was
allowed.
Case (a) The contract is discharged by lapse of time (i.e. 3 years) from 1st July 2001 because the
debt has become time barred and hence X cannot exercise his right to recover this debt.
Case (b) The contract is not discharged by lapse of time because the period of limitation is yet to
expire on 31st Aug. 2004 (3 years from the expiry of the credit period).

5) Discharge by Breach of Contract - A contract is said to be discharged by breach of contract if any

party to the contract refuses or fails to perform his part of the contract or by his act makes it
impossible to perform his obligation under the contract. A breach of contract may occur in the
following two ways:
(a) Anticipatory Breach of Contract - Anticipatory breach of contract occurs when party declares
his intention of not performing the contract before the performance is due.
(b) Actual Breach of Contract - Actual breach of contract occurs in the following two ways:
(i) On Due Date of Performance: If any party to a contract refuses or fails to perform his part of
the contract at the time fixed for performance, it is called an actual breach of contract on due
date of performance. (ii) During the Course of Performance: If any party has performed a part
of the contract and then refuses or fails to perform the remaining part of the contract, it is
called an actual breach of contract during the course of performance.