THE INDIAN CONTRACT ACT (ICA), 1872

It extends to the whole of India except the State of Jammu & Kashmir and came into force on 1st September 1872

What is a contract?
Section 2(h) An agreement enforceable by law is a contract. Thus, Contract = Agreement + Legal Obligation i.e., a duty enforceable by Law

Agreement?
Section 2(e)
Promise/(s) Promise/(s)

= Agreement
(in exchange for)

As per Sec 2(e): Every promise and every set of promises, forming the consideration for each other, is an agreement.

Promise?
Section 2(b) Promise = Proposal/Offer + Acceptance A proposal, when accepted becomes a promise

Proposal
Section 2(a) When a person signifies to another his willingness to do or abstain from doing something with a view to obtain his assent to such act

Acceptance
Section 2(b) Giving of assent to the proposal. An Agreement is the sum total of offer/proposal and acceptance

Characteristics of Agreement
Plurality of Persons: There must be two persons to
make an agreement because one person cannot enter into an agreement with himself

Consensus-ad-idem: Both the parties to an

agreement must agree the subject-matter of the agreement in the same sense and at the same time

Legal Obligation
 An agreement to become a contract must give rise to a

legal obligation i.e., a duty enforceable by law.

 Expectations created by promises of the parties shall be

fulfilled and their non-fulfillment shall give rise to legal consequences i.e., in case of default on the part of either party an action for breach of contract could be enforced through a court.
 All contracts are agreements but all agreements are not

contracts

Kinds of Contracts
From the point of view of Enforceability
1.

Void Voidable Unenforceable Illegal Valid

2. 3. 4. 5.

1. Void Contract Sec2(j)

 Void means not binding in law  Void Contract implies a useless contract which has no legal

effect at all.
e.g. A and b contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract to marry becomes void.

Void Agreement (void-ab-initio): In the eye of law such an

agreement is no agreement at all from its very inception e.g.  Agreement with or by a minor  Agreement in restraint of trade Illegal Agreements  Wagering/Betting Agreements

2. Voidable Contract 2(i)

 Voidable i.e., void + able
Section 2(i) An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract e.g. A threatens to shoot B if he does not sell his new Karizma bike to A for Rs. 20,000. B agrees. The contract has been brought about by coercion and is voidable at the option of B.

3. Unenforceable Contract
 It is valid in itself but is not capable of being enforced

in a court of law because of some technical defect such as absence of writing, registration, requisite stamp.

4. Illegal or unlawful contract

 forbidden by law  Defeat the provisions of law  Is fraudulent  Involves injury to the person or property of another  Is immoral

5. Essential elements of a Valid contract: (Sec. 10)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Agreement - Offer & acceptance Legal consequences - rights & obligations Capacity of the contracting parties Consideration Lawful object Free consent Certainty Possibility of performance Writing & registration Not expressly declared to be void.

Offer: Sec.2(a)
 Essentials of offer:

It must be an expression of the willingness to do or abstain from doing something. Such expression must be to another person. Such expression must be made with the intention to obtain the assent of the other person to such an act or abstinence.
e.g. I may sell my motorcycle if I get Rs 14,000 for it. I am willing to sell my motorcycle to you for Rs.14,000

The person making the proposal or offer ---- promisor or offeror, The person to whom the offer is made ---- offeree The person accepting the offer ---- promisee or acceptor

Legal Rules Regarding a Valid Offer

1. Offer may be express or implied. e.g. M says to N that he is willing to sell his motorcycle to him for Rs.40000.
JSRTC runs buses on different routes to carry passengers at scheduled fares.

2. Must give rise to legal consequences & be capable of creating legal relationship. 3. Terms must be certain & not vague e.g. X purchased a horse from Y and promised to buy another , if the first one proves
lucky. X refused to buy the second horse , Y could not enforce the agreement.

4. May be specific or general. 5. Can be made subject to any terms & conditions.

Legal Rules Regarding a Valid Offer

6. Must not be an invitation to offer. e.g. 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.

7. Communication of special terms

e.g. 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.

Legal Rules Regarding a Valid Offer

8. Must be communicated to offeree. 9. Two identical cross-offers do not make a contract
 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 Offers Instead of accepting an offer, the offeree makes a counter offer, i.e., accepts the same subject to certain conditions or qualification

Lapse & revocation of an offer:

Lapse of stipulated or reasonable time. Acceptance not in prescribed mode. Rejection. Death or insanity of offeror or offeree before acceptance. Revocation. Revocation by non-fulfillment of a condition precedent to acceptance. Subsequent illegality or destruction of subject-matter.

Acceptance: Sec 2(b)

When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Legal Rules regarding a Valid Acceptance
Acceptance must be given only by the person to whom the offer is made. Must be absolute & unqualified. Must be in prescribed mode or reasonable manner. Must be communicated by the acceptor. Within reasonable time. Acceptance must succeed an offer. Rejected offers can be accepted only if renewed.

CONSIDERATION
Sec 2(d)
When at the desire of promisor, the promisee or any other person has done or abstained from doing, or does of abstained from doing or promises to do or to abstained form doing something such act or abstinence, or promise is called consideration for a promise. e.g. A agrees to sell his house to B for Rs 10,000. A promises to type the manuscript of Bs book and in return B promises to teach As son for a month


Consideration means a reasonable equivalent or other valuable benefit passed on by the promisor to the promise or by the transferor to the transferee. Blackstone- consideration is the recompense (repay) given by the party contracting to the other. Pollock consideration is the price for which the promise of the other is bought, and the promise thus given for value is enforceable. Consideration is the price of a promise, a return or quid pro quo, something of value received by the promise as inducement of the promise

 

Essentials of Consideration
 Consideration must move at the desire of offeror. e.g. A sees Bs house on fire and helps in extinguishing it. He cannot demand payment for his services because B never asked him to come for help  Consideration may move from the promisee or any other person i.e.

even a stranger to the consideration can sue on a contract, provided he is a party to the contract
 Stranger to a contract cannot sue e.g A mortgage his property to B in consideration of B s promise to A to pay As debt to C, C cannot file a suit against B to enforce his promise , C being no party to the contract between A & B Exceptions: Beneficiary in case of trust created An addressee of an insured article Family settlement for females When the defendant act as an agent to third party

Essentials of Consideration
 May be past, present or future. e.g. A teaches Bs son at Bs request in the month of January and in Feb. B promises to pay A a sum of Rs 200 for his services. The service of A will be past consideration A sells and deliver a book to B , upon Bs promise to pay for it at a future date  Must be of some value. e.g A agrees to sell his motorcycle worth Rs. 20,000 for Rs. 1,000 only and his consent is free , the agreement is valid.  Must be real. Physically impossible, illegal, uncertain consideration is not a valid consideration

No Consideration, No Contract- Exceptions:

 Agreement made on account of Natural love & affection, expressed in      

writing, registered, parties in near relation Sec 25(1) Agreement to compensate for past voluntary service. Sec 25 (2 ) Payment of time-barred debt. Sec 25(3) Completed gift. Sec 25(1) Contract of agency. Sec 185 Compromising a due debt. Sec 63 Contribution to charity.

Capacity of parties: (Sec 11)

Section 11 Every person is competent to contract who is of the age of majority
according to the law to which he is subject , and who is of sound mind, and is not disqualified from contracting by any law to which he is subject . Person incompetent to contract : 1. Minor: Sec 3 of the Indian Majority Act 1875, a person domiciled in India, who is under 18 years of age is a minor. 2. Unsound Minds 3. Disqualified person

Minors Agreements
         

Minor : Void & inoperative No restitution Beneficial agreements are valid No ratification on attaining the age of majority. Rule of estoppel does not apply. Minors liability for necessaries. Specific performance. Minor partner Minor & insolvency

Unsound mind: Sec 12

A person is said to be of sound mind for the purpose of making a contract if at the time he makes it, he is capable of understanding it and of forming a rational judgement as its effects upon his interests.  Usually of sound mind.  Usually of unsound mind

Causes:
    

idiocy Lunacy Drunkenness Hypnotism Mental decay

Effects:
 Void & inoperative  Similar to agreements entered into by minors.

Disqualified persons:
 Alien enemies  Foreign sovereigns & ambassadors  Convicts  Married women  Insolvents

Free consent: Sec 14

CONSENT` (SECTION 13) When two or more persons agree upon the same thing in the same sense, they are said to consent. Ex- A agrees to sell his Fiat Car 1983 model for Rs. 80,000. B agrees to buy the same.
There is a valid contract since A and B have consented to the same subject matter.

FREE CONSENT(Sec 14): Consent is said to be free when its not caused by-Causes affecting contract 1. Coercion (Sec 15) 2. Undue influence (Sec 16) 2. Fraud (Sec 17) 4. Misrepresentation (18) 5. Mistake (Sec 20,21,22) (i) of fact (a) Bilateral (b) Unilateral (ii) of Fact Consequences Contract voidable Contract voidable Contract voidable Contract voidable

Void Generally not invalid Void

Coercion: Sec 15
 Committing or threatening to commit any act forbidden by the Indian

Penal Code or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with an intention to cause any person to enter into an agreement.
 Threat to shoot, murder, giving wrong evidence, attempt to commit

suicide , theft are examples of acts forbidden by Indian Penal Code

Effects of Coercion:
 Voidable at the option of the party whose consent was so

caused .(Sec 19)  As per Sec 64, if the aggrieved party opts to rescind a voidable contract, he must restore any benefit received by him to the other party from whom received.

Undue Influence: Sec 16

A contract is said to be induced by undue influence when the relation subsisting between the parties is such that one of the parties is in a position to dominate the will of the other and he uses this position to obtain an unfair advantage over the other.

Presumption of Undue Influence:

 In the following cases undue influence is

presumed to exist & the burden of proof lies on the party who is in a position to dominate the will of the other:  The person holds a real or apparent authority over the other,

e.g., master & servant, police officer & accused.  Fiduciary relationship e.g., father & son, doctor & patient.  The contracting parties mental capacity is temporarily or permanently affected due to age, illness, mental or bodily distress, e.g., old illiterate persons.

No presumption of undue influence:

 In the following cases law does not presume

undue influence & the burden of proof lies on the party alleging that undue influence existed:

 Mother & daughter  Grandson & grandfather  Husband & wife  Creditor & debtor  Landlord & tenant.

Effects of Undue Influence:

 Voidable  Sec. 64: Court has the discretion to direct the aggrieved

party to refund the benefit in part or in whole or set aside the contract without any direction for refund of benefit.  There is no criminal liability in case of undue influence.

Misrepresentation: Sec 18
 A representation means a statement of fact made by one

party to the other either before or at the time of contract, relating to some matter essential to the formation of the contract, with an intention to induce the other party to enter into a contract.  It may be expressed by words spoken or written or implied from the acts or conduct of the parties.  In law, a representation when wrongly made without an intention to deceive the other party is known as misrepresentation.

Sec 18:
 Positive assertion of unwarranted statements of material

facts believing them to be true.  Where a statement when made was true but subsequently before it was acted upon, it became false to the knowledge of the person making it , then a duty is cast upon the person to disclose the change of circumstances to the other party.  Causing mistake about the subject matter innocently.

Effects of misrepresentation:
 Voidable  May choose to rescind the contract or  Affirm the contract & insist that he be put in a position

in which he would have been, if the representation made had been true.

Fraud: Sec 17
Fraud means & includes any of the following acts committed by a party with an intention to deceive or induce the other party to enter into a contract:
1. 2. 3. 4. 5.

A false statement made intentionally is fraud Active concealment of a material fact by a person having knowledge of the fact is fraud. A promise made without an intention of performing it. Any act or omission declared by law to be fraudulent. Any other act fitted to deceive.

Effects of fraud:
 Right to rescind the contract.  Affirm the contract and ask for restitution, i.e., to be put

in a position, he would have been, if the statement made had been true.  The aggrieved party can also claim damages.  Fraud by a stranger to the contract does not affect the contract.

Action for fraud:

 Fraudulent statement must be instrumental in inducing

the party to enter into a contract.  The plaintiff must have been actually deceived by the fraudulent statement.  No action will lie if the plaintiff does not sustain any loss or injury.  The contract is not Voidable if the party had enough means at its disposal to discover the truth with ordinary diligence.

Loss of right of rescission:

 Affirmation: where the aggrieved party after becoming

aware of his right to rescind the contract, chooses to affirm it, either by express words or through his conduct, which shows an intention to affirm it, loses his right to rescind the contract.  Restitution not possible: where the party seeking to rescind the contract is not in a position to restore the benefits received under the contract, cannot exercise his right of rescission.

Contd..
 Lapse of time: where the aggrieved party fails to exercise

his right of rescission promptly, may lose his right to rescind the contract.  Right of third parties: where third parties acquire bona fide rights in the subject matter of the contract, before it can be rescinded, then such rights are valid against the aggrieved party and the right to rescind will no longer be available.

Mistake:
 1. 2.  1. 2.

Mistake of law: Mistake of law of the country. Mistake of foreign law. Mistake of fact: Bilateral mistake Unilateral mistake

Mistake of law:
 Mistake of law does not give right to the parties to set

aside the contract & hence such a contract is not Voidable. This is based on the maxim Ignorantia juris non-excusat . Hence no relief can be granted on the grounds of mistake of law.  However, if one of the parties makes a mistake of law, through the inducement, whether innocent or otherwise, of the other party, then the contract may be avoided.

Mistake of foreign law:

 Mistake of foreign law stands on the same footing as

mistake of fact. Here the agreement is void in case of bilateral mistake only.

Bilateral mistake:
 Where the parties to an agreement misunderstood each

other & are at cross purposes, there is a bilateral mistake.  In this case there is no agreement as there is no consensus and hence the agreement is void.  In case of bilateral mistake of an essential fact, the agreement is void ab initio.

Essentials of bilateral mistake:

 The mistake must be mutual, i.e., both the parties must

misunderstand each other so as to nullify consent.  Mistake must relate to some fact and not an opinion.  The fact must be essential to the agreement: mistake as to the existence, identity, title, quantity, quality of the subject-matter of the contract.

Unilateral mistake:
  1. 2. 3.

Where only one of the contracting parties is under a mistake, as to the matter of fact essential to the contract, it is a unilateral mistake. In case of unilateral mistake the contract is: Valid: if the mistake is caused due to ones own neligence or lack of reasonable care. Voidable: if the mistake is caused by fraud, misrepresentation, etc. Void ab initio: where the mistake is with regard to the identity of a person & where such identity is crucial to the agreement or the mistake is with regard to the nature of a written document

PERFORMANCE OF CONTRACTS
Performance of Contract Offer to perform or tender of performance According to Section 38, if a valid offer/tender is made and is not accepted by the promisee, the promisor shall not be responsible for non-performance nor shall he lose his rights under the contract. A tender or offer of performance to be valid must satisfy the following conditions:  It must be unconditional.  It must be made at proper time and place, and performed in the agreed manner.