Indian Contract Act

Indian Contract Act

The Main Structure of the Indian Contract Act, 1872

Dr Subhash Gupta

General Rules pertaining to contracts (Sections 1 to 75)

Preliminary – Sections 1 and 2 [Short title, extent, commencement and interpretation clause].Proposals, acceptance, communication and revocation of proposals [Sections 3 to 9]Voidable Contracts and Void agreements, free consents, capacities of parties etc. [Sections 10 to 30]Contingent Contracts [Sections 31 to 36]Performance of Contracts

[Sections 37 to 67]Quasi Contracts

[Sections 37 to 67]Breach of contracts and remedies for breach of contracts.

[Sections 73 to 75][II] Special Types of Contracts [Sections 124 to 238]

(1) Contracts of Indemnity and Guarantee [Sections 124 to 147](2) Principles of Contract of Bailment [Sections 148 to 181](3) Contract of Agency [Sections 182 to 238]

1

Indian Contract Act

Distinction Between an Agreement and a Contract:

Agreement Contract

Every promise and every set of promises, forming the consideration for each other is an agreement. [Section 2(e)]. For constituting an agreement, an offer by one party and its acceptance by other party are required. In other words an offer and its acceptance together constitute an agreement. Thus, Agreement=Offer + its acceptance

An agreement enforceable by law is a contract [Section 2(h)]. Merely agreement is not a contract but its enforceability at law together constitutes a contract.

Thus,Contract=Agreement + its Enforceability at law

For constituting an agreement, a promise or sets of promise forming consideration for each other are required.

An agreement becomes a contract only when such agreement fulfills all the legal conditions of a contract e.g. formation of legal relationship, free consent, lawful object, etc.

An agreement is a wider concept than that of a contract

A contract is specie of an agreement and as such it is a narrower concept. Therefore, it is said that every contract is an agreement but every agreement is not necessarily a contract.

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Indian Contract Act

It is not necessary that every agreement must create legal obligation because all agreements do not go to constitute contracts

Every contract necessarily creates a legal obligation because every contract is basically an agreement.

An agreement cannot be concluding or a binding contract

A contract is always concluding and binding on the concerned parties.

Section 10 states that all agreements are contracts if

they are made by the free consent of parties

competent to contract, for a lawful consideration and

with a lawful object and are not hereby expressly

declared to be void. Thus, an agreement must

possess certain elements to become a contract.

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Indian Contract Act

Essential elements of a valid contract:

Section 10 states that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void. Thus, an agreement must possess certain elements to become a contract. Following are the essential elements of a valid contract:

(a) There must be an agreement,

(b) Parties to a contract must be

competent,

(c) There should be an intention to create a

legal relationship,

(d) There must be free consent of parties to

the agreement,

(e) Lawful consideration,

(f) Legal or lawful object.

(g) Agreement not expressly declared void

by law,

(h) Compliance with legal formalities,

(i) Certainty and possibility of

performance.

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Indian Contract Act

Classification of contracts

(i) On the basis of mode of formation(a) Express contracts(b) Implied contracts (c) Quasi contracts

(ii) On the basis of execution or performance(d) Executed contracts,(e) Executory contracts(f) Unilateral contracts(g) Bilateral contracts

(iii) On the basis of the form of contracts (h) Formal contracts & (i) Simple Contract

(iv) On the basis of validity or enforceability.(j)Valid contracts,(k)Void contracts,(l)Voidable contracts,(m)Illegal contracts,(n)Unenforceable contracts

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Indian Contract Act

Essentials or rules of a valid offer:

The Indian Contract Act, 1872 contains certain legal rules or essentials regarding proposals or offers which are as under:-

(a) Terms of an offer must be clear, specific or

definite, certain and not loose or vague.

(b) An offer must create legal relationship.

(c) An offer must be communicated to the

person to whom it is made.

(d) Intention of offer must be to obtain the

consent or assent.

(e) Offer may be express or implied; general or

specific. It may also be positive or negative.

(f) An offer should not include any term or

terms of non-compliance that may be

assumed to lead acceptance.

(g) A statement of price is not an offer.

(h) An offer is different from an invitation to an

offer.

(i) Two identical cross-offers do not constitute

a contract.

(j) An offer can be made subject to any terms

and conditions.

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Indian Contract Act

Lapse of an Offer:

(a) An offer lapses if not accepted in the mode prescribed by an offer

(b) An offer lapses after stipulated or reasonable time

(c) An offer lapses by revocation

(d) An offer lapses because of subsequent illegality or destruction of subject matter

(e) Lapse of an offer by rejection

Legal rules or essentials of a valid acceptance:

(a) Acceptance must not be qualified.

(b) Acceptance may be express or implied.

(c) Acceptance must be communicated to the offeror.

(d) Acceptance may be given for the offer that has been communicated.

(e) Acceptance must be in the mode prescribed or usual and reasonable mode.

(f) Acceptance must be communicated within a reasonable time.

(g) Silence is not considered as a mode of acceptance.

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Indian Contract Act

(h) Acceptance of the proposal means acceptance of all terms of the offer made by the proposer.

(i) If a principal makes a proposal through his agent, it is enough if the acceptance is communicated to the agent.

(j) Acceptance must be communicated before the offer lapses or before it is withdrawn.

(k) Acceptance must always be given by the party or parties to whom the offer is made.

(l) Acceptance must make a clear intention on the part of the promisee to fulfill the terms of the promise given. An acceptance to do something which a person (promisee) has no intention to perform is not a valid acceptance.

(m) If an acceptance is given by a person which is subject to certain condition e.g. subject to formal contract or subject to contract to be approved by solicitors or subjects to contract, no contract can be formed till a formal contract is entered into or permission of the concerned persons is obtained.

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Indian Contract Act

Essential elements of a valid or lawful consideration:

Consideration is nothing but some act or forbearance or promise, suffered or done or made by the promisee for the promise. But every act or forbearance is not a consideration unless it possesses certain essential elements which are noted down below:-

(a) Consideration may be an act to do

something or abstinence or forbearance of

doing something.

(b) Consideration may be past, present or

future.

(c) Consideration must be real and not illusory.

(d) Consideration should move at the desire of

the promisor.

(e) Consideration may move from any person

including the prormisee.

(f) For supporting each independent promise,

there must be an independent consideration.

(g) Consideration need not be adequate.

(h) Consideration must be something that the

promisor is not already bound to do.

(i) Consideration must be valuable in the eyes

of law.

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Indian Contract Act

Exceptions to the rule of

“ No consideration, no contract”:

(a) Promise made on account of love and affection

(b) Promise for compensation of voluntary services

(c) Promise to pay any time bared debt

(d) Contract of Agency

(e) Completed gifts

Exceptions to the rule of

NO CONSIDERATION, NO CONTRACT

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Promises made on account of love and affection

Promises for Compensating voluntary services

Contracts of Completed gifts

Contract of Agency

Promises to pay time-barred debts

Indian Contract Act

Kinds of Consideration:

There are following five kinds of consideration:

1. Present or Executed Consideration.

2. Past Consideration.

3. Future or Executory Consideration.

4. Unlawful Consideration.

(i) When forbidden by law.

(ii) When defeat the provisions of law

(iii) When they are fraudulent

(iv) When cause injury to other persons or their

property.

(v) When opposed to public policy.

5. Illusory or Unreal Consideration.

Capacity of Parties

All agreements are contracts provided that:

(a) they are made by the free consent of parties

(b) these parties must be competent to contract

(c) the contract must be for a lawful consideration and with a lawful object and

(d) they must not be expressly declared to be void.

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Indian Contract Act

Agreement with the minors:

(a) Agreement with or by a minor is absolutely void

(b) No Ratification of Minor’s contract

(c) A minor can be a promisee

(d) No restitution in agreements with a minor

(e) Minor’s Insolvency

(f) No estoppel in the case of a minor

(g) Minor as a partner

(h) A minor as an agent

(i) A person working as a surety for a minor

(j) Liability of a minor for necessities

(k) Responsibility of parents or guardians of a minor

(l) Liability of a minor for torts (civil wrong)

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Indian Contract Act

Types of Unsound Mind

(i) Permanent Unsoundness (ii) Temporary (1) Illness(2) Shock(3) Accidental(4) Intoxication

(a) Congenital (b) Non-Congenitali.e. right from birth

(i) Accidental (ii) Disease

Persons disqualified from contracting by the law:

(a) Alien enemies,

(b) Foreign sovereigns, their diplomatic staff and

accredited representatives;

(c) Insolvents,

(d) Convicts,

(e) Corporations.

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Indian Contract Act

Consent is said to be free when it is not caused by :

(1) Coercion, as defined in Section 15, or (2) Undue influence, as defined in Section 16, or (3) Fraud, as defined in Section 17, or (4) Misrepresentation, as defined in Section 18, or (5) Mistake, subject to the provisions of Sections 20,

21 and 22.

Coercion:

“Coercion” is the 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 the intention of causing any person to enter into an agreement.

Characteristics of Coercion:(a) Coercion implies committing or threatening to

commit any act forbidden by the Indian Penal Code.

(b) Coercion also implies the unlawful detaining or threatening to detain the property of another person.

(c) The act of coercion must have been performed with the intention of causing any person to enter into an agreement.

(d) It is not necessary that the coercion must be applied by a party to the contract. It also can be applied by a stranger.

(e) It is not necessary that the Indian Penal Code should be in force at the place where the coercion is applied. Following famous illustration will make this characteristic very clear.

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Indian Contract Act

Undue Influence :

(1) A contact is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

(2) In particular and without prejudice to the generality of the ‘foregoing principle, a person is deemed to be in a position to dominate the will of another:

(a) Where he holds a real or apparent authority over the other or where he stands in a fiduciary relation to the other; or

(b) Whether 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.

(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.

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Indian Contract Act

Important elements of undue influence:

(a) The relations subsisting between the parties to a contract are such that one of them is in a position to dominate the will of the other;

(b) The dominant party uses his position to obtain an unfair advantage over the party;

(c) The dominant party may hold a real or an apparent authority over the other party, and contract is entered into by using an undue influence.

Important points of Distinction between Coercion and Undue Influence:

(a) In coercion, some criminal act is involved while in undue influence, criminal act is not involved.

(b) Coercion is mainly of a physical character whereas undue influence is of a moral character. Therefore, sometimes, undue influence is called as moral coercion.

(c) In coercion, the consent of an aggrieved party is obtained by committing or threatening to commit an act forbidden by the Indian Penal Code or detaining or threatening to detain properly unlawfully. In undue influence, the consent of an aggrieved party is obtained under moral

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Indian Contract Act

influence. Person obtaining the consent takes the undue advantage of his position.

(d) In coercion, intention is always there to induce someone to enter into an agreement.In undue influence, the party which uses his influence uses his position to obtain certain advantage at the cost of other party.

(e) In coercion, it is not necessary that there should be some relationship between the promisor and the promisee. But in undue influence, there always exists some sort of relationship between the parties to the agreement. Such relationship can be fiduciary or paternal.

Essential elements of Fraud:

(a) There must be a false representation.

(b) It must be done by the party or his agent.

(c) The representation must relate to a fact.

(d) The other party must have been attracted to act upon the representation leading to a fraud.

(e) The representation intentionally done to commit a fraud must have been done before the conclusion of the contract.

(f) The other party must have relied upon the representation intentionally done to commit a fraud and thereby must have been deceived.

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Indian Contract Act

Effects of fraud and remedies

The party defrauded can exercise any of the following rights:

(a) As a contract induced by fraud is viodable at the option of the party defrauded, he can avoid or rescind the contract but he must do so within a reasonable time.

(b) The party defraud can sue for the damages suffered or ask for the restitution.

(c) The party can insist for the performance of the contract on the condition that the other party shall take necessary steps to put the defrauded party in a position in which it would have been if the representation made had been true.

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Indian Contract Act

Mistake

Mistake of Law Mistake of fact

(Section 21) (Section 20)

Mistake of Law Of the country Unilateral Bilateral

mistake mistake

Mistake of Law of the of the foreign country

Mistake as to possibility of

performing the Contract Mistake as to the subject

matter regarding

(1) Existence

(5) Subject matter

(2) Identity

(3) Quantity (6) Title

(4) Quality (7) Price

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Indian Contract Act

FLAWS IN CONSENT

Flaws in (A) Coercion [Section 15]

Consent (B) Undue Influence [Section16]

(C) Fraud [Section 17]

(D) Misrepresentation [Section 18]

(1) By positive statement

or assertion

(2) By breach of duty

(3) By causing a

mistake by innocent

misrepresentation

(E) Mistake of Law and Fact

[Sections 20 and 21]

Legality of Object and Consideration

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Indian Contract Act

(i) It is forbidden by law; or

(ii) It is of such nature that, if permitted, it would defeat the provisions of any law; or

(iii) It is fraudulent; or

(iv) It involves or implies injury to the person or property of another; or

(v) The court regards it as immoral; or

(vi) The court regards it as opposed to public policy.

(VI) When the court regards a consideration or an object of an agreement as opposed to public policy, such agreement is unlawful:

(1) Agreements to commit crimes are void. If the consideration is an agreement is to commit any crime, such agreement is opposed to the public policy.

(2) Agreements with enemies are void. If

someone enters into an agreement with enemies to trade in goods without prior permission and without obtaining license from the proper authority of Indian Government, such agreement is void.

(3) An agreement barring a right of legal proceedings of any person is void [Sec. 28].

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Indian Contract Act

(4) An agreement is restraint of trade is void. Every person has a right to carry on lawful trade or business or to do any lawful occupation and therefore agreements entered into a restraint of trade are void [Section 27].

(5) Wagering agreements are not only void but illegal. This means the agreements to pay money or money’s worth as happening or non-happening, of particular event or events are void. No suit can be filed to recover anything alleged to be won on the wager.

(6) Agreements interfering an administration of justice are void. Such agreement may take any of the following forms:

(a) Stifling prosecution: Any agreement not to prosecute an offender or criminal is an agreement for stifling prosecution and therefore unlawful and void.

(b) Interference with the course of justice: An agreement obstructing or interfering the ordinary process and procedure of justice is unlawful and void e.g. agreements of giving bribes, threatening the witnesses, pleaders etc.

(2) Agreements by way of champerty and maintenance are not absolutely void. If the object of entering into such agreements is not immoral, they are valid. An agreement whereby one person agrees to assist another in the process of recovering money or any other property and to share the

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Indian Contract Act

proceeds thus acquired is called champerty. When a person has no legal interest in the subject matter but still he agrees to give some sort of assistance to help the other person to bring a legal action, this is known as maintenance.

(3) Agreements tending to create interest opposed to duty are unlawful. If any person enters into an agreement whereby he is supposed to do something which is opposed to his duty, such agreement is void.

(4) The agreements not to plead to bar of limitation to claims are void as they defeat the provisions of the law of limitation.

(5) Agreements interfering with marital duties are unlawful and therefore void. These agreements include promises by married person to marry during the lifetime or after the death of their wives, agreements to lend money to women in consideration of their getting divorces and marrying the lenders etc.

(6) An agreement which a person promises in return to procure the marriage of another person for some monetary consideration is void as it is opposed to public policy.

(7) According to Section 26 of the Act, every agreement in restraint of the marriage of any person, other than a minor, is void as the law considers marriage as the right of every person.

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Indian Contract Act

Void Agreements

All agreements entered into are not enforceable by law. The agreements which are not enforceable by law are said to be void [Section 2(g)] such agreements do not give rise to any legal consequences. All agreements that are opposed to public policy are void.

Following agreements have been expressly declared to be void by the Contract Act:

(1) Agreements by incompetent parties [Sec. 11](2) Agreements made under mutual mistake of

facts [Section 20].(3) Agreements the consideration or object of

which is unlawful [Section 23].(4) Agreements the consideration or object is

partly unlawful [Section 24].(5) Agreements entered into without any

consideration [Section 25].(6) Agreements made in restraint of marriages

[Section 26].(7) Agreements made in restraint of trade,

business, occupation [Section 27].(8) Agreements in restraint of legal proceedings

[Section 28].(9) All agreements the, meaning of which is not

certain [Section 29].(10) Wagering agreements [Section 30].(11) Agreements contingent on impossible

events [Section 36].(12) Agreements to do an act impossible in itself

[Section 56].

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Indian Contract Act

Distinction between a-wagering agreement and a

contingent contract:-

A Wagering Agreement Contingent Contract

A wagering agreement is an

agreement between two parties

wherein one party promises to

pay money or money’s worth

on happening of some

uncertain event in

consideration of other party’s

promise to pay if that event

does not take place [Section

30].

It is a contract to do or not to

do something, if some event,

collateral to such contract,

does or does not happen.

[Section 31].

Every wagering agreement is of

a contingent nature.

Every contingent contract

may not be of a wagering

nature.A wagering agreement is

absolutely void and illegal.

A contingent contract is valid.

Wagering agreements always

consist of reciprocal promises.

Contingent contract may not

contain reciprocal promises.

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Indian Contract Act

The future event is the sole

determining factor in a

wagering agreement.

In a contingent contract, the

future event is collateral.

Except for winning or losing of

money or money’s worth, the

parties to a wagering

agreement have no other

interest in the subject matter.

Parties to a contingent

contract have some interest in

the subject matter. In the

absence of such interest in

the subject matter, a

contingent contract may turn

to be of a wagering nature.In a wagering contract, none of

the parties intends to perform

the contract itself. They are

only interested to pay or

receive money or money’s

worth and therefore a wagering

agreement is considered as a

game of change.

In a contingent contract,

parties intend to perform the

contract itself.

Contracts which need not be performed.

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Indian Contract Act

1. When performance of a contract becomes impossible, such contract need not be performed, [Section 56].

2. When there is an agreement between the parties to a contract to substitute a new contract for it or to rescind the old contract or after it, there is no need to perform the original contract [Section 62].

3. When 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 except instead of it any satisfaction which he thinks fit, such contract need not be performed [Section 63].

4. When a person, at whose option a contract is voidable, rescinds it, the other party thereto need not perform any promise contained therein in which he is promisor. Such contract need not be performed [Section 64].

5. If any promisee neglects or refuses to afford the promisor reasonable facilities for performance of his promise, the promisor is excused by such neglect or refusal as to non-performance caused thereby.

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Indian Contract Act

Who may perform the contract ?

(a) Promisor [Section 40].

(b) Agent [Section 40].

(c) Legal representative [Section 37(2)].

(d) Third person [Section 41].

(e) Joint promisor [Section 42 to 44].

Time and place of performance of a contract:

(a) Performance of promise within a reasonable time.

(b) Performance of promise where time and place is specified.

(c) Application of performance at proper time and place i.e. on a certain day and at a certain place.

(d) Promisor to apply to the promisee to appoint a place for performance of promise.

(e) Manner or time by promisee to perform a promise.

Time of performance of contract:

(a) Where time is the essence of the contract.

(b) When time is not the essence of the contract.

Discharge of Contract

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Indian Contract Act

A contract is said to be discharged, terminated or dissolved when the rights and obligations created by that contract come to an end. Discharge of contract means termination of the relationship between the parties to a contract.

A contract may be discharged or dissolved in any one of the following:

(a) By performance of the contract(b) By agreement.(c) By lapse of time.(d) By operation of law.(e) By breach made by any party to contract.(f) By assignment.(g) By impossibility of performance.(h) By material alternation without the consent

of the concerned party.

Discharge of a contract by agreement or consent:

(1) By novation [Section 62].

(2) By rescission [Section 62].

(3) By alteration [Section 62].

(4) By remission [Section 63].

(5) By waiver.

(6) By merger.

(7) By owing to the occurrence of an event.

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Indian Contract Act

Discharge of contract by operation of law:

(a) Death: In contracts where personal skill or taste or ability is required, the death of the promisor results in termination of contracts. In other contracts where the personal skill or ability is not required, the rights and the liabilities of the deceased person pass on to the legal representative(s) as the case may be.

(b) Insolvency: When a person is declared insolvent, he is released from performing his part of the contract by law. Thus, an insolvent is discharged from all liabilities incurred prior to his adjudication.

(c) Merger: It implies that an inferior right accruing to the party to a contract merges into a superior right accruing to the same party under the same or other contract.

(d) Complete loss of evidence: If the evidence proving the existence of a contract is lost, it stands terminated.

(e) When the rights and liabilities vest in one and the same person, a contract stands terminated e.g., If a bill of exchange is received by its acceptor, other parties are discharged.

Discharge of contract by breach:

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Indian Contract Act

(1) Actual breach: It means breach committed by either at the time when the performance of the contract is due or during its performance. Actual breach is also known as present breach.

(2) Anticipatory breach: It implies repudiation of an integral part of the contract by the promisor before the actual date of performing the contract [Section 39].

Discharge of contract by assignment:

Discharge of contract by impossibility of performance:

i. Destruction of subject matter.ii. Death or incapacity of personal service.iii. Non-existence of a particular state of

things.iv. Non-occurrence of a particular state of

things.v. Out-break of war.vi. Change of law.

Discharge of contract by material alteration:

Remedies for Breach of a Contract:

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Indian Contract Act

(a) Recession of the contract.(b) Suit for damages.

i. Ordinary damagesii. Special damages.iii. Nominal damages.iv. Vindictive damages.v. Damages agreed in advance.

vi. Damages of loss of reputation.(c) Quantum meruit.(d) Suit for specific performance.(e) Suit for injunction

Specific performance is not granted in the following cases:

(1) Where damages are an adequate remedy for breach.

(2) Where the contract is in its nature revocable.(3) Where the contract is uncertain.(4) When the contract is entered into by trustees

in breach of their trust.(5) Where the contract is inequitable to either

party.(6) Where it is not possible for the Court to

supervise the contract.(7) When a company makes any contract using

the powers not conferred on it by its Memorandum of Association.

Kinds of Quasi-contracts:

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Indian Contract Act

There are five kinds of quasi-contractual obligations:

(a) Supply of necessaries [Section 68].

(b) Reimbursement of payment by an interested person [Section 69].

(c) Liability of payment for non-gratuitous acts [Section 70].

(d) Responsibility of a finder of goods [Sec. 71].

(e) Payment of money by mistake or coercion [Section 72].

Distinction between a contract and a quasi-contract:

Contract Quasi-Contract

1. An agreement

enforceable by law is a

contract [Section 2(h)].

1. Quasi-Contract is

nothing but certain

relations resembling

those created by a

contract and it is not

actually a contract.

2. A contract basically 2. There is no agreement

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Indian Contract Act

requires an

agreement.

at all in the quasi-

contract3. A contract results from

the will of parties

expressed with a view

to create certain

obligation.

3. Quasi-Contract is itself

an obligation

resembling that created

by a contract.

4. There are various

essential elements

required for a valid

contract.

4. There are no such

essential elements

required for formation

of a quasi contract.

5. A contract is always

full-fledged and is

binding on those who

enter into the contract.

5. A Quasi-Contract is not

full-fledged but it is an

implied contract.

Strictly speaking, a

Quasi-Contract is not a

contract not in fact but

in law.

Distinction between a Contract and a Quasi Contract:

Contingent Contract Quasi-Contract

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Indian Contract Act

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.

[Section 31].

Under certain conditions, the

law creates and enforces legal

rights and obligations when no

real contract exists. Such

obligations are known as quasi

contract. The contract Act

describes Quasi-Contracts as

certain relations resembling

those contracts.In a contingent contract,

performance of a contract

depends upon happening or

not happening of some event in

the future.

In a Quasi-Contract, benefit of

an act done by one person is

taken by some other person.

That person acts on his own

but expects certain return.A contingent contract is a

contract in fact.

A Quasi-Contract is a contract is

law.In a contingent contract, there

is the responsibility to perform

legal obligation.

In a Quasi-Contract, there is

always equitable obligation

alongwith legal obligation as it

rests on the ground of equity.A contingent contract is a valid

contract.

A Quasi-Contract in the strict

sense is not a contract at all.

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