Professional Documents
Culture Documents
Indian Contract Act 1872
Indian Contract Act 1872
1872
Introduction
The English Connection:
Common law: precedents & customs.
Equity: natural justice.
Pacta sunt servanda: agreements must be
honored.
Stare decisis: settled law should not be
disturbed.
Essential elements of a valid
contract: (Sec. 10)
Agreement - Offer & acceptance
Legal consequences - rights & obligations
Capacity of the contracting parties
Consideration
Legal 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.
Rules regarding a valid offer:
Offer may be express or implied.
Must give rise to legal consequences & be capable of creating
legal relationship.
Terms must be certain & not vague.
May be specific or general.
Must not be an invitation to offer.
Can be made subject to any terms & conditions.
Must be communicated to offeree.
Invitation to offer, cross offers & counter offers.
Communication of special terms
Prescribed mode of acceptance.
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.
Non-fulfillment of condition precedent.
Subsequent illegality or destruction of subject-matter.
Acceptance: Sec 2(b)
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.
Within reasonable time.
Acceptance must succeed an offer.
Rejected offers can be accepted only if renewed.
Consideration: Sec2(d)
Essentials of consideration:
Consideration must move at the desire of offeror.
May move from offeree or any other person.
Stranger to a contract cannot sue; except in case of
trust created, an addressee of an insured article;
family settlement.
May be past, present or future.
Must be of some value.
Must be real.
“No Consideration, No Contract”-
Exceptions:
Natural love & affection.
Agreement to compensate for past voluntary
service.
Payment of time-barred debt.
Completed gift.
Contract of agency.
Contribution to charity.
Capacity of parties: (Sec 11)
Minor :
Void & inoperative
No restitution
Beneficial agmts are valid
No ratification on attaining the age of majority.
Rule of estoppel does not apply.
Minor’s liability for necessaries.
Specific performance.
Minor partner
Minor agent
Minor & insolvency
Unsound mind: Sec 12
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
Coercion
Undue influence
Misrepresentation
Fraud
Mistake
Coercion: Sec 15
Committing or threatening to commit any act forbidden by the
IPC with an intention to cause any person to enter into an
agreement.
The unlawful detaining or threatening to detain, any property
with an intention to cause any person to enter into an
agreement.
The act constituting coercion, may be directed at any person
& not necessarily at the other party to the agreement.
It does not matter whether the IPC is or is not in force where
the coercion is employed. If suit is filed in India the said
provision will apply.
Effects of Coercion:
Voidable
Sec 64
The party exercising coercion exposes himself
to criminal liability under the IPC, besides an
action in contract.
Burden of proof lies on the party who wants to
set aside the contract on the plea of coercion.
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.
Contd..
Undue influence implies mental & moral coercion in
such a way that the consent given is not free.
The person in a position to dominate the will of the
other need not be a party to the contract or be benefited
by the contract; it is sufficient if the third party benefits
as long as he is interested in the third party.
Unreasonable bargains, high prices, high rate of
interest etc are instances of circumstances when undue
influence is presumed.
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:
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.
The remedy is lost if the other party had
sufficient means of discovering the truth with
ordinary diligence.
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. A false statement made intentionally is fraud
2. Active concealment of a material fact by a person having
knowledge of the fact is fraud. However, mere non-
disclosure is not a fraud, if there is no duty to disclose.
3. A promise made without an intention of performing it.
4. Any cat or omission declared by law to be fraudulent.
5. Any other act fitted to deceive.
Silence & fraud:
Mere silence as to facts likely to affect the
willingness of a person to enter into a contract
is not fraud, unless:
1. Such a person is under a duty to speak or
2. Silence is in itself equivalent to speech.
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:
Mistake of law:
1. Mistake of law of the country.
2. Mistake of foreign law.
Mistake of fact:
1. Bilateral mistake
2. 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:
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:
1. Valid: if the mistake is caused due to ones own neligence or lack of
reasonable care.
2. Voidable: if the mistake is caused by fraud, misrepresentation, etc.
3. 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
Lawful object & consideration
‘Object’ means the design or purpose of the
contract.
‘consideration’ is said to be unlawful if it involves
an act or price which is unlawful.
“Illegal” or “unlawful’” means a transaction not
enforceable by courts. It does not necessarily refer
to a punishable offence, unless it is expressly
punishable by any criminal or special legislation.
Circumstances under which object &
consideration is held to be unlawful:
Forbidden by law: an object or consideration is
said to be forbidden by law when it is a punishable
by the criminal law of the country or by any special
legislation or regulation made by a competent
authority under the powers derived from the
legislature.
If it is of such a nature that, if permitted it would
defeat the provisions of any law, that is it would
indirectly lead to the violation of law.
If it is fraudulent.
Contd..
Where it implies or involves injury to the
person or property of another.
If court regards it as immoral: immorality
extends to:
1. Sexual immorality
2. Furtherance of sexual immorality
3. Interference with marital relations
4. Acts against good public morals.
Contd..
If court regards it as opposed to public policy:
public policy is an illusive concept & is generally
governed by precedents. Some of the following
cases have been held to be opposed to public policy:
1. Trading with an alien enemy: as such trading tends
to aid the economy of the enemy country and is
hence considered unlawful. However such contracts
can be entered into with the special permission of
the govt.
Contd..
2. An agmt. interfering with the course of justice
3. Agmts. for stifling criminal prosecution: any agmt. which
seeks to prevent the prosecution of a guilty party is
opposed to public policy & hence void. The court cannot
give effect to an agmt. Which attempts to take away the
administration of law out of the hands of the judges &
put it in the hands of private individuals. However there
is an exception in cases of certain compoundable
offences under the CrPC which can be compromised &
agmts. For the compromise of such offences is valid.
Contd..
4. Traffic in public offices: an agmt. for sale or transfer
of public offices or appointments to such offices in
consideration of money is void; cause if permitted it
would result in inefficiency & corruption.
5. Agmts creating an interest opposed to duty.
6. Agmts unduly restraining personal liberty.
7. Agmts interfering with parental duties
8. Agmts which tend to create monopolies.
Object or consideration unlawful in
part:
Where an agmt contains several distinct promises
to do certain legal things & also certain illegal
things; then, if the legal part cannot be separated
from the illegal part, i.e., there is a single
consideration for several distinct promises, then the
entire agmt is treated as illegal & hence void.
Where there is separate consideration for distinct
promises & the legal part can be separated from the
illegal part, then the legal part is valid contract &
hence enforceable.
Contd..
In the case of alternative promises, where one
branch is legal & the other branch is illegal, then
the legal branch alone can be enforced.
Transactions which are collateral or incidental to
illegal contracts are also tainted with illegality &
therefore not enforceable, provided the parties to
the collateral transactions had knowledge of the
illegal design of the primary agmt.
Effects:
Void
No restitution.
Void Agreements:
Agreements in restraint of marriage [Sec. 26]
Agreements in restraint of trade [Sec. 27]
Agreements in restraint of legal proceedings [Sec. 28]
Agreements the meaning of which is uncertain [Sec.
29]
Agreements by way of wager [Sec. 30]
Agreements contingent on impossible events [Sec. 36]
Agreements to do impossible acts [Sec. 56]
Void Agreements:
Agreements in restraint of marriage [Sec 26]:
Exception : an agreement restraining the marriage of a minor
is valid.
Agreements in restraint of trade [Sec 27]: any kind of
restraint of trade, whether reasonable or not is void; however
agreements restraining freedom of action necessary for
carrying on a business are not void.
Exception: Sale of goodwill (provided the restraint is
reasonable in case of time & space), partners agreements, trade
combinations, negative stipulation in service agreements.
Contd..
Agreements in restraint of legal proceedings [Sec 28]:
i. A party absolutely restricted from taking usual legal
proceedings , in respect of any rights arising from a
contract.
ii. An agreement which limits the time within which a party
can enforce his rights under a contract, without regard to
the time allowed by the Limitation Act.
iii. An agreement which provides for forfeiture of any rights
arising from a contract, if suit is not brought within a
specified period, without regard to the time allowed by the
Limitation Act.
Contd..
Agreements the meaning of which is
uncertain [Sec 29].
Agreements by way of wager [Sec 30]: The
term ‘wager’ means a ‘bet. The essence of a
wagering agreement is that, one party is to win
& the other to lose upon a future event, which
at the time of contract is of an uncertain nature.
If the event turns out one way ‘A’ will lose & if
it turns out the other way ‘A’ will win.
Essentials of wager:
1. There must be a promise to pay money or money’s worth.
2. The promise must be conditional on an event happening
or not.
3. The event must be an uncertain one. If one of the parties
has the event in his own hands, then it is not a wager.
4. Each party must stand to win or lose under the terms of
agreement.
5. No party must have proprietary interest in the event. The
stake must be the only interest which the parties have in
the agreement.
Exception:
“This sec. shall not be deemed to render
unlawful a subscription, or contribution, or an
agmt. to subscribe or contribute, made or
entered into for or toward any plate, prize or
sum of money, of the value or amount of 500
rupees or upwards, to be awarded to the winner
or winners of any horse race.”
Agreements contingent on
impossible events: [Sec. 36]
Such contracts can be performed only if the contemplated
event takes place. The performance of the contract depends
on the happening or non-happening of an event. Such an
event should be of an uncertain nature. The event must be
incidental to the contract, there should be a direct correlation
between the event & performance of the contract. If the event
becomes impossible, the contract becomes void.
If the contingent contract is to be performed within a
stipulated time & if the contingent event does not take place
within the stipulated time, the contract becomes void.
Agreements to do impossible acts:
[Sec 56]
An agreement to do an act impossible in itself is
void.
Effects:
Void
No restitution : no restoration of benefit
received is allowed in the case of agreements,
expressly declared void under the Indian
Contract Act.
Quasi contracts: [Sec 68-72]
In case of quasi contracts there is no offer,
acceptance or consensus; in fact there is no
intention on the part of either parties to enter into a
contract; still the law, from the conduct &
relationship between the parties, implies a promise,
imposing obligation on one party & conferring a
right in favor of the other party. Thus under certain
special circumstances, obligations resembling those
created by a contract are imposed by law although
the parties have never entered into a contract.
Doctrine of unjust enrichment:
A quasi contract rests upon the doctrine of unjust
enrichment which declares that a person shall not
be allowed to enrich himself unjustly at others
expense.