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Summary

Indian Contract Act

The essential elements of contract are offer or proposal and acceptance, lawful consideration
with a lawful object, competent parties, free consent, an agreement made must not be
expressly declared to be void, writing and registration if required by the law, legal
relationship, possibility of performance, legal relationship, certainty, enforceability by law
and stamping and registration when required by law.

A letter of intent is not a contract.

Every promise and every set of promises, forming the consideration for each other is an
agreement. The kinds of agreement are valid agreement, void agreement, enforceable
agreement, voidable agreement, unenforceable agreement and Illegal agreement. An
agreement enforceable by law is contract. The kinds of contracts are valid contract, voidable
contract, void contract, unenforceable contract, executed contract, executor contract, express
contract, implied contract, quasi- contract, contingent contract, contracts of record, specialty
contract, simple contract and statutory contract.

An agreement in order to constitute a contract must have the following elements- parties to
the contract must be competent, they should exercise free consent, there must be lawful
consideration with lawful object and must not be expressly declared to be void. Agreement
and contract is distinguished.

When one person signifies to another his willingness to do or to abstain from doing anything,
with a view to obtaining the assent of the other to such act or abstinence is said to make a
‘proposal’. For a valid proposal- beyond expression of willingness, there must be something
in the nature of request without dictating any terms and the offer must be intended to create
legal relations between the parties. A mere statement of intention does not constitute a
binding promise. The offer must be made to a definite person. An offer can be express or
implied from the circumstances. An offer must be communicated to the offeree and if the
offer is conditional, the conditions must be clearly communicated. A counter-offer amounts
to rejection of the original offer. An advertisement inviting tenders is not an offer in itself. An
offer and invitation to offer are different and are distinguished.

When the person to whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted. Acceptance must be absolute and unqualified, it must be expressed in
usual and reasonable manner, mental acceptance is not sufficient in law, acceptance must be
communicated to the offerer, acceptance of the proposal means the acceptance of all the
terms even though the offeree is ignorant of some of the terms of the offer, acceptance of the
offer need not be always expressed in words and acceptance must be by a certain person. If
the act is done in ignorance of the proposal, it is not acceptance of the proposal. Acceptance
must be given within a reasonable time. Acceptance must be given before the offer lapses or
is revoked or is withdrawn. A proposal when accepted becomes a promise. Some case laws
are discussed for better understanding.
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Consideration: when, at the desire of the promisor, the promise or any other person (i) has
done, or abstained from doing or (ii) does or abstains from doing, or (iii) promises to do or to
abstain from doing something, such act or abstinence or promise is called consideration for
the promise. Essentials of a valid consideration are it must move at the desire of the promisor
but sometimes it may move from promisor or any other person. Consideration must be past,
present or future. Consideration may be an act of doing or abstaining from doing something
or it may be an act of forbearance or abstinence. Consideration must be real and not illusory.
Consideration must not be unlawful, illegal, immoral or opposed to public policy.
Performance of existing obligation is no consideration. Forbearance to sue is a good
consideration.

Some of the exceptions to the rule “an agreement without consideration is void” are
agreement made on account of natural love and affection for near relations provided it is
made in writing and registered.; promise to compensate for voluntary services; promise to
pay a time-barred debt, gifts, agreement to create agency etc.

Kinds of consideration are past consideration, executed consideration, executor consideration,

unlawful consideration and unreal or illusory consideration.

An unlawful consideration is one where it is forbidden by law, or is of such nature that, if

permitted, it would defeat the provisions of any law, is fraudulent, or involves or implies
injury to the person or property of another; or the court regards it as immoral or opposed to
public policy. The following agreements are held to be against public policy:
trading with an enemy, champerty and maintenance contracts, stifling prosecution, marriage
brokerage agreements, agreements interfering with administration of justice, agreements as
regards sale of public offices, agreements tending to create monopoly, waiver of illegality,
agreements in restraint of marriage, agreements in restraint of trade, agreements between
pleaders and clients, agreements in restraint of legal proceeding, agreements to defraud
creditors, agreements not to bid, foreign awards, non-compliance of court’s orders and
unreasonable contracts with state.

One of the essential elements of a valid contract is that the parties to the contract must be
competent to contract. Every person is competent to contract (i) who is of the age of majority
according to the law to which he is subject; (ii) who is of sound mind (lunatics and
drunkards) and (iii) who is not disqualified from contracting by any law (for example an
insolvent) to which he is subject.

Minor’s contract is absolutely void, there can be no specific performance of a minor’s

contract, ratification of minor’s contract at a future date of attaining majority and a minor
cannot be stopped by a false representation as there can be no estoppels against a statute. An
agreement by a guardian on behalf of a minor is valid. A minor cannot be adjudged as
insolvent. A release of a minor of his rights in a property is absolutely infructuous in law. A
contract for personal service by minor is void. When can a minor contract?
A promisor or a transferee, agency, partnership, a gift in favour of minor is valid and if a
person has supplied necessities to a minor is entitled to be reimbursed.
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Contract is said to be free when it is not caused by (i) coercion (ii) undue influence (iii) fraud
(iv) misrepresentation or (iv) mistake. When there is consent, but not ‘free consent’ the
contract is voidable at the option of the party whose consent was not free. When consent is
caused by mistake of both parties, then the agreement is void.

Coercion – an act forbidden/ punishable by IPC, nay proceed from anybody, even a person
who is not a party to the contract, include physical compulsion, fear and even menace to
goods, act done or threatened with the intention of causing any person to enter into
agreement.

The transaction is said to be under undue influence when one of the parties is in a position to
dominate the will of the other, the dominating party uses that position to obtain unfair
advantage over the other, and act of undue influence amounts to coercion or fraud.

The essentials of fraud are intention to deceive, act must be done by a party to a contract or
with his connivance or his agent, false representation or a false promise and the party so
induced must have acted upon it and suffered loss.

Consent given under misrepresentation of facts is no consent at all. The party whose contract
is caused by misrepresentation can avoid the contract or rescind the contract within a
reasonable time.

An erroneous belief about something is known as mistake. The mistake can be of fact or of
law. When both the parties to an agreement are under a mistake as to the matter of fact
essential in the agreement, the agreement is void. Mistake can be bilateral or unilateral.
Contract is not voidable because it was caused by a mistake as to any law in force in India.

A void agreement is not enforceable by law. The following are types of void agreements:

 Agreement made by an incompetent person

 Agreement made under mutual mistake as to matter of fact essential to the agreement
 Agreement made under mistake as to law not in force in India
 Agreement, the consideration or object of which is unlawful or unlawful in part
 Agreement made without consideration
 Agreement in restraint of marriage other than a minor is void
 Agreement, the meaning of which is uncertain
 Agreement in restraint of trade, lawful profession or business of any kind. It
encourages free trade. Some of the exceptions to this rule are restraining freedom of
action, limiting competition, agreement between partners not to carry on a similar
business, service agreements. In case of sale of goodwill, the restraint on the seller
can be for similar business in local area till the buyer carries on the similar business
and must be reasonable
 Agreement in restraint of legal proceedings
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 Agreement by way of wager. A wager is an agreement between two parties to the

effect that if a given uncertain event happens, one party shall pay a certain sum o the
other and vice versa. Exceptions to wagers are an agreement of Rs, Fiver hundred
more in case of horse race, speculation, insurance contract, share market transactions,
games of skill/ athletic contests, , crossword or literary competition and chit funds
 Agreement contingent on an uncertain future event if the event becomes impossible
 Agreement contingent on an impossible event
 Agreement to do an impossible act
 Agreement to do an act which subsequently becomes impossible- may be physical or
legal impossibility of the act. In either case the agreement is void ab-initio.
Impossibility does not include commercial impossibility
 Contract becomes impossible of performance or is frustrated where the subject matter
of the contract ceases to exist; where circumstances arise which make the
performance of the contract impossible; where object contemplated by the parties or
the event contemplated does not occur, the contract is frustrated; where the party who
is to perform the contract dies, or is incapacitated from performing the contract; where
enactment of legislation or government interference prevents the performance of the
contract and where the act becomes unlawful

Where the contract becomes void, the party who has received advantage under it must restore
it to the other party or make compensation for it. Where a contract is partially performed and
is found to be void subsequently, the court may allow a proportionate part of advantage
received.

An offer or proposal to be complete must be communicated. By communication the promisor

signifies his willingness and the promisee signifies his assent. Only when offer is
communicated, it can be accepted. Communication can be effected by an act (conduct, word,
written or oral; so by telephone, telegram. Fax or e-mail) or omission (conduct or
forbearance). A mere mental act is not communication the communication of a proposal is
complete when it comes to knowledge of the person to whom it is made.

Communication of acceptance is complete as against the propose, when it is put in the course
of transmission to him, so as to be out of the power of the acceptor. Communication complete
as against the acceptor, when it comes to the knowledge of the proposer.

After a transaction is ripened into a contract it requires the consent of both parties to revoke
or modify it. A proposal may be revoked at time before the communication of its acceptance
is complete as against the proposer, but not afterwards. A proposal can be revoked in any of
the four ways- by communication of notice of revocation by the proposer to the other party;
by lapse of tome prescribed or by lapse of a reasonable time if time not prescribed; by failure
of the acceptor to fulfil the a condition precedent to acceptance and by death or insanity of
the proposer if the fact of his death or insanity comes to the knowledge of the acceptor before
acceptance. Acceptance can be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not afterwards
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A ‘contingent contract’ is a contract to do or not to do something, if some event, collateral to

contract, does or does not happen. Essential are there should be existence of contingency,
happening or non-happening of some event in future, contingency must be uncertain and the
event must be collateral. Rules of contingent contract and differentiation between contingent
contract and wagering contracts are discussed.

The parties to a contract must either perform, or offer to perform their respective promises,
unless such performance is dispensed with or excused under the provisions of this Act, or any
other Law. Promises bind the legal representatives of the deceased promisor. The liability of
the legal representatives is limited to the extent of the value of the property inherited from the
deceased. In cases where personal considerations like skill, personal qualities, or personal
services are involved for the performance of the contract, the contract cannot be enforced
upon the representatives of the deceased. Death of either party puts an end to the contract.
Offer or tender of performance must be unconditional, should be made by promisor or his
representative to perform the promise, it must be made at a proper reasonable time and place
and made to the promise or his representative. Party rightfully rescinding the contract is
entitled to compensation for any damage which he has sustained through non-fulfilment of
the contract.

Effects of failure to perform the contract when time is essential and when time is not essential
are discussed. Rules for Performance of reciprocal promises under section (51-54 &57) when
to be simultaneously performed, order in which reciprocal promises are to be performed, in
case of dependent promises where one cannot be performed till the other is performed,
effects, here a party prevents performance; and to do certain things legal and also other things
illegal.

In the case of an alternative promise, one branch of which is legal can be enforced by law.
The other branch which is illegal cannot be enforced and is void. Personal obligations to the
contract are not assignable, while impersonal obligation of the contract is assignable.
Assignment of contracts may be by the act of parties or by operation of law- on death to legal
heirs except in case of skill and abilities and in case of insolvency to the Official Assignee or
Official Receiver.

In case of devolution of joint liabilities, the rules regarding jointly liable, promisee’s right,
equal contribution, default in contribution and release of joint promisor are discussed. Section
59 to 61 lay down three rules regarding appropriation of payments where payment of debt to
be discharged is indicated; where payment of debt to be discharged is not indicated; and
where the debtor does not intimate and the creditor fails to appropriate.

Certain relations between the parties resemble those created by contract. Law requires a
person who receives the benefit to pay or compensate the person giving the benefit, even
though he receives the benefit without any contract. There is no contract in fact but is created
by law. Such a contract created or constituted by law is known as “Quasi Contract”
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Types of Quasi Contracts;

 Claim for supply of necessaries to person incapable of contracting

 Reimbursement of money paid, in which he is interested
 Obligation of person to pay for enjoying benefit of non-gratuitous act
 Responsibility of finder of goods
 Liability of a person to whom money is paid or thing delivered by mistake or under
coercion

Contract and Quasi Contract distinguishing points are discussed.

Discharge of contract means termination of contract. Contract is discharged in following

ways:

 By performance- by performance of obligation; by refusing tender of performance

and by promise failing to offer facilities for performance
 By breach- by refusal and by actual breach
 By anticipatory breach of contract- by repudiation of contract or by impossibility of
performance
 Consequences of anticipatory breach- elect to rescind the contract; may treat
the contract as still operative and subsisting and wait for the time of
performance
 Damages measured in case of anticipatory breach of contract in case of
repudiation of contract is difference in price prevailing on the date of breach
and the contract price; and in case of contract kept alive, difference between
contract price and the price prevailing on the date fixed for the performance
 By frustration: by impossibility at the time of formation of contract or subsequent to
the formation of contract. Cases of supervening impossibility can be destruction of the
object necessary for performance of the contract, change of law, death or personal
incapacity, out-break of war, non-existence of particular state of things which forms
the basis of contract
 By agreement: by consent; by novation. No consideration required for substituted
contract under section 62.
 By accord and satisfaction: to do something instead; by remission and waiver ; by
rescission
 By operation of law; by insolvency or bankruptcy; by merger
 By unauthorised material alteration
 By lapse of time
 By death
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Remedies to aggrieved party for breach of contract are –

 Suit for specific performance where the court directs the party to perform the promise
according to the terms of contract
 Suit for injunction- the court directing a person to do or refrain from doing certain
act, which is the subject matter of the contract. Power of the court to grant injunction
is discretionary, may be temporary or an indefinite period.
 Suit for damages for the loss sustained- damages given by restitution and as a
monetary compensation to the injured party
 Suit for loss of profit due to delay in handling over of site causing idling labour and
machinery
 Compensation- an aggrieved party entitled to receive compensation from the party
who has broken the contract
 Quantum Meruit which means as much as earned or deserved. A person under certain
circumstances claim payment for the work done or goods supplied without any
contract or under a contract which is discharged by the breach of the other party. It is
based on implied condition that the party receiving benefits agrees to pay for it. The
claim of quantum meriut can only arise from a request of services and acceptance of
such services by the party. The doctrine is applied in cases of non-gratuitous acts;
where part is performed and remaining part is prevented from being performed
because of the breach committed by the other party; and where a contract is
discovered to be void

Types of damages are compensatory, nominal, exemplary and special damages

Rules for damages and interest by way of damages is discussed Indian and English law
on penalty and liquidated damages are discussed

Earnest money is treated as part payment of the price when the contract is completed. It
represents a guarantee that the contract will be fulfilled. Earnest money can be forfeited if
it is given at the time of conclusion of the contract and it represents a guarantee that the
contract will be fulfilled i.e. it is give to bind the contract and it is part of the purchase
price when the transaction is carried out. Where the amount paid is in great proportion to
the totality of the consideration, the amount is characterised as advance and not earnest
money.