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The Indian Contract Act

1872

SCOPE OF THE ACT:


The Contract Act came into force on 1
September 1872.
It was passed and
implemented to control various kinds of
commercial and business contracts.
The law of contract creates jus in
personam and not jus in rem. Jus in
personam means personal rightsthe
rights against a person or a party with
whom you have entered into a contract.
Therefore, it can be said that jus in
personam provides the right to a

WHAT IS A CONTRACT?
Section 2(h) of the Indian Contract Act, 1872
states that 'an agreement enforceable by law is
contract
We can summarize it as under.
Contract = An agreement + enforceable by law
Agreement:
According to section 2(e), An agreement means
every promise & every set of promises, forming
consideration for each other
Promise
As per Section 2(b) of the Contract Act, a proposal
when accepted becomes a promise.
Promise = Proposal by one person + its
acceptance by another person

Consensus-ad-idem:
Before there can be an agreement, both
the parties must agree upon the subject
matter of the agreement(same thing) in
the same sense & at the same time.

ESSENTIAL ELEMENTS OF VALID


CONTRACTSSECTION 10
1. Offer and Acceptance
An offer is a starting point for any contract.
The offer must be accepted to form a
valid contract.
2. Intention to Create Legal Relation
. There must be an intention to create a
legal relation. In all social, domestic,
moral, religious or political agreements,
the usual presumption is that the parties
do not intend to create the legal
obligations.
However,
in
business

Example
A invites B to a dinner and B accepts it. If A
tails to serve the dinner, B cannot go to court.
The invitation for dinner is a social agreement.
Lawful Consideration
The lawful consideration means something in
return. As a contract contains the reciprocal
set of promises, a consideration is necessary.
The consideration must be lawful and should
have a commercial value.
Example
A promises to pay $50,000 on a certain date
to B without any promise in exchange. This is
not a valid contract.

Free Consent
It is essential for every contract that, there must
be a free & genuine consent of all the parties.
According to Section 14, A consent is said to be
free, if it is not caused by coercion, undue
influence, fraud, mis representation or mistake.
The parties should be of same mind on all material
terms of the contract.
Example
A has two carsone black and the other white. He
offers to sell one of his cars to B. A intends to sell
the black one while B accepts the offer believing
that it is for the white car. Here, A and B are not
thinking in the same sense of a particular thing. In
this situation, there is a mistake, so it cannot be
said to be a free consent.

Lawful Object
Every agreement has some objects or
purposes. The object of an agreement
should not be illegal, immoral or opposed
to the public policy. In simple words, we
can say that the object of an agreement
must be lawful.
Example
A promised to pay Rs. 1 lakh to B to kill C.
The killing of a person is punishable
under the IPC. Therefore, the promise is
unlawful and void.

Capacity of Parties
Every person is not competent to enter
into a contract. Person who has attained
the age of majority with a sound mind
and not disqualified under any act is
competent to enter into a contract.
Agreement Must Not Be Expressly
Declared Void or Illegal
If a certain agreement is expressly
declared to be void by the law of country
then such an agreement, if entered into,
shall not be enforceable by the court.

Certainty of Meaning
An agreement contains terms as decided
by the parties. The terms of agreement
must be certain and unambiguous. If the
terms of an agreement are uncertain, it is
not a valid contract.
Example
A agreed to pay Rs. 5 lakh to B for an
ultra-modern decoration of his drawing
room. The agreement is void because the
meaning of the term ultra-modern' is not
certain.

Possibility to Perform
Every agreement contains reciprocal
promises. The promises under the
contract must be possible to perform. If
the parties have agreed on the contract
which contains any promise not possible
to perform in real life, the contract will
not be considered as a valid contract.
Example
A agrees to discover treasure by magic
for B. The agreement is void because the
act in itself is impossible to be performed
from the very beginning.

Legal Formalities
In some cases, the document in which the contract
is incorporated has to be stamped. In some other
cases, a contract, besides being a written one, has
to be registered. Thus, where there is a statutory
requirement that the contract should either be
made in writing or registered, the required
formalities must be complied with.
Therefore, we can say that an agreement will
become a contract when it satisfies all the
essentials of a valid contract. If any one of the
elements of a valid contract is missing, it is treated
as an invalid contract. All the agreements may
or may not be a contract but all the contracts
are basically agreements.

TYPES OF CONTRACT OR CLASSIFICATION OF


CONTRACT
Valid Contract
If the contract entered into by the parties and
satisfies all the essential elements of a valid contract
as per the act, it is said to be a valid contract.
Void Contract
A contract which ceases to be enforceable by law is
known as a void contract. A contract may be valid in
the beginning but later on, due to some reason, it
does not remain enforceable & become void.
Example: A Playback singer enters into a contract to
give program at a Music concert. But He dies before
the date of performance of contract. Here,
performance of this contract becomes impossible.
So, it becomes void.

Voidable Contract
When the contract is entered into
without the free consent of party, it
is considerate as a voidable contract. The
definition of the act states that a voidable
contract is enforceable by law at the
option of one or more parties but not
at option of the other parties.
Voidable contract will be considered as
valid if it is not cancelled by the
aggrieved party within a reasonable time.

Illegal Agreement
An illegal agreement means that which is
immoral or criminal in nature or which is
opposed to public policy.
Example: An agreement to supply
smuggled goods.
Unenforceable Contract
It is that contract which is not enforceable
in the court of law, due to some legal or
technical defect.
Eg. Absence of writing, lack of stamp etc.

Express Contract
An express contract is a contract made
by the use of words spoken or written.
Implied Contract
An implied contract is a contract which is
made otherwise than by the words
spoken or written. It came into existence
on account of an act or conduct of the
parties.

Quasi-contract
It means a contract which does not arise
from any formal agreement but is
imposed by law. It is based upon the
principle of equity means no one should
grow rich out of another persons cost. It
is similar to a contract in which a legal
obligation is imposed on a party who is
required to perform it.
Example: T, a tradesman, leaves goods at
Cs house by mistake. C treats the goods
as his own. C is bound to pay for the

Executed Contract
In an executed contract both the parties
have performed their promises under a
contract. It is a contract where, under the
terms of contract, nothing remains to be
done by the parties.
Example
A sells his car to B for 1 lakh. A delivered
the car and B paid the price. This is an
executed contract.

Executory Contract
In an executory contract both the parties
are yet to perform their promises. In
other words, it is a contract where parties
have to still perform their obligation in
the future.
Example
A sells his car to B for 1 lakh. If A is still to
deliver the car and B is yet to pay the
price, it is an executory contract.

Partly Executed and Partly Executory


Contract
In a partly executed and partly executory
contract,
one
party
has
already
performed his promise and the other
party has yet to execute his promise.
Example
A sells his car to B. Though A has
delivered the car, B has yet to pay the
price. For A it is an executed contract,
whereas it is an executory contract on the
part of B since the price has yet to be
paid.

Unilateral Contract
A unilateral contract is also known as a one-sided
contract. It is a contract where only one party has
to perform his promise. In such a contract, the
promise on one side is exchanged for an act on
the other side. After the formation of a unilateral
contract, only one party remains liable to perform
his obligation because the other party has,
already performed his obligation.
Example
Alap promises to pay 1000 to anyone who finds
his lost cellplone. Bansi finds and returns it to
Alap. From the time Bansi found the cell phone,
the contract came into existence. Now Alap has
to perform his promise, i.e., the payment of 1000.

Bilateral Contract
In a bilateral contract both the parties
have
to
perform
their
respective
promises. It is also known as a two-sided
contract.
Here,
the
obligation
is
outstanding on the part of both the
parties.
They are similar in nature to Executory
contracts.

PROPOSAL AND ACCEPTANCE


A proposal is an offer by one person
to another to enter into a contract.
The term proposal is defined under
Section 2(a) as under:
'When one person signifies to another, his
willingness to do or abstain from doing
anything with a view to obtaining the
assent of the other, to such an act or
abstinence, he is said to make a
proposal'.

LEGAL RULES AS TO OFFER


The offer is the first step in a valid
contract. If the offer itself is not valid, the
contract can never be valid. Following are
the legal rules of an offer.
1. Offer should not contain terms,
non-compliance of which may be
assumed as acceptance.
2.
Offer
Must
Be
Unambiguous and Certain

Definite,

3. Offer Must Be Made to Create Legal

4. Offer must be communicated


Unless the offer is communicated, there
can be no acceptance, because the
offeree does not know what he has to
accept.
5. Offer must be made with a view to
obtaining the assent of the other
party, to whom it is made.
6. Offer must be distinguished from(a)
a declaration of Intention (b)
Invitation to Offer ( c ) a statement
of price.

Acceptance
As per Section 2(b) 'when the person to
whom the proposal is made signifies his
assent thereto, the proposal is said to be
accepted. The proposal when accepted,
becomes a promise'.

LEGAL RULES FOR THE ACCEPTANCE


1. Acceptance
Must
Be
Absolute
and
Unconditional
2. Acceptance Must Be Communicated
3. Acceptance must be according to the mode
prescribed or as per usual & reasonable mode.
4. Acceptance must be given within a
reasonable time (before the offer lapses or
before the offer is withdrawn)
5. Acceptance can not precede an offer
6. Acceptance May Be Express or Implied
7. Mere Silence Is Not Acceptance of an Offer
8. Acceptance Subject to Contract Is No
Acceptance

MEANING OF CONSENT
Two persons are said to consent, when
they agree upon the same thing in the
same sense.
FREE CONSENTSECTION 14
A consent is said to be free, when it is not
obtained by
CoercionSection 15
Undue influenceSection 16
FraudSection 17
MisrepresentationSection 18
MistakeSections 20, 21 and 22

CoercionSection 15
Definition:- According to Section 15, Coercion
is
1.The committing or threatening to commit, any act
forbidden by the Indian Penal code (IPC), or
2.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.
When a consent is obtained by coercion, the
contract is voidable at the option of the aggrieved
party and any benefit received by the other party
under coercion must be paid back. If the aggrieved
party has suffered from any loss, he can recover
the loss from the defaulting party.

UNDUE INFLUENCE
According to section 16(i)
A contract is entered on undue influence
when relations that exist between the
parties are such that one of them is in a
position to dominate the will of the other,
and the dominant party uses his position
to obtain unfair advantage over the other.
When a contract is made with undue
influence, the contract is voidable. The
aggrieved
party
can
recover
the
damages, if he has suffered front loss
because of undue influence.

FraudSection 17
Fraud may be defined as an intentional, deliberate or willful misstatement of facts, which are material for the formation of a
contract.
The fraud means and includes the following acts:
1. Suggestion of facts which is not true by one person who does
not believe it to be true.
2. Active concealment of the fact.
Example
Furniture dealer conceals the cracks in furniture by polish work.
3. A promise made without any intention of performing it.
4. Any act or omission, specifically declared as fraudulent by law.
5. Any other act to deceive.
The aggrieved party can ask for a specific performance. The
aggrieved party can sue for damage, if he has suffered a loss.
A mere silence as to facts is not fraud.

MisrepresentationSection 18
Mis representation is a false statement
which made by a person innocently
(without any intention to deceive the
other party). Here, the person making
statement, honestly believes that it is
true.
It also includes non-disclosure of a
material fact or facts, without any
intention to deceive the other party.
The aggrieved party can cancel the
contract. It means a contract is voidable
at the option of the aggrieved party but

MistakeSections 20, 21 and 22


means an erroneous belief about some
facts. A mistake can either be (a) mistake
of law and (b) mistake of fact.
(a) Mistake of Law
it means there is mistake in under
standing the provision of any law by the
party to contract.
Mistake of Indian Law Everyone is
supposed to know the law of land.
Ignorance of law is no excuse. Therefore,
if there is a mistake of Indian law, the
contract is not void or voidable.

Mistake of Foreign Law


A mistake of foreign law is treated, as if it
were a mistake of facts, because person
cannot be expected to know the law of
the other country.
(b) Mistake of Fact
A mistake of facts can be classified either
as a bilateral mistake or a unilateral
mistake.
Bilateral Mistake
It means both the parties are at mistake
related to the essential part of
agreement. If an agreement is entered

Unilateral Mistake
A unilateral mistake means one party is
at mistake. A contract is neither void nor
voidable except that it is mistake as to
the nature of the contract or a mistake
with regard the identity of the person.

Capacity or competency to contract


Capacity means competence of the parties
to enter into a valid contract, according to
section 10, an agreement becomes a
contract, if it is entered into between the
parties who are competent to contract.
According to section 11, every person is
competent to contract: who is of the age of majority according to
the law, to which he is subject,
Who is of sound mind
Who is not disqualified from contracting by
any law to which he is subject.

Thus, according to Section 11, following


persons are not competent to contract:
Minor
Persons of Unsound Mind
Persons disqualified from contracting by
any law

Legal Position of Minor:1. An agreement with minor is void ab initio means


it has no legal existence from very beginning.
2. A minor can be a promisee or beneficiary but
can not be a promisor. This means if minor has
entered into an agreement with other person, the
other party cannot bind him by the contract.
3. As minors agreement is void from the very
beginning, it cannot be ratified by him on
attaining majority.
4.If he has received any benefit under a void
agreement, he can not be asked to compensate
or pay for it.

5. A minor can always plead minority, even in


those
cases,
where
he
has
done
misrepresentation. If a minor represents himself as a
major and enters into an agreement, he can
escape from his liability by arguing his minority.
However, if minor has obtained some money or
property by misrepresentation, the court will direct
him to restore the money or property received.
6.There can be no specific performance of
minors agreement because it is void from the very
beginning.
7. A minor can not become a partner in a firm.
But, he can be a beneficiary. So, he can be
admitted to the benefits of an existing partnership,
with the consent of the other partners.

8. A minor cannot he adjudged (declared)


insolvent. because he is incapable of contracting
debt.
9. A minor is always liable for necessaries
supplied or necessary services rendered to him
or to his dependents: Necessaries Include:
Necessary goods, as well as
Certain services, such as education, training,
medical & legal advice etc.
If a person supplies some necessaries of life to
minor or to his dependents to whom he is legally
bound to support, then, minor is always liable to
pay its price. The supplier has a right to recover
the price of necessaries supplied.

If the minor has some property, the


supplier can recover price out of it. But, if
he has no property, he can not be
punished.
10.A minor can be an agent: An agent is
merely a connecting link between the
principal & the third person. Hence, so
long as the principal is major, a minor can
be an agent, and he can bind his principal
by his acts, without incurring any
personal liability.
11.His parents or guardian are not liable for
the contracts, entered into by him, even

12. A minor is liable in tort (a civil wrong)


Eg. A 14-year old boy drives a car
carelessly and injures B. He is liable for
the accident

PERSON OF UNSOUND MIND


An agreement by a person of unsound
mind is void. Following are the categories
of persons considered as persons of
unsound mind.
1. An Idiot
2. Delirious Persons
3. Hypnotized Persons
4. Mental Decay
5. Drunken Person

PERSON DISQUALIFIED BY LAW


1. Body Corporate or Company or Corporation
A company cannot enter into any contract which
is beyond its memorandum or which is personal in
nature as it is an artificial person.
2. Alien Enemy
. An alien means a person who belongs to a foreign
state. An alien can be an enemy or a friend. When
he is a citizen of any country which was against
India in war, he is known as alien enemy. If any
contract is entered into with the alien enemy and
the war breaks out with that country, the contract
is suspended until the war is over. During the war,
the contract can be entered into with the alien
enemy with the permission of the central
government.

3. Convict
A convict cannot enter into a contract
while he is undergoing imprisonment. But
he can enter into a contract with the
permission of central government while
undergoing imprisonment. However a
convict can enter into a contract when is
released from jail or he has been granted
bail.
4. Insolvent
When any person is declared as an
insolvent his property vests in the
receiver and therefore, he cannot enter

Performance of Contract: When the parties to the contract fulfill their


obligations arising under the contract within
prescribed time and in the prescribed manner,
it is performance of contract.
Some times, the promisor offers to perform his
duty or obligation under, the contract at proper
time and place, but the promisee does not
accept the performance. This is known as
attempted performance or tender.
A tender of performance is equivalent to actual
performance. It relieves the promisor from the
liability of further performance and gives him a
right to sue the promisee for the breach of
contract.

Essentials / Requisites of a Valid tender:


It must be unconditional. It becomes
conditional when it is not according to the
terms of the contract.
It must be of the whole quantity contracted
for or of the whole obligation. If the contract
requires full payment and if the tender is of
installment, it is not a valid tender.
It must be by a person, who is in a position
and who is willing to perform his promise.
It must be made at proper time and place. So
a tender of goods after business hours or a
tender of goods or money before the due
date is not a valid tender.

It must be made to the proper person (the promisee


or his duly authorized agent). It must be also in
proper form.
It may be made to one of several joint promisees. In
such case, it has the same effect as a tender to all of
them.
In case of tender of goods, it must give a reasonable
opportunity to the promisees for inspection of goods.
In Legal Tender Money: In case of a tender of money,
the tender must be in legal tender money. Legal
tender money means current currency notes or
coins. The tender of money in the form of foreign
currency is not a valid tender, unless it is agreed
between the parties. A payment by a cheque is the
valid tender, if the person to whom it is made is
ready and willing to accept it.

By
whom
the
contract
must
be
performed:1.Promisor himself:- This means a contract,
which involves use of personal skill of promisor,
must be performed by the promisor himself.
Eg. A contract to sing a song at a musical
event.
2. Agent: When the performance of the contract
does not require personal skill, it may be
performed by the promisor or by his
representative.
Eg. A promise to pay Rs. 10,000 to B for his
personal service. This payment may be done
by either A or his agent.

3. Legal representatives:- (when a contract involves


use of personal skill or it is based on personal
considerations, it comes to an end on the death of
the promisor.)
But, in other contracts the legal representatives of
the deceased promisor are bound to perform the
duties, under a contract. But their liability under a
contract is limited to the extent of the property they
inherit from the deceased.
4.Joint promisors:- When two or more persons have
made a joint promise, then unless a contrary
intention appears from the contract, all such persons
must jointly fulfill the promise. If any of them dies,
his legal representatives must jointly with the
surviving promisors, fulfill the promise. If all the
promisors die, the legal representatives of all of them
must fulfill the promise jointly.

Who can demand performance:


It is the only promisee, who can demand
performance of the promise under a
contract. It makes no difference whether
the promise is for the benefits of
promisee or any other person.
Eg. A promises B to pay Rs.500 to C. A
does not pay the amount to C. Here, C
can not take any action against A. It is
the only B who can enforce the promise
against A.
In case of death of promisee his legal
representatives
can
demand

DISCHARGE OF CONTRACT
A contract is said to be discharged when
the obligations created by it come to an
end. The various modes of discharge of a
contract are as follows :
1.
Discharge
by
performance.
Discharge of a contract by performance
takes place when the parties to the
contract fulfill their obligations arising
under the contract within the time and in
the manner prescribed. The performance
may be
(i) actual performance, or

2.Discharge by agreement or consent. A


contract rests on the agreement of the parties. As
it is agreement which binds them, so by their
agreement or consent they may be discharged.
The discharge by consent may be express or
implied. Discharge by implied consent takes place
by
1.Novation: means a new contract is substituted for
an existing one, either between the same parties
or between one of the parties and a third party,
In such a case, the old contract comes to an end.
2. Alteration: means a change in any of the terms
of the contract by the mutual consent of all the
parties to the contract. In such a case, the old
contract comes to an end.

3.Rescission: means all or some of the terms of the


contract are cancelled, In such a case, the old
contract comes to an end.
4.Remission: means to accept less performance (to
accept lesser sum in full payment) of the promise
made. In such a case, the old contract comes to
an end.
5.Waiver: It takes place when the parties to a
contract agrees that they shall no longer be bound
by the contract. Thus waiver means to forgo or to
sacrifice the rights under a contract. In such a
case, the old contract comes to an end.
6.Merger: When a right under an earlier contract is
merged (joined) with right of the another contract,
the earlier contract comes to an end. This is
known as merger.

3. Discharge by impossibility. Impossibility of


Performance may be
Initial impossibility:- An agreement to do an act
impossible in itself is void.
Supervening impossibility:- Impossibility which arises
subsequent to the formation of a contract
is called
subsequent or supervening impossibility,
A contract is discharged by supervening impossibility in
following cases:
(a) Destruction of subject-matter of contract;
(b) Non-existence or non-occurrence of a particular state of
things;
Eg. A & B contract to marry each other. Before the time of
marriage, B goes mad. The contract becomes void.

(c) Death or Personal Incapacity;


(d) Change of law or stepping in of a
person with statutory authority;
Eg. A agreed to sell his land to B. But,
after the formation of contract, the govt.
issued a notification and acquired the
land. The contract is discharged.
(e) Outbreak of war.
The contract is discharged in all of the
above cases.

The following cases are not covered by supervening


impossibility :

(a) Difficulty of a performance; (due to some un contemplated


delays or events)

(b) Commercial impossibility; (It has become less profitable or


costly)

(c) failure of a third person on whose work the promisor relied;

(d) strikes, lock-outs and civil disturbance;

(e) failure of one of the objects.

The contract is not discharged in all of the above cases.

4.Discharge by Lapse of time:- If a contract


is not performed within the period of limitation
and if no action is taken by the promisee in a
Law Court, the contract is discharged.
5.Discharge by operation of law. This
includes discharge by
(a) Death of promisor,
(b)Merger of original contract into another
contract,
(c) Insolvency of the promisor,
(d)Unauthorised alteration of the terms of
contract, and
(e)Rights and liabilities becoming vested in
the same person.

6. Discharge by breach of contract:


If a party breaks his obligation which
the contract imposes, there takes
place breach of contract.
Actual breach of contract: It may occur
(a) at the time when the performance is
due or (b) during the performance of the
contract.
Anticipatory breach of contract: It occurs
when a party repudiates his liability or
obligation under the contract before the
time for performance arrives.

Remedies for breach of contract:


A remedy is the means given by law for
the enforcement of a right. When there is
a breach of contract by one party,
following remedies are available to the
injured party:
1. Rescission
2. Suit for Damages
3. Suit upon Quantum Meruit
4. Specific Performance of Contract
5. Injunction

1. Rescission: when there is a breach of contract by


one party, the other party may rescind the contract
and refuse further performance. In such case, he
becomes free from all his obligations under the
contract.
Example: D promises P to supply 10 bags of wheat
on a certain day. P agrees to pay the price after the
receipt of the goods. D does not supply the goods. P
is discharged from liability to pay the price.
Effects:
When one party rescinds the contract, he is liable to
restore (to return) any benefits, which he has
received under the contract,
But, if a person rightfully rescinds a contract, he can
claim compensation for any loss, arising to him, due
to non performance of the contract by the other party.

2. Suit for Damages:- When there is a breach of contract


by one party, it may result into loss to other party. Here,
the injured party can sue for damages.
Damages are the monetary compensation allowed to the
injured party by the court for the loss or injury suffered by
him.
The main object of awarding damages is to put the
injured party in the same position in which he would have
been, if there had been performance of contract & not the
breach. Its purpose is to compensate the aggrieved party
and not to punish the party at fault. This is known as the
doctrine of restitution.
While determining the damages, the court takes the
following points into account:
Inconvenience caused by the non performance of the
contract
Motive of breach of contract
Manner of breach of contract

3.Suit upon Quantum Meruit: The term


Quantum Meruit means as much as earned.
When a person has done some work under a
contract and the other party repudiates
(cancels) the contract or due to some event the
further performance becomes impossible, then
the party who has done some work can claim
proportionate remuneration for the work done.
Example: A agrees to write articles for B the
publisher of a magazine. A writes articles for 6
months but thereafter B stops to publish the
magazine. In such a case, A can claim
proportionate remuneration for the articles
written by him for 6 months.

4. Specific Performance of Contract: In


certain cases, the court may give
directions to the party ( in breach) to
perform his promise according to the
terms of the contract.
The specific performance may be ordered
by the court in the following situations:
When the goods are of a unique nature or
special value (not easily available in the
market).
Where the actual damages arising from
the
breach
of
contract
are
not
measurable.

5. Injunction: The injunction may be


defined as an order of the courts
restraining
a
person
from
doing
something which he promised not to do.
It means a stay order granted by a court.
Where there is a breach of contract by
one party and the order of a specific
performance is not granted by the court,
the injunction may be granted. The
injunction is granted by the courts at
their discretion.
Example: A film actress agreed to act
exclusively for Yash Raj films for one year