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INDIAN CONTRACT ACT, 1872

What are Contracts

• Contract is defined in Section 2(h) of the Act as an agreement enforceable by law.
• Agreement-consensus ad idem
• Obligation-legal duty to do or abstain from doing what one has promised to do or
abstain from doing

Agreements which are not contracts

• Agreements relating to social matters
• Domestic agreements
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Definition

Contracts as Defined by Eminent Jurists

1. “Every agreement and promise enforceable at law is a
contract.” – Pollock
2. “A Contract is an agreement between two or more persons
which is intended to be enforceable at law and is contracted
by the acceptance by one party of an offer made to him by the
other party to do or abstain from doing some act.” – Halsbury
3. “A contract is an agreement creating and defining obligation
between the parties” –
Salmond
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ESSENTIAL ELEMENTS OF A CONTRACT

1. Offer and Acceptance

2. Lawful Consideration
3. Capacity of Parties
4. Free Consent
5. Legality of object
6. Not declared to be void
7. Certainty of performance
8. Possibility of performance
9. Writing and Registration
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KINDS OF CONTRACT
1. Voidable Contract: An agreement which is enforceable by law at
the option of one or more of the parties thereto, but not at the
option of the other or others, is a voidable contract.
2. Void Contract: A contract which ceases to be enforceable by law
becomes void, when it ceases to be enforceable. A void contract
is a nullity from its inception.
3. Unenforceable Contract: A contract which cannot be enforced is
a valid contract in law, but is incapable of proof, and therefore
cannot be enforced in the Court of Law.
4. Executed Contract: Where both the parties have performed their
obligation, it is an executed contract.
5. Executory Contract: Here neither party to the contract has
performed his share of the obligation, for example, both the
parties have yet to perform their promises, the contract is
executory.
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KINDS OF CONTRACT-CONTD.
6. Express Contract: When the terms of a contract are reduced in
writing or are agreed upon by spoken words at the time of its
formation, the contract is express.
7. Implied Contract: The terms of a contract are inferred from the
conduct or dealing between the parties. When the proposal or
acceptance of any promise is made otherwise than in words, the
promise is said to be implied. Such an implied promise leads to an
implied contract. For example, A boards a bus. It is implied from
his conduct that A has entered onto an implied promise to
purchase a ticket.
8. Quasi-Contract: Certain relations resemble those created by a
contract. Certain obligations which are not contracts in fact but
are so in the contemplation of law. These are called Quasi-
Contracts.
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KINDS OF CONTRACT-CONTD.
Illustration:
‘A’ supplies necessities to ‘B’ who is not capable of contracting and
reimbursing to ‘A’. A is entitled to be reimbursed from B’s property.
9. Quasi contracts raise out of obligation enjoyed by one person
from the voluntary acts of the other which are not intended to be
performed gratuitously.
Illustration:
‘X’ supplies ‘Y’, a lunatic, with necessaries suitable for his condition
of life. X is entitled to be reimbursed from ‘Y’ property.
10. Contingent Contract: A contingent is one in which a promise is
conditional and the contract shall be performed only on the
happening of some future uncertain event.
Illustrations:
‘A’ contracts to pay B Rs 10,000, if B’s house is burnt. This is a
contingent contract.
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CONCEPTS RELATING TO OFFER

Offer- Section-2 (a)When one person signifies his willingness to do or abstain from
doing something with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.
-Offer must intend to create legal relations;
-Terms of offer must be certain, definite and not vague;
- The offer must be distinguished from a mere declaration of intent;
- Offer must be distinguished from a mere declaration of intent;
-Offer must be in the knowledge of offeree.
- Communication of offer should be made especially of any special terms and
conditions
- Offers should be distinguished from an Invitation to offer –there is no final
willingness only circulation of information

Pharmaceutical society Of Great Britain v. Boots Cash Chemists Ltd. (1952) 2 All E.R.
456)- issue of self service
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Types of offer

• General offer or specific offer

Carlill v. Carbolic Smoke Ball Company
(1893) 1 QB 256- concept of general offer
made
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ACCEPTANCE
 Acceptance- Sec. 2 (b) of the Contract Act states when the person to
whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted.
 Must be unqualified and absolute
 Expressed in some usual and reasonable manner/prescribed manner
 Acceptance must be communicated
 Only authorised person should communicate about the acceptance
 Acceptance should be made within the prescribed time or reasonable
time;
 Acceptance should be given before offer lapses
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Standard contracts/Shrink wrap contracts/e contracts

A standard form contract (sometimes referred to as an adhesion or boilerplate contract) is a

contract between two parties, where the terms and conditions of the contract are set by one of
the parties, and the other party has little or no ability to negotiate more favorable terms and is
thus placed in a "take it or leave it" position.
Shrink wrap contracts are license contracts which are generally accepted by opening of the
wrapper.

Examples of standard form contracts are insurance policies (where the insurer decides what it
will and will not insure.While these types of contracts are not illegal per se, there exists a very
real possibility for unconscionability . In addition, in the event of an ambiguity, such ambiguity will
be resolved contra proferentem against the party drafting the contract language.
• Theoretical issues:
• Rarely read
• Acceptance difficult as access to full terms may not be there
• Social pressure to sign
• Unequal bargaining power
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Communication and Revocation of offer and acceptance

• An offer or an acceptance must be communicated to the other party.

• An offeror may revoke an offer before it has been accepted, but the
revocation must be communicated to the offeree. If the offer was
made to the entire world, such as in Carlill's case, the revocation
must take a form that is similar to the offer.

• If the offer is one that leads to a unilateral contract, the offer

generally cannot be revoked once the offeree has begun
performance.
 CONSIDERATION Amity Business School

 Consideration is also a valid ingredient of a contract-Sec. 2(d) defines it

as when, at the desire of the promisor, the promisee or any other person
has done or abstained from doing or does and abstains from doing
something , such act or abstinence or promise is called a consideration
for the promise.

Consideration is based on the term ‘quid-pro-quo’ which means

‘something in return’. When a person makes a promise to other, he
does so with an intention to get some benefit from him. This act to do or to
refrain from doing something is known as consideration.
 Consideration must have been given at the desire of the promisor. AmityA Business School
contract without
consideration is void and can at the best be called a gratituous promise.
The first essential of consideration is that the act or abstinence must have done at
the desire of the promisor. It follows that any act performed at the desire of the third
party cannot be a consideration.

2. A Consideration may be given by the Promisee or by any other Person: Under the
Indian Law, it is not necessary that consideration must be given by a promisee only.
Consideration may also be given by any other person. A contract is valid as long as
consideration is given, whether by the promisee or any other person.
For E.g. Chinnayya v/s Ramaya (1881) 4 Mad 137‑ In this case 'A' transferred certain
property by deed of gift to her daughter 'B', with the condition that 'B' should pay
certain annuity to 'A's brother 'C'. 'B' agreed to pay the annuity to her uncle 'C' in
writing. Later on, she denied to pay it on the ground that no consideration had moved
from 'C' to her (B). It was held that consideration might also move from any other
person. It was held that consideration moved from A, the donor of the estate though
not from her brother C and that was sufficient consideration for the daughters promise
to A’s brother becase the consideration in Indian law can move from the promisee or
any other person. Therefore ‘C’ was entitled to maintain a suit.
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3. A Consideration may be Past, Present, or Future: The consideration may be past,
present, or future. This is clearly indicated by the words, used in the definition of
consideration given in the Act. (English law-past consideration is no consideration)

4. Consideration need not be Adequate: Consideration means "something in return"

which need not necessarily be equal in value with "something given". The law simply
provides that a contract should be supported by some consideration and the courts of
law are not concerned as to its adequacy.

5. Consideration must be Real and not Illusory: Although the consideration may be
inadequate, it must be real, competent, and must have some value in the eyes of law.
It should be physically, legally possible to be performed. It should not be illusory.
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6. Consideration must not be Illegal, Immoral or Opposed to Public Policy:
Consideration must not be illegal, immoral, or opposed to public policy. Every
agreement, of which the object or consideration is illegal, immoral, or opposed to
public policy, is void under Section 23 of Indian Contract Act.

Section 23 of the Indian Contract Act states that :

The consideration or agreement is lawful unless:

- it is forbidden by law
- is of such a nature that if permitted, would defeat the provisions of any law or
- is fradulent or
- involves and implies injury to the person or property of another or
- The court regards it as immoral or opposed to public policy

7. Consideration must be something, which the Promisor is not already bound to

do.

 Privity to a contract- no stranger can be a party to a contract

 Privity of consideration-can sue under Indian law
No Consideration, No Contract: Consideration is one of the essential elements to
support a valid contract. When a party to an agreement, promisesAmity Business
to do School
something he
must get 'something' in return. If he does not get something in return, the contract is
not valid. This 'something' is defined as consideration. Therefore, an agreement
without consideration is void and cannot become a contract.

Exceptions: Following are the exceptions to the rule ‘no consideration, no contract’:

1) An Agreement made on Account of Natural Love and Affection [Section 25 (1)]:

When an agreement is made in writing and registered under the law, for the time
being in force, for the registration of documents, and is made out of natural love and
affection between parties standing in a near relation to each other, no consideration is
required in such a case For E.g. An agreement between a father and his son or
between a husband and wife.

2) A Promise to Compensate for Past Voluntary Services [Section 25 (2)]: When a

promise is made to compensate wholly or in part, a person who has already
voluntarily done something for the promisor, or something which the promisor was
legally compellable to do, is enforceable at law, even though without consideration.
E.g. A supports B’s infant son. B promises to reimburse A’s expenses. This is a
contract.
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3) A Promise to pay Time Barred Debt [Section 25 (3)]: A promise to pay the time
barred debt, in whole or part is enforceable provided it is in writing and is signed by
debtor himself or his agent on his behalf. For E.g. A owes B Rs.1,000 but the debt is
time barred. A signs a written promise to pay B Rs.500 on account of the debt.
This is a contract.

4) Creation of an Agency [Section 185]: No consideration is required to create an

agency.

5) Gift [Section 25]: According to Section 25, nothing shall affect the validity as between
the donor and donee of any gift actually made.
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Capacity to contract

Who is competent to make a contract:-

Section 11. Every person is competent to contract who is of age
of majority according to the Law to which he is subject, who
is of sound mind and not is disqualified from contracting by
any Law to which he is subject.
Age of majority:- According to section 3 of Indian majority Act-
1875 every person domiciled in Indian attains majority on the
completion of 18 years of age.
Exception: - 21 years- in the following cases.
a. Where a guardian of a minor’s person or property is appointed
under the Guardian and wards Act, 1890.
b. Where minor’s property has passed under the superintendence of
the court of words.
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Should be major-Mohori Bibi v Dharamdas Ghose (1930)-contracts of minor are void

The rules regarding minor’s agreement are as under-

1) A minor's agreement is void ab initio: In India an agreement with or by a minor is void ab initio and
inoperative as a minor has no capacity to enter into a contract. A minor is neither liable to perform what he
has promised to do under a contract nor is he liable to repay money which he might have received under a
contract.
Mohori Bibee V. Dhurmodas Ghose. In this case a minor executed a mortgage for Rs.20,000, out of which he
received Rs.8,000 from the mortgagee. Subsequently, the minor sued for setting aside the mortgage. The
mortgagee claimed refund of Rs.8,000 paid by him. The Privy Council held that a minor's agreement was
absolutely void and the minor was not liable to return the money.

2) A Minor can be a Beneficiary: A minor cannot be bound by contract but he can be a lawful beneficiary. Thus a
promissory note executed in favour of a minor can be enforced.

3) A minor's property is liable for necessaries: Under Section 68 of the Indian Contract Act, if a person
incapable of entering into a contract, or anyone whom he is bound to support, is supplied by another person,
with necessaries suited to his condition in life, the person, who has furnished such supplies is entitled to be
reimbursed from the property of such person. It is to be noted that only minor's property is liable, minor is not
personally liable for necessaries supplied to him.
4) No estoppel against a minor: The rule of estoppel is only a rule of evidence i.e. a rule of formal law. This
rule is not applicable to minors. Amity Business School
A Minor who falsely represents himself to be a major and induces another person to enter into contract, can
plead minority as a defence.

5) No subsequent ratification of a minor's agreement: Since a minor's agreement is void ab initio, a minor
who has entered into an agreement during his minority cannot subsequently ratify (approve) the contract
on attaining majority.
6) No specific performance of a minor's agreement: Neither the minor nor the other party can ask for the
specific performance of a minor's agreement.

7) No insolvency for a minor: A Minor is incapable of contracting debts and hence he cannot be adjudged
insolvent.

8) A minor can be admitted to the benefits of partnership: A minor cannot enter into an agreement of
partnership, however with consent of all the partners he can be admitted to the benefits of partnership.

9) A Minor can act as an agent: A minor can become an agent, and by his acts he binds his principal;
however a minor is not personally liable for his principal.

10) A minor cannot be member of a registered company: This is because a minor is not competent to
apply for membership.
Sec 12- A person is said to be of sound mind --- if at the time of making the contractAmity Business
he is capable of School
understanding it and forming a rational judgment as to the effects upon his interests. A person who is usually of
unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person who is
usually of sound mind, but occasionally of un- sound mind, may not make a contract when he is of unsound
mind. I

Should be mentally sound-free and full consent is required

A person of unsound mind
Lunatic Idiot Drunken and Intoxicated
Person of Unsound Mind

-A person who is usually of unsound mind, but occasionally of sound mind can make a contract when he is of
sound mind. Similarly, a person who is usually of sound mind, but occasionally of unsound mind, may not make
a contract when he is of unsound mind.
-At time of entering into a contract, a person must be sound mind. Law presumes that every person
is of sound mind unless otherwise it is proved before court. An agreement by a person of unsound
mind is void. The following are categories of a person considered as person of a unsound mind.

An idiot
An idiot is a person who is congenital (by birth) unsound mind. His incapacity is permanent and therefore he
can never understand contract and make a rational judgment as to its effects upon his interest. Consequently,
the agreement of an idiot is absolutely void ab initio. He is not personally liable even for the payment of
necessaries of life supplied to him.

Delirious persons
A person delirious from fever is also not capable of understanding the nature and implications of an
agreement. Therefore, he cannot enter into a contract so long as delirium lasts.
Hypnotized persons Amity Business School

Hypnotism produces temporary incapacity till a

person is under the effect of artificial induced sleep.

Mental decay
There may be mental decay or senile mind the to old
age or poor health. When such person is not capable
of understanding the contract and its effect upon his
interest, he cannot enter into contract.

Lunatic is not permanently of unsound mined. He

can enter into contract during lucid intervals i.e.,
during period when he is of sound mind.
• Disqualified person Amity Business School

- Alien enemy- cannot sue in times of war

- Foreign sovereigns and ambassadors-
prior sanction of Central government
- Convict-one who is guilty and is
imprisoned cannot contract
- Joint Stock company and corporation
incorporated under a special act-depends
upon its MOA
 Assignment questions: Amity Business School

• What is a contract? Explain in detail the essential elements of a contract?

Also discuss the different types of contracts?

• Explain offer and acceptance and their valid ingredients?

• What is consideration-explain the elements and exception to consideration?

• Explain the modern day validity of standard and shrink wrap agreements.
How does the interpretation by the courts resolve this issue?

• Explain the position of an minor in Indian contracts relating to his capacity to

contract?

• Explain mental capacity and disqualification by law concepts with regard to

competency to contract.
 CONSENT AND FREE CONSENT
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 The contracting parties must give their consent freely.
 'Consent' means that the parties must agree about the subject
matter of the agreement in the same sense and at the same time.
 Consent is said to be free if it is not induced by coercion, undue
influence, fraud, misrepresentation or mistake.
 The absence of free consent would affect the legal enforceability
of a contract.
 Complainant must prove that if he had known the truth or had not
been forced to agree, he would not have entered into the contract.
 Void or voidable depending on the nature of the flaw:
 Coersion, undue influence, misrepresentation or fraud-voidable
(Sec 19-19A)
 Bilateral mistake-void-no consent at all
 COERCION Amity Business School

• Section 15-"Coercion" is the committing or threatening to

commit, any act forbidden by the Indian Penal Code (45
of 1860), 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.
• Act concerning coercion may be directed be directed at
any person and not necessarily the other party.
• Threat to file a suit a –if only a false charge
• Threat to commit suicide
• Duress
• Effect-void may repudiate the contract bsed on recission.
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UNDUE INFLUENCE

"Undue influence" defined 

A contract is said to be induced by "under 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 generally of the foregoing principle, a
person is deemed to be in a position to dominate the will of another -

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

(b) where 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 be upon the person in a position to dominate the will of
the other.
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FRAUD

"Fraud" means and includes any of the following acts committed by a party
to a contract, or with his connivance, or by his agents, with intent to
deceive another party thereto his agent, or to induce him to enter into the
contract;

(1) the suggestion as a fact, of that which is not true, by one who does
not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of

the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent
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MISREPRESENTATION

“Misrepresentation" means and includes –

• 1) the positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, though he believes it to be true
• 2) any breach, of duty which, without an intent to deceive, gains an
advantage to the person committing it, or any one claiming under him, by
misleading another to his prejudice or to the prejudice of any one claiming under
him;
• 3) causing, however innocently, a party to an agreement to make a mistake
as to the substance of the thing which is the subject of the agreement.
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MISTAKE

Where both parties to an agreement are under a mistake as to a

matter of fact essential to the agreement, the agreement is void. An
erroneous opinion as the value of the thing, which forms the subject
matter of the agreement, is not deemed as mistake as to a matter of
fact. Unilateral mistake, i.e. the mistake in the mind of only one party
does not affect the validity of the contract.
 Amity Business School
Test questions

1. “An agreement enforceable by law is a

contract” Discuss the definition and bring
out clearly the essential elements of a
contract.
2. Define consideration. How far is it
necessary for the validity of a contract.
Critically discuss the essential elements.
3. X purchases certain goods from Y on
credit without any intention of repaying it.
Discuss the case and remedy.
 LEGALITY OF OBJECT
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• The object of the agreement must be lawful.
• An agreement is unlawful, if it is:-
• (i) illegal
• (ii) immoral
• (iii) fraudulent
• (iv) of a nature that, if permitted, it would defeat the provisions of any law
• (v) causes injury to the person or property of another
• (vi) opposed to public policy-trading with an alien enemy, agreements interfering with
the course of justice, agreements stifling criminal prosecution
 Void agreements Amity Business School
• 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 acts
– sec 36
• Agreements to do impossible acts –sec 56
 PERFORMANCE Amity Business School
• When a contract is entered into, the parties must perform their respective obligations under the
contract. Where a promisor dies before performance of a contract his legal representative is
bound to perform the contract unless a contrary intention appears from the words in the contract
or the nature of the contract.
• A promisor must either actually perform or offer to perform his obligation under the contract, to
the promisee. This offer is called `tender of performance'. The essentials of a valid tender of
performance are:-
It must be unconditional;

It must be at a proper time and place, since a tender made before the due date is not effective;
sec 46-50, 55

It must be made to the proper person;

It must be of proper quantity and as to the whole of obligation;

It must be made by a person willing and able to perform there and then;

It must give a reasonable opportunity to the promisee, for inspection of goods or articles.

Once the promisor makes a valid tender of performance, it is then for the promisee to accept the
performance. If the tender of performance is rejected by the other party, the promisor is not
responsible for non-performance and is entitled to sue the promise for breach of the contract.
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PERFORMANCE-CONT.
• Contracts which need not be performed are:-

-Agreement to do impossible acts, are void and need not be performed.

-When a contract is substituted by a new contract, or is rescinded or altered, the original contract need not be
performed.
-Contracts discharged by operation of law need not be performed.
-Contracts which have lapsed by time.

• The principles with regard to time and place for performance of a contract:-

-Where a contract states the time and place for its performance, the parties must perform accordingly.
-Where the contract does not specify any time for its performance, and the promisor has undertaken to perform
without a request from the promisee, then it must be carried out within a reasonable time.
-Where the contract is to be performed on a certain day and the promisor has undertaken to perform without a
request from the promisee, the promisor may perform it at any time during the usual hours of business on such
day, at the specified place.
- When the promise is to be performed on a certain day, and the promisor has not undertaken to perform without a
request from the promisee, the promisee must make a request for the performance at a proper place and within
the usual hours of business.
- When a promise is to be performed without a request by the promisee, and no place is fixed for its performance,
the promisor must request the promisee to fix a reasonable place for the performance and perform the promise at
such place.
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DISCHARGE
• A contract is said to be discharged when the liabilities of the parties thereto, come to
an end or are determined. A contract may be discharged by any of the following
modes:-
By Performance:- when both parties perform their promises and nothing remains
thereunder, to be done the contract is discharged.
By Impossibility of Performance:- the impossibility may be initial or subsequent.
By Mutual Agreement:- where the parties to a contract agree to substitute a new
contract for it, or to rescind or alter it, the original contract stands discharged.
By Remission:- where a party to a contract dispenses with, either wholly or in part,
the performance of a contract by the other party, or extends the time for performance,
or accepts any other satisfaction instead of performance, the contract stands
discharged to the extent remitted.
By Operation of Law:- a contract is said to be discharged by operation of law under
the following circumstances:-
-Material alteration or loss of a written document;
-Merger of an inferior contract into a superior contract;
-Discharge of an insolvent;
-When rights and liabilities under the same contract become vested in the same
person.
 BREACH AND REMEDIES

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- By Breach or Non-Performance:- when a party to a contract has refused to perform or is disabled from performing,
his promise, the promisee may put an end to the contract on account of breach by the first party.

Where a party to a contract refuses to perform it or becomes disabled to perform it, it amounts to breach of
contract and the promisee may set aside the contract unless he has signified by words or conduct, his intention to
continue it. The remedies available to the aggrieved party, in case of breach of contract by the other party are:-

Suit for rescission of the contract :- Rescission is the revocation of a contract. When a contract is broken by one
party, the other party may sue for rescission and refuse further performance. In such a case, the aggrieved party
is absolved of all its obligations under the contract.

Suit for damages:- the party who is injured by the breach of a contract may bring an action for damages. Damage is
the monetary compensation allowed by the court to the aggrieved party for the loss or injury suffered by him as
the result of breach by the other party.

Suit for injunction:- An injunction is an order of the court requiring a person to refrain from doing some act which has
been the subject matter of contract. The power to grant injunction is discretionary and it may be granted
temporarily or for an indefinite period.

Suit upon 'Quantum Meruit':- The term "quantum meruit" means, 'as much as is merited' or 'as much as earned'. A
suit of quantum meruit is a claim for the value of the material used or supplied under a contract that has become
void on account of breach by the other party. When a contract becomes void, any person who has received any
advantages under such contract is bound to restore it, to the person from whom he received it.

Suit for specific performance:- When the loss suffered by breach of contract cannot be compensated by damages or
where there are no standards to ascertain the quantum of damages, the aggrieved party may approach the Court
for the grant of a decree for specific performance of the contract. Specific performance is granted when:-
Amity Business School