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The Indian Contract Act, 1872 is not a complete code on the law of contracts.
The preamble to the Act reads: “Whereas it is expedient to define and amend
certain parts of the law relating to contracts, it is hereby enacted as follows.”
Further the Indian Contract Act does not affect any usage or custom of trade.
Thus, the parties to a contract, which clearly provide for the application of usages
into their contracts, are expressly saved from the operation of this Act.
• Section 2(h) defines a contract as “an agreement
enforceable by law”
• Thus to make a contract there must be –
• (i) an agreement
• (ii) the agreement should be enforceable by law.
Meaning and Essentials of a
Valid Contract
Contract. A contract is an agreement,
enforceable by law, made between at least
two parties by which rights are acquired by
Legal
one and obligations are created on the part Agreement
Obligation
of another.
Agreement.
Section 2(e) defines an agreement as “every
promise and every set of promises forming Contract
consideration for each other”.
Contract = Agreement + Legal Obligation
In this context, the word ‘promise’ is defined
by s.2(b). In a contract there are at least two
parties. One of them makes a proposal (or
an offer) to the other, to do something, with
a view to obtaining the assent of that other
to such act.
Thereby for the formation of a contract
Cont….
Privity of Contract. As a contract is entered into by two or more persons
thereby creating rights and obligations for them, it is a party to the contract
only who can enforce his rights as against the other party (i.e., the
promisor). The basic principle underlying law of contracts is that a stranger
to a contract cannot maintain a suit for a remedy. The law entitles only
those who are parties to the contract to file suits for exercising their rights.
This is known as ‘privity of contract’.
Goods Rs
B
Privity of Contract
Classification of Contracts. Contracts may be classified in terms of their
(i) Validity or enforceability,
(ii) Mode of formation and
(iii) Performance.
Essentials of a Valid Contract
• Acceptance
• Acceptance should be given by a proper person i.e. to whom the offer was made.
Cross Offers
Counter Offers
Capacity to Contract [Ss.10-12]
Persons who are Competent to Contract. Any one cannot enter into a
contract; he must be competent to contract according to the law. Every person is
competent to contract if he (i) is of the age of majority, (ii) is of sound mind, and
(iii) is not disqualified from contracting by any law to which he is subject (s.11).
Capacity of a Minor to Enter into a Contract. The contract law defines
maturity as the age of majority. That usually is 18 years. Does this mean that a
minor is not competent to contract? No, a minor may make a contract, but he is
not bound by the contract; however the minor can make the other party bound by
the contract.
A minor’s parents/guardians are not liable to his creditors for the breach of a
contract by him whether the contract is for necessaries of life or not.
A minor cannot contract null and void ab intitio
Free consent. For a contract to be valid it is not only necessary that the parties
consent but also that they consent freely. Where there is a consent but no free
consent the contract is voidable at the option of the party whose consent was not
free. Thus, free consent is one of the essentials of a valid contract. A consent is
said to be free when it is not caused by: (i) coercion, (ii) undue influence, (iii)
fraud, (iv) misrepresentation or (v) mistake.
Cont….
Examples.
(i) A agrees to sell his Maruti car Delux model for Rs 1.20 lakhs. B agrees to
buy the same. There is a valid contract since A and B have consented to
contract on the same subject matter.
(ii) A who owns two Maruti cars, offers to sell one, say, yellow-coloured, to B for
Rs 1.20 lakhs. B agrees to buy the car for the price thinking that A is selling
the other car red coloured. There is no consent and hence no contract. A
and B have agreed not to the same thing but are thinking for different cars.
(iii) A signed a promissory note which he was told was a letter of guarantee. He
was held not liable on the promissory note, as there was no consent and
consequently no agreement entered into by him.
Meaning of Coercion (Ss. 15 and 72). Coercion is (i) the committing or
threatening to commit any act forbidden by the Indian Penal Code or (ii) the
unlawful detaining.
Meaning of Undue Influence (s.16). Undue influence consists in the improper
exercise of power over the mind of one of the contracting parties by the other.
Meaning of Misrepresentation (Ss.18-19). Misrepresentation is also known as
simple misrepresentation whereas fraud is known as fraudulent
misrepresentation.
Meaning of ‘Mistake’ [Ss.20-21]. Mistake may be defined as an erroneous
belief on the part of the parties to the contract concerning something pertaining
to the contract.
Meaning and Effect of ‘Unilateral Mistake’. There is a unilateral mistake where
only one party to a contract is under a mistake as to a matter of fact.
Mistake of Law. It may be (i) mistake of law of the land, or (ii) mistake of foreign
law. In the first case the rule is “Ignorantia juris non-excusat”.
Consideration [Ss.2(d), 23-25,185]
The term consideration is used in the sense of quid pro que, i.e., “something in
return”. This something or consideration need not be in terms of money.
Abstinence or promise is called a consideration for the promise”.
“No Consideration, No Contract” [Ss.10 and 25]. A promise without
consideration cannot create a legal obligation. The benefit so received or the
loss, damage or inconvenience so caused is regarded in law as the
consideration for the promise.
Rules Regarding Consideration
1. Consideration must move at the desire of the promisor
2. Consideration may move either from the promisee or any other person
3. Consideration need not be adequate
4. Consideration must be real and competent
5. Consideration must be legal
6. A consideration may be present, past or future
Consideration
• Hence……..
No Consideration No Contract
CONTRACTS WITHOUT CONSIDERATION
Agreements made on account of natural love and
affection [Sec. 25(1)]
It is registered under the law
If is between parties standing in near relation to
each other
Exceptions to rule
Compensation for past voluntary services
Promise to pay time barred debt if it is in written
Gifts made under Transfer of Property Act
Contracts of Agency
Contract of Gurantee as per section 127 of ICA, 1872
• Promise to pay time barred debt [Sec. 25(3)
(i) If it is expressed in writing
(ii) If it is signed by the debtor or his agent
4. Gifts
Unlawful Consideration And Object [Ss.23-24]
There are certain cases in which the consideration and the object of an
agreement are unlawful, thereby making it unenforceable. Section 23 defines
an illegal agreement as one the consideration or object of which
(i) is forbidden by law; or
(ii) defeats the provisions of any law; or
(iii) is fraudulent; or
(iv) involves or implies injury to the person or property of another; or
(v) the court regards it as immoral or opposed to public policy.
Examples. X agrees to buy from a jeweller certain jewellery to be delivered to
him after two months. In the meantime, the government enacts a law on gold
control and prohibits dealings in gold. When the time for delivery of the
jewellery comes the jeweller refuses to deliver the same. What can X do? He
has no cause of action. The contract becomes void when the law is enacted.
Thus, the contract was originally valid but becomes void later on by
subsequent (supervening) illegality.
Agreements Declared Void [Ss.26-30]
The Act declares certain agreements to be void. Some of them (such as the
following) have already been explained: (i) agreements entered into through a
mutual mistake of fact between the parties (s.20); (ii) agreements, the object or
consideration of which is unlawful (s.23); (iii) agreements, part of consideration of
which is unlawful (s.24); (iv) agreements made without consideration (s.25).
Some other agreements which are declared to be void are below.
Agreements Against Public Policy (Ss.26-28).
Agreement in Restraint of Trade. Section 27
Restraint of Legal Proceedings (s.28)
Uncertain or Ambiguous Agreements (s.29)
Wagering Agreements (s.30)