The Indian Contract Act, 1872

CS(Dr.)S.N.Modi
Asst.Profesor, NIFM
Email – sandeepmodi@nifm.ac.in
 What is law of contract?

1.The law of contract is contained in The Indian

Contract Act,1872 which

(i) deals with the general principles of law governing

all contracts, and(ii) covers the special provisions
relating to special contracts like bailment(section
148), pledge(section 172), indemnity(section 124),
guarantee(section 126) and agency(section 182 to
238).
 Law of Contract
• 2.The law of contract is applicable not only to
business but also to the day to day personal
dealings. In fact, each one of us enter into a
number of contracts from sunrise to sunset.

• 3.The general law of contract relates to the (i)

essentials of a valid contract(ii) the rules of
performance and discharge of a contract and,
(iii) remedies available to the aggrieved party in
case of breach of contract.
 What is a contract?

1. As per section 2(h), a contract is an

agreement enforceable by law. Thus,
Contract=An agreement+ Enforceability of an
agreement.

2. What is an agreement?: As per section

2(e),every promise and every set of promises
forming the consideration for each other is an
agreement.
 What is contract

• As per section 2(b),a proposal when accepted

becomes a promise.

• Thus, agreement=offer(or proposal)+

acceptance of offer(or proposal)

• All contracts are agreements but all

agreements are not contracts.
 What is a contract?

1. What is an Offer? As per section

2(a),when one person signifies to
another his willingness to do or to
abstain from doing anything with a
view to obtaining the assent of that
other to such act or abstinence, he is
said to make an offer or proposal.
 Illustration of Offer
• “ Do you intend to sell your motorcycle ” is not
a proposal.
• “I may sell my motorcycle if I can get Rs.14000
for it” is not a proposal.

• M says to N as “ I am willing to sell my

motorcycle to you for Rs.14000” is a proposal
as it has been made with the object of taking
assent of N.
 From Proposal to Contract

• Proposal (Offer) Assent (Acceptance)

Promise

• Promise (s) Consideration for each

other Agreement

• Agreement Enforceable by law

Contract
• A Contract is an agreement; an agreement is a
promise and a promise is an accepted proposal.
What is an enforceability of agreement?

1.An agreement is enforceable by law if it creates

some legal obligation. In case of default, the parties
must intend to sue and to be sued.
2. Agreements are basically of two types-
(i) Commercial or business agreements-In such
agreements, the usual presumption is that the
parties intend to create legal relations unless
otherwise stated.
(ii) Social or domestic agreements- In such
agreements, the usual presumption is that the
parties do not intend to create legal relations unless
otherwise stated.
 Illustration
• Agreements of moral, religious or social
nature. Eg – A promise to lunch together at a
friend’s house or to take a walk together are
not contracts because they are not likely to
create a duty enforceable by law for the
simple reason that the parties never intended
that they should be attended by legal
consequences.
 Illustration
• An agreement to buy certain specific goods at
an agreed price eg – 100 bags of wheat at Rs.
1430 per bag is a contract because it gives
rise to a duty enforceable by law and in case
of default on the part of either party an action
of breach of contract could be enforced
through a court.
Difference between an agreement and a contract
Point of Difference Agreement Contract
(i) What constitutes ? Agreement=offer+ Contract= Agreement+
acceptance of offer its enforceability(i.e.
offer +acceptance +
enforceability)

(ii) Creation of legal may or may not create a essentially creates a

obligation legal obligation legal obligation

Every agreement need All contracts are

(iii) One in other not necessarily be a necessarily agreements.
contract

(iv) Binding An agreement is not A contract is necessarily

necessarily binding. binding.
 Essential Elements of a Valid Contract (Section 10)

• Offer and Acceptance

There must be a ‘lawful offer’ and ‘lawful acceptance’
Minimum two parties, one to make the offer and the other to accept the
offer. Offer must be valid.
For offer to be valid, certain conditions should be fulfilled such as intention
to create legal relations
the terms to be certain and unambiguous
communication to the person to whom it is made etc.
For acceptance to be valid, certain conditions to be fulfilled such as –
it be absolute and unqualified[Section 7(1)]
must be made in the prescribed manner
must be communicated by the authorized person before offer lapses.
 Essential Elements of a Valid Contract

• Intention to create legal relations

Agreements should be attached by legal
consequences and create legal obligations.
Eg – M promises his wife N to get her a saree
if she is will sing a song. N sang the song but
M did not bring saree for her. N cannot bring
an action in a court to enforce the agreement
as it lacked the intention to create legal
relations.
Essential Elements of a Valid Contract
• Lawful Consideration
Consideration has been defined as the price paid
by one party for the promise of the other. An
agreement is legally enforceable only when each of the
parties to it gives something and gets something. It
must be lawful. (Sec.23)

• Capacity of Parties
The parties to an agreement must be competent
to contract, otherwise it cannot be enforced by a court
of law. Age of majority and of sound mind and must not
be disqualified from contracting (Sec.11)
 Essential Elements of a Valid Contract
• As per section 11, to be competent to contract,
parties must fulfill three conditions i.e. they should
be
• (a)major
• (b) of sound mind and
• (c)not declared disqualified from contracting by
the law to which they are subject such as alien
enemy, foreign Sovereign or Ambassador convicts,
company or statutory corporation, insolvents.
Section 3 of the Indian Majority Act, 1875 is
important.
 Essential Elements of a Valid Contract

• Free Consent
‘Consent’ means that the parties have agreed upon
the same thing in the same sense (Sec.13). There is
absence of ‘ free consent’ if the agreement is
induced by
coercion
undue influence
fraud Voidable
Agreement
misrepresentation
mistake (Sec.14) Void
Agreement
 Essential Elements of a Valid Contract

• Coercion - under pressure or threat such as beating etc.]

• Undue influence - dominating the will of another person to
obtain unfair advantage over the other such as master and
servant, parent and child, ITO and assessee, Trustee and
beneficiary, doctor and patient etc.
• Fraud - false representation of fact made willfully with a view to
deceive the other party such as knowingly telling a wrong
information
• Misrepresentation - false representation of fact made
innocently or non-disclosure of a material fact without any
intention to deceive the other party
• Mistake - it occurs when a parties intending to do one thing
does something else by error. mistake is an erroneous belief
concerning something such as buying and selling a horse which
at the time of agreement is dead]
 Essential Elements of a Valid Contract

• Lawful object
Parties to an agreement must agree for an
lawful object. If the object is unlawful for one or the
other reasons the agreement is void (fraudulent,
illegal, immoral, opposed to public policy, injury to
the person or property)

• Writing and Registration

A contract may be in oral or writing. But in
special cases the Act says that agreement to be valid
must be in writing and registered.
Illustration of Writing and Registration of a contract

• Agreement to pay time barred debt must be in

writing (Sec.25)
• Arbitration Agreement must be in writing as
per Arbitration and Conciliation Act, 1996
• Agreement for Sale of Immovable Property
must be in writing and registered under the
Transfer of Property Act, 1882.
 Essential Elements of a Valid Contract
• Certainity
Agreements, the meaning of which is not
certain or capable of being mad certain are void.
Eg – A agrees to sell B ‘a hundred tons of oil’.
There is nothing whatever to show what kind of
oil was intended. The agreement is void for
uncertainity.
Essential Elements of a Valid Contract
• Possibility of Performance
An agreement to do an act impossible in
itself is void. (Sec.56)
Eg – A agrees with B to discover treasure by
magic. The agreement is not enforceable.

• Not expressly declared void

An agreement in restraint of marriage,
agreement in restraint of trade are void
agreements.
 What are various types of contracts?

(1) Contracts on the basis of creation- Four types (i)

Express contract-is one which is made by words
spoken or written.
Eg – A tells B on telephone that he offers to sell
his car for Rs.80,000 and B in reply informs A that he
accepts the offer, there is an express contract.

(ii) Implied contract-is one which is made otherwise

than by words spoken or written. It is inferred from
the acts of parties or by law. Case of a coolie or shoe
shiner.
 What are various types of contracts?
(iii) Tacit contract-is one which is inferred from the
conduct of parties. For example, withdrawal of cash
through ATM. Another example is the fall of a
hammer in an auction sale.

(iv) Quasi Contract – there is no express or implied

agreement between the parties but law recognizes as
a contract. For example – obligation of finder of lost
goods to return them to the true owner or liability of
person to whom money is paid under mistake to
repay it back.
 What are various types of contracts?
(2) Contracts on the basis of execution: Three types:
(i) Executed contract-is one in which both the parties to
the contract have performed their respective
obligations under the contract.
Eg – When a bookseller sells a book on cash payment it is
an executed contract.

(ii) Executory contract-is one in which both the parties to

the contract have to perform their respective obligations
in future.
Eg – T agrees to coach R, a pre-medical student, from first
day of the next month and R in consideration promises to
pay T rs.3000 per month, the contract is executory.
 What are various types of contracts?
(iii) Partly executed and partly executory
contract-is one in which one of the parties to the
contract have performed his obligation and the
other party has still to perform his obligation.
Eg – M gives the possession of car to N for
Rs.1,00,000 cash down and N pays Rs.10,000 as
earnest money and promises to pay balance
amount on next Sunday. M promises to execute a
sale deed on receipt of full amount. Partly
executed by M and partly executory on part of N.
 What are various types of contracts?
(3) Contracts on the basis of enforceability-Six types-
(i) Valid contract- is one which satisfies all the conditions
prescribed by law. For example, marriage offer and
acceptance by two parties

(ii) Voidable contract[section 2(i)]: is one which is

enforceable by law at the option of one or more of the
parties thereon but not at the option of the other or
others. Consent of one party is normally obtained by
coercion or undue influence or fraud or
misrepresentation. Repudiation must take place within
a reasonable time.
 What are various types of contracts?

• A, threatens to shoot B if he does not sell his

new Bajaj bike to A for Rs.2,000. B agrees.
The contract has been brought about by
coercion and is voidable at the option of B.
• A contracts with B that A shall whitewash B’s
house for Rs.100. A is ready and willing to
execute the work accordingly but B prevents
him from doing so. The contract becomes
voidable at the option of A.
 Consequences of Rescission of Voidable
Contract
• Section 64 says that when a person at whose option
a contract is voidable rescinds it, the other party
thereto need not perform any promise therein
contained in which he is a promisor.
• If the party rescinding the contract has received any
benefit from another party to such contract, he must
restore such benefit.
• Eg – when a contract for sale of a house is avoided
on the ground of undue influence, any money
received on account of the price must be refunded.
 What are various types of contracts?
• (iii) Void contract[section 2(j)]-is one which
ceases to be enforceable by law and hence
becomes void. Actually, it was valid when
entered into but subsequently becomes void
due to (a)impossibility of performance,
(b)change of law or (c)some other reason.

• For example, death of a party to a marriage.

 What are various types of contracts?
• A agrees to sell B 100 bags of wheat at 1650 rs
per bag. Before delivery, the Government bans
private trading in wheat. The contract becomes
void.
• M by threatening to murder B’s son, makes B
agree to sell his car worth Rs.30,000 for a sum
of Rs.10,000 only. The contract being a result of
coercion is voidable at the option of B. B either
affirm or reject the contract. In case B decides
to rescind the contract, it becomes void.
 What are various types of contracts?
• (iv) Void agreement[section 2(g)]-is one which
is not enforceable by law i.e. void right from
the time it is made. for example, a contract
with a minor or a person of unsound mind
• It is void ab-initio and does not give rise to any
legal consequences.
 What are various types of contracts?
(v) Illegal agreement-is one the object of which is
illegal and hence is void from the very beginning. For
example, agreement between two persons to kill a
third person. In such a case, even collateral
agreements are also void.
(vi) Unenforceable contract-is one which is valid but
can’t be enforced due to technical defect such as not
in writing or under stamped. After removal of
technical defect, it can be enforced. For example, an
oral agreement for arbitration is unenforceable but if
reduced to writing ,it can be enforced.
 Special contracts
1. Contingent contract: As per section 31, it is a contract to
do or not to do something if some event collateral to
such contract does or does not happen. For example,
insurance contracts. Also called conditional contract.
Kinds of contingent contracts: (i) Contract contingent upon
happening of an uncertain event[Section 32] (ii) Contract
contingent upon the non-happening of a certain
event[Section 33] (iii) Contract contingent upon the future
conduct of a living person[Section 34] (iv) Contract
contingent upon the happening of an uncertain specified
event within a fixed time[Section 35] (v) Contract
contingent upon the non-happening of an uncertain
specified event within a fixed time (vi) Contract contingent
upon impossible event[Section 36]: These are void.
 Special contracts-contd.

2. Quasi contract: It is not a contract at all

because one or the other elements of contract
are missing. It is an obligation imposed by the
law upon a person for the benefit of another
person even in the absence of a contract. It is
based upon the principle of equity which means
that no person shall be allowed to unjustly
enrich himself at the expense of another. Such
obligations are called quasi-contracts because
the outcome of such obligations resemble those
created by a contract.
 Special contracts-contd.
Kinds of quasi-contract: (i) Right to recover the
price of necessaries supplied[Section 68]: to a
person incompetent to contract or a or any one
dependent upon such incompetent person (ii)
Right to recover money paid for another
person[Section 69] (iii) Right to recover for non-
gratuitous act[Section 70] (iv) Responsibility of
finder of goods[Section 71] (v) Right to recover
from a person to whom the money is paid or
thing is delivered by mistake or coercion[Section
72]
 Special contracts-contd.
3. Wagering agreement: As per section 30 of the Act, it is
an agreement between two persons under which money
or money’s worth is payable by one person to another
on the happening or non-happening of an uncertain
future event. Such agreements are chance oriented and
therefore completely uncertain. For example, Agreement
between X and Y that X to pay Y Rs. 1,000 if it rains on a
certain day and Y to pay X Rs. 1,000 if it does not rain on
that certain day.
3.1 Essentials of wagering agreement: (i) promise to pay
money or money’s worth (ii) Uncertain event (iii) Both
the parties have a chance either to win or to lose (iv)
Neither part to have control over the event (v) Neither
 Special contracts-contd.
3.2 Effects of wagering agreement: (i)
Agreements by way of wager are void in India. (ii)
Agreements by way of wager have been declared
illegal in the state of Maharashtra and Gujarat.
(iii) No suit can be filed to recover the amount
won on any wager (iv) Transactions which are
collateral to wagering agreements are not void in
India except in the state of Maharashtra and
Gujarat. (v) Transactions which are collateral to
wagering agreements are illegal in the state of
Maharashtra and Gujarat.
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