The Indian Contract Act 1872-General – EBook – Business Law – B.Com – Dibrugarh University – As per CBCS System

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INDIAN CONTRACT ACT, 1872

By-

AMIT BANSAL; MA in Economics

Faculty Member of G.S Lohia College

TOPICS COVERED

  • Important Definations
  • Types of Contracts
  • Essential Elements of a valid contract
  • Consideration
  • Performance of a conract
  • Breach of a contract
  • Quasi Contract
  • Contingent contract

INDIAN CONTRACT ACT, 1872

Important Definitions:

  1. Proposal [Section 2(a)] – When one person signifies another person his willingness to do or abstain from doing anything with a view to obtaining the assent of that other to such an act or abstinence, he is said to make a proposal. A proposal is also known as an offer.
  •  Promise [Section 2(b)] – A proposal when accepted becomes a promise.
  • Promisor and Promisee [Section 2 (c)] – The person making the proposal is called the promisor and the person accepting the proposal is called the promise.
  • Acceptance and Promise – When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise.
  • Agreement [Section 2(e)] – Every promise and every sets of promises forming consideration for each other is an agreement.
  • Void Agreement [Section 2(g)] A void agreement as an agreement not enforceable by law.
  • Contract [Section 2(h)] – An agreement enforceable by law is contract.
  • Voidable Contract [Section 2(i)] – An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of others, is a voidable contract.

Types of Contract

1. On the basis of the Mode of Formation

  • Express Contracts: A contract would be an express contract if the terms are expressed by words or in writing.
  • 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: Even in the absence of a contract, certain social relationships give rise to certain specific obligations to be performed by certain persons. These are known as quasi contracts as they create same obligations as in the case of regular contract. Quasi contracts are based on principles of equity, justice and good conscience.

 2. On the basis of performance

  • Executed contract: The consideration in a given contract could be an act or forbearance. When the act is done or executed or the forbearance is brought on record, then the contract is an executed contract.
  • Executory contract: In an executory contract the consideration is reciprocal promise or obligation. Such consideration is to be performed in future only and therefore these contracts are described as executory contracts.
  • Partly executed and partly executory: 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.
  • Unilateral contract: Unilateral contract is a one -sided contract in which only one party has to perform his duty or obligation.
  • Bilateral contract: A Bilateral contract is one where the obligation or promise is outstanding on the part of both the parties.

3. On the basis of Validity or Enforceability

  • Valid contract: If the contract entered into by the parties and satisfies all the 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 void contract is not enforceable by the court.
  • Voidable contract: When the contract is entered into without the free consent of party, it is considered as a voidable contract. The definition of the act states that a voidable contract is enforceable by law at the option at the option of one or more parties but not at option of the other parties.
  • Illegal Agreement: An illegal agreement is one which is forbidden by law. It cannot be enforced by any court.
  • Unenforceable contract: A contract which satisfies all the requirements of the contract but has technical defects is called an unenforceable contract. A contract is said to have a technical defect when it does not fulfill the legal formalities required by some other act.

ESSENTIAL ELEMENTS OF VALID CONTRACT

All contacts are agreement but all agreements are not contract

For an agreement to become contract the following essential elements must be present :-

  1. Offer and Acceptance: A contract must have an offer made by one party and an acceptance of offer made by the other party. An offer to be valid must be communicated properly to the offeree (the person to whom offer is made). Similarly, an acceptance to be valid must be communicated to the offeror (the person making the offer). Once an offer is accepted it becomes a promise.
  2. Intention to create legal relationship: The parties must have an intention to create legal relationship. They, must be willing to fulfill their part of the promise, else must be ready to face legal implications. A mere social promise is not a contract. For example: Promising to attend a birthday party, is not a contract.
  3. Lawful Consideration: The consideration to a contact must be lawful. Not just lawful the rule also says that in absence of consideration there will be no contact at all. For a contract to be valid consideration must come from both the parties. Though there are some exceptions to this rule.
  4. Capacity of parties: The parties to the contract must be capacited to enter into the contract. Parties are said to be without capacity in the following cases:-
  5. A minor
  6. A person of unsound mind
  7. A person disqualified by a competent court.
  8. Free Consent: The consent of parties to the contact must be free. A contact may become invalid for want of free consent in the following cases:-
  9. Coercion โ€“ Committing an offence punishable under Indian penal Code to force someone enter into a contract.
  10. Fraud โ€“ Falsely misrepresenting wrong facts as true or vice-versa for making someone enter into a contract.
  11. Misrepresentation โ€“ Representing wrong facts under a mistake that the facts are correct.
  12. Undue Influence โ€“ Using oneโ€™s position or influence over the other, and making the other give his/her consent to an agreement. (Father- Son, Advocate- Client, teacher-Student)
  13. Agreements expressly declared void: Law states certain categories of agreement are void and hence are not legally enforceable.
  • Lawful object: The ultimate aim or the object of the agreement must be lawful. For example- an agreement between A & B that, A will pay B a sum of Rs. 50,000 if B kills C. This agreement is illegal and void ab initio as its object is unlawful.
  • Legal Formalities: In many cases law prescribes certain legal formalities for certain classes of agreement, in such cases those agreement are valid as a contract only when those formalities are completed. For example: Sale of immovable property exceeding value Rs.100/- requires compulsory registration under Indian law.
  • Certainty: An agreement must be certain in its terms. A vague or uncertain agreement is void. For example:- A agrees to sell B his car for Rs.50,000/-. A have 10 cars and the agreement fails to mention which specific car. The agreement is void for lack of certainty.
  1. Possibility of Performance: An agreement to be valid must be possible of being performed. An agreement between A & B wherein B has promised to pay A a sum of Rs.50,000/- if A makes Bโ€™s dead son alive is void ab initio as it is impossible of being performed.  

A detailed discussion of some of the following aspects of contract will further establish the contention stated above

PROPOSAL/OFFER

The following are the essential elements of a valid proposal

  • Existence of two parties – For a valid offer, there must be two parties. A person cannot make an offer to himself.
  • Communication – The offer must be communicated to the offeree.
  • Willingness – The offer must show willingness of the offeror. Mere telling or sharing a plan is not an offer.
  • Intention of Obtaining Assent – The offer must be made with a view to obtain the assent of the offeree.
  • May be positive or Negative – The offer may involve doing something or not doing something.
  • Offer Must be definite, Unambiguous and certain
  • The offer may be general or specific
  • The offer may be express or implied.
  • The offer must be for a possible act

ACCEPTANCE

Rules governing acceptance

  • Acceptance must be absolute and unqualified
  • The acceptance must be communicated
  • Acceptance must be in the prescribed mode
  • Mere silence is not acceptance
  • The proposer cannot prescribe the method of refusal
  • An offer once rejected cannot be accepted until it is renewed.
  • Acceptance may be express or implied
  • Acceptance can only be given by the person to whom the offer is made
  • Acceptance must be made before the lapse or withdrawal of an offer.

CONSIDERATION

Section 2 (d) of the Indian Contract Act, 1872 defines consideration as โ€˜when at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or abstain from doing something, such an act or abstinence or promise is called consideration for the promise.

From the above definition it can be inferred that-

1. Consideration must be at the desire of the promisor.

2. Consideration may move from one person to any other person

3. Consideration may be past, present or future and

4. Consideration should be real though not adequate.

Legal Requirements Regarding Consideration:

  • Consideration means doing or not doing something
  • Consideration must move at the desire or Promisor
  • Consideration can flow either from the promisee or any other person:
  • Consideration may be inadequate
  • Consideration may be Past, Present or Future
  • Act Promisor bound to do is not consideration
  • Consideration must be lawful
  • Consideration should be possible to perform

โ€œNo consideration no contractโ€. An agreement without consideration is void.

Not only that, even inadequate consideration would render the enforceability of the contract quite difficult as the free consent of the parties would become suspect. The Act however contains certain exceptions to this important rule. These are:

i. On account of natural love and affection:

ii. Compensation paid for past voluntary services:

iii. Promise to pay debts barred by limitation:

iv. Creation of Agency:

v. In case of completed gifts, no consideration is necessary.

Capacity of parties

A contract must have parties who have the legal capacity to contract. Law states when an individual is incapacity to contract

  1. Minor โ€“ A minor doesnโ€™t have the legal capacity to enter into a contract. A contract with a minor is void ab initio. He is only liable for any necessities supplied to him, and that liability is also limited to his estate/property. A minor can enter into a contract only through his legal guardian.
  2. Unsound mind โ€“ A person of unsound mind is not legally capable of entering into a contract. Law presumes that such an individual cannot take decision out of his free will.
  3. Disqualified by court โ€“ Certain individual are disqualified by courts from entering into contract based on the principle of moral policy, justice, equity and good conscience.

Free Consent

An agreement requires free consent of both the parties to the agreement to be valid. Free consent is absent in the following cases

  1. Coercion โ€“ When a party to a contract commits an offence punishable by Indian Penal Code to force an individual to enter into a contract such a contract is voidable at the option of the person on whom such coercion was applied.
  2. Fraud โ€“ Fraud is a criminal act of making a false statement knowing it to be false to induce someone to enter to a contract.
  3. Misrepresentation โ€“ Misrepresentation can also be said to be an honest mistake. It is slightly different from fraud. Here the person making the false statement believes that the statement is true.
  4. Undue influence โ€“ Undue influence is using ones influence over some other person to adduce him to enter into a contract. In some cases, law presumes the presence of undue influence โ€“ Agreement between Lawyer and his client, Doctor and Patient, Teacher and student, Agreement with a parda nishi women.

If a contact is made and it lacks free consent due to the presence of any of the above elements, the party whose consent was not free to such agreement has the option of either making the contract valid or void and thus contracts lacking free consent are voidable.     

(Statutory declaration: The above notes have been compiled referring to Indian Contact Act, 1872 โ€“ Bare Act, elements of Mercantile Law by N.D.Kapoor and various websites. The above notes are reference and not exhaustive and students are advised to refer to the reference books to get a complete idea of the topic.)

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