indian contract act

Amity Business SchoolMBA, Semester 1

Legal Aspects of BusinessMs. Shinu Vig

Amity Business School

Indian Contract Act, 1872

The Act defines a contract as “an agreement enforceable by law.”

Agreement:

An agreement is a promise or a set of promises, whereby a person makes an offer to another and it is accepted by the person to whom it is made.


Agreements which are not contracts:

a) Agreements relating to social matters.

a) Domestic arrangements between husband and wife.


Kinds of contracts:

a) According to mode of formation:• Express contracts (oral or written)• Implied contracts

a) According to validity:• Valid contracts• Void contracts• Voidable contracts• Void agreements


Section 10 of the Act provides that “all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void.”

Essential elements of a valid contract:• Offer• Acceptance• Lawful consideration• Lawful object• Free consent• Competent parties


Offer:

An offer means a proposal. It is made with a view to obtaining the assent of the other party to the proposed act or abstinence.

Types of offer:

a)Express offer (written on oral) or Implied offer

b)General offer or specific offer


Essentials of a Valid Offer:• An offer must be clear and definite. • Offer must be made with a view to obtain acceptance thereto• Offer must be made with the intention of creating legal relationship• Offer must be communicated to the offeree.


Acceptance:

When the person to whom the offer is made signifies his assent thereto, the offer is said to be accepted.

Essentials of valid acceptance:• It must be absolute and unqualified.• It must be communicated to the offeror. It may be express or implied.• It must be made in the mode prescribed, if any.• It must be made within the time specified, if any.• Mere silence of offeree is not acceptance.


Revocation of Offer:• By the offeror at any time before acceptance.• By death or insanity of the offeror before acceptance.• By death or insanity of the offeree before acceptance.• By rejection.• By not accepting in the mode prescribed.• By counter-offer by the offeree.

Revocation of acceptance:

Acceptance can be revoked before the communication of the acceptance is complete.


Consideration:

Consideration is what a promisor demands as the price for his promise.

Essentials of Consideration:• It can move from promisee or any other person.• It need not be in terms of money only.• It need not be adequate.• It must be real and not vague.• It must be lawful.


Lawful Object:Object or consideration of an agreement is unlawful if it is:• forbidden by law; or• it is of such nature that if permitted it would defeat the provisions of law; or• is fraudulent; or• involves or implies injury to the person or property of another; or• the Court regards it as immoral or opposed to public policy.

Agreements with unlawful consideration or object are void.


Capacity to Contract:

Every person is competent to contract if he/ she

i) is of the age of majority

ii) is of sound mind

iii) is not disqualified from contracting by any law to which he is subject.


Free Consent:

The parties should mean the same thing in the same sense and agree voluntarily.

Consent is not free when it is caused by:

i.Coercion

ii.Undue influence

iii.Misrepresentation

iv.Fraud

v.Mistake


Coercion:

i.The committing or threatening to commit any act forbidden by the Indian Penal Code or

ii.The unlawful detaining or threatening to detain any property to the prejudice of any person whatever with the intention to cause any person to enter into any agreement.

Consequences of coercion:

Agreement caused by coercion is voidable at the option of the party whose consent has been so obtained.


Undue influence:

A contract is said to be induced by undue influence where the relation 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 unfair advantage over the other.

Examples: Master and servant; Solicitor and client; Doctor and patient….etc.

Consequences of Undue Influence:

Agreement caused by undue influence is voidable at the option of the party whose consent has been so obtained.


Fraud:

Fraud is an untrue statement made knowingly or without belief in its truth or recklessly, carelessly, whether it be true or false with the intent to deceive.

Consequences of Fraud:

The party aggrieved has following remedies-

i. Can avoid the contract

ii.Can demand performance of the contract

iii.Can sue for damages


Misrepresentation:

Misrepresentation means a false representation of fact made innocently or non-disclosure of a material without any intention to deceive the other party.

Consequences of Misrepresentation:

The party aggrieved has following remedies-

i.Can avoid the contract

ii.Can demand performance of the contract


Mistake:

Mistake is an erroneous belief on the part of parties to the contract concerning something pertaining to the contract.

Effect of mistake:

Mistake renders the contract void. To be operative so as to render the contract void, the mistake must be:

i. of fact and not of law or opinion;

ii. the fact must be essential to agreement and

iii. must be on part of both the parties.


Agreements declared void:

Agreements against public policy- Some of the agreements which are against public policy have been declared to be void by law. These are:•Trading with enemy•Agreements for sale of public offices and titles•Agreements in restraint of marriage•Agreements in restraint of parental rights•Agreements in restraint of legal proceedings•Agreements in restraint of trade


Performance of Contracts:

The parties to the contract must either perform or offer to perform their respective promises unless such performance is dispensed with or excused under the Indian Contract Act or any other law.

Who must perform:i. The promisor himself

ii. If not specified, then agent of promisor can perform

iii. In case of death of promisor, his legal representatives must perform

iv. In case of contracts involving personal skill, promisor himself should perform.


Tender of Performance :

If promisor performs his side of the contract and the performance is rejected, the promisor is discharged from further liability and may sue for the breach of contract, if he so wishes.

To be valid, a tender must fulfill following conditions:

i. It must be unconditional

ii. It must be made at a proper place and time.

iii. If it relates to delivery of goods, the promisee must have a reasonable opportunity to check the goods.


Discharge of Contracts:

A contract is said to be discharged or terminated when the rights and obligations arising out of a contract are extinguished.

Modes of discharge of contracts:• Performance or tender• Mutual consent or agreement (by novation, rescission, alteration etc.)• Lapse of time• Operation of law• Impossibility of performance• Breach of contract


Discharge of Contracts by impossibility:

A contract is deemed to have become impossible of performance and thus void under the following circumstances:

a. Destruction of the subject matter of the contract.

b. By the death or disablement of the parties.

c. Subsequent illegality.

d. Declaration of war.


Remedies for Breach of Contracts:

When a contract is broken, the injured party has several courses of action open to him. The injured party may :

i. Rescind the contract and refuse further performance of contract

ii. Sue for damages (Ordinary/ Special damages)

(Hadley v. Baxendale)

iii. Sue for specific performance

iv. Sue for injunction

v. Sue on quantum meruit


Contingent Contracts:

A contingent contract is a contract to do or not do something, if some event collateral to such contract, does or does not happen. For example- contract of indemnity and guarantee.

Essentials of Contingent Contracts:

i.The performance depends upon happening or non- happening of some future event.

ii.The event must be uncertain.

iii.The event must be collateral to the contract


Contract of INDEMNITY

A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ‘contract of indemnity’.

Parties to the contract of indemnity:

i. Indemnifier- One who promises to make good the loss.

ii. Indemnity-holder- One whose loss is to be made good.


Contract of GUARANTEE:

A contract of guarantee is a contract to perform a promise or discharge the liability of a third person in case of his default.

Parties to the contract of Guarantee:•Principal Debtor: The person for whom guarantee is given.•Creditor: The person to whom guarantee is given.•Surety: The person who gives the guarantee.


Kinds of Guarantee :

i. Specific guarantee

ii. Continuing guarantee

Revocation of continuing guarantee:• By notice of revocation by the surety.• By the death of the surety.• By discharge of the principal debtor.


Contract of BAILMENT:

Bailment is a transaction whereby one person delivers goods to another person for some purpose, upon a contract that they are, when the purpose is accomplished, to be returned or otherwise disposed of according to the directions of the person delivering them.

Parties to contract of bailment:•Bailor: The person who delivers the goods.•Bailee: The person to whom goods are delivered.


Duties of a bailee:• To take reasonable care of the goods.• Not to use the goods in unauthorised manner.• To keep the goods bailed to him separate from his own goods.• Not to set up an adverse title to the goods.• To return the goods without demand on the expiry of the time fixed or when purpose is accomplished.• The bailee must return to the bailor any increase, accretion or profits which have accrued from the goods bailed.

Duties of a bailor:• To disclose all the known faults in the goods.• To pay any extraordinary expenses incurred by the bailee.•


Contract of PLEDGE:

Pledge or pawn is a contract whereby an article is deposited with a lender of money or promisee, as security for the repayment of a loan or performance of a promise.

Parties to contract of pledge:•Pledgor: The depositor is called the pledgor.•Pledgee: The person to whom it is deposited is called the pledgee.


Rights of a Pledgee:• To retain the goods pledged.• To claim reimbursement of extra-ordinary expenses• To sue pledgor• To sell the goods.

Duties of a Pledgee:• To take reasonable care of the goods• To return the goods• To return accretion to the goods• Not to make unauthorized use of goods• Not to mix goods pledged with his own goods


Contract of AGENCY:

Agent :

An agent is a person employed to do any act or to represent another (his principal) in dealings with third persons.

Principal:

The person for whom act is done by agent or who is represented in dealings with third persons by an agent, is called the principal.


Creation of Agency:

i. By express authority

i. By implied authority:• By estoppel• By holding out• By necessity

iii. By ratification

iii. By operation of law


Classification of Agents:

i. On the basis of extent of authority:• General Agents• Special Agents

ii. On the basis of nature of work:• Mercantile Agents

-Broker, Factor, Auctioneer, Commission Agent, Del-credere Agent

• Non Mercantile Agents

Bankers and Partners


Extent of Authority of Agents:

• In normal circumstances-

Depends upon the terms expressed on his appointment or may be implied by the circumstances of the case.

• In case of emergency-

He can do all such things which may be necessary to protect the principal from loss in an emergency and which he would do to protect his own property under similar circumstances.


Duties of Agents:

1. To act according to directions or custom of trade.

2. To act with reasonable care and skill.

3. To render account.

4. To communicate with principal and to obtain his instruction.

5. To disclose all material information.

6. Not to disclose confidential information entrusted to him.

7. Not to allow his personal interest to conflict with his duty.

8. Not to make secret profit.

9. To pay sum received for principal.

10.Not to delegate his authority.


Rights of Agents:

1. Right to receive remuneration.

2. Right of lien on the goods or property.

3. Right to be indemnified against all charges, expenses, liabilities properly incurred in the course of agency.


Termination of Contract of Agency:• By performance of the contract.• By mutual agreement.• By revocation of authority by the principal.• By renunciation of his authority by the agent.• By expiration of the period fixed for the agency.• By death/ becoming of unsound mind of principal or

agent.• By insolvency of the principal.