Chapter 2 : The Indian Contract Act 1872

Definition Sir Frederic Pollock - “Every agreement and promise enforceable at law” According to Sec 2(h) “An agreement enforceable by law Agreement – Every promises and set of promises forming consideration for each

other.

Essential Elements of Valid Contract

Minimum Two Parties – one party has to make an offer and other must accept it. Offer & Acceptance – There must be an offer and acceptance to the offer, resulting

into an agreement. It should be lawful Legal Formality – The agreement should be enforced and be complete legal relations

between parties to it. Lawful Consideration – consideration is an essential element of a valid contract, it

may be past, present or future but it may be lawful Free Consent – Consent means that the parties must agree about the subject matter of

the agreement in the same sense and at the same time. Lawful Object Certainty & Possibility of performance – The terms and conditions must not be vague

or uncertain. Legal Formalities –Generally a contract must be written always.

Classification Of Contract According to Validity

1. Valid Contract – A valid contract is an agreement duly enforceable by law with all the essential elements of a contract.

2. Voidable Contract – It is enforceable by law at the option of one parties3. Void Agreement – it is an agreement not enforceable by law because one or more of

essentials of valid contract 4. Void Contract – An agreement may be enforceable initially and due to certain

circumstances may become void subsequently5. Illegal Agreement - 6. Unenforceable contract – it is one which cannot be enforced in a court of law because

of some technical defect or absence of contract in writing.

According to Formation

1. Express contract – a contract where in both offer and acceptance are made in words, or written

2. Implied contract – a contract which is inferred from the conduct of parties or course of dealings between them

3. Quasi contract – it is a contract which does not arise by virtue of agreement express or implied but the law recognizes the contact under special circumstances

According to Performance1. Executed Contract – An executed contract is one in which both the parties have

performed their respective legal obligations.2. Executory Contract – It is one in which both parties have yet to perform their

respective duty.

OFFERA proposal is an expression of intention to do or not to do something. It is also called an "offer"

Section 2 (a) of the Contract Act defines the proposal as "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 a proposal"

Kinds of offer::

1. Expressed offer: When the offer is made by express words, spoken or written. 2. Implied offer: an offer may be implied by the conducts of the parties or the

circumstance of the case E.g., The Karnataka State Road Transport Corporation runs omnibuses on various routes to carry passengers at the scheduled fares. This is an implied offer by KSRTC.

3. Specific offer: when the offer is made to a specific person then such offer is called specific offer. The acceptance to such offer can be given by the person to whom the offer is made and not by any one else.

4. General offer: when the offer is made to the world at large. E.g., advertisements.

Essentials of a valid offer:

1. A valid offer must intend to create legal relations: It must not be a casual statement. If the offer is not intended to create legal relationship, it is not an offer in the eyes of law.

For example; Sunil invites Sridhar to a dinner party and Sridhar accepts the invitation. Sridhar does not turn up at the dinner party. Sunil cannot sue Sridhar for breach of contract as there was no intention to create legal obligation. Hence, an offer to perform social, religious or moral acts without any intention of creating legal relations will not be a valid offer.

2. The terms of an offer must be definite, unambiguous and certain: They must not be loose and vague..

For example; Sridhar says to Sunil "I will give you some money if you sell your bike". This is not an offer which can be accepted because the amount of money to be paid is not certain.

3. There is a clear difference between offer, invitation to offer or an announcement:a. An announcement: a declaration by a person that he intends to do something

gives no right of action to another. Such a declaration only means that an offer will be made or invited in the future and not that an offer is made now. E.g., Auction sale, Will, etc.

b. An invitation to make offer: Display of goods by the shopkeeper with a price marked on it does not make an offer, but merely gives an invitation to the public to make an offer to buy the goods at the price marked on it. E.g., quotations, catalogues, advertisements, prospectus issued by the company, etc.

4. An offer to do or not to do must be made with a view to obtaining the assent of the other party. Mere enquiry is not an offer.

5. An offer is effective only when it is communicated to the offeree. Communication is necessary whether the offer is general or specific. The offeror may communicate the offer by choosing any available means such as a word of mouth, mail, telegram, messenger, a written document, or even signs and gestures. Communication may also be implied by his conduct. A person can accept the offer only when he knows about it. If he does not know, he cannot accept it. An acceptance of an offer, in ignorance of the offer, is no acceptance at all.

6. . Offer must not contain a term the non-compliance of which may be assumed to amount to acceptance: the person making the offer cannot say that if acceptance is not communicated by a certain time, the offer would be considered as accepted.

7. A statement of price is not an offer: a mere statement of price is not construed as an offer to sell

ACCEPTANCE:A contract is formed when an offer is accepted. The offeree's willingness to be bound by the terms of the offer is known as "acceptance".

Section 2 (b) of the Contract Act defines acceptance as

"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".

Essentials of a valid Acceptance

1. Acceptance must be absolute and unconditional: An acceptance, in order to be binding, must be absolute and unconditional. It must correspond with all the terms of the offer. Every offer must be accepted as it is.

For example; Sunil offers to sell his site to Sridhar for Rs.100000. Sridhar accepts to purchase it for Rs.80000. This acceptance is not valid. It is a counter-offer.

2. Acceptance must be communicated: Acceptance must be communicated. Communication need not be in writing or by word of mouth. Mere desire to accept a proposal is not acceptance. Uncommunicated or mental acceptance is not a valid acceptance. The person who has authority to accept should communicate acceptance.

3. Acceptance must be in the mode prescribed: If the offeror prescribes the mode or manner of acceptance, the acceptance must be made in accordance with the mode prescribed.

For example, if the offeror says "acceptance to be sent by email", the offeree must send an email. If the acceptance is not made in the mode prescribed, the offeror may within a reasonable time after the acceptance is communicated to him, insist that the acceptance must be made in the prescribed mode. But if he does not inform the offeree as to this effect, he is deemed to have accepted the acceptance. If no mode is prescribed by the offeror, the acceptance must be made according to some usual and reasonable mode.

4. Acceptance must be given within a reasonable time: If the offeror has prescribed a time within which offer must be accepted, it must be accepted within the prescribed time. If no time is prescribed for acceptance, the offer must be accepted within a reasonable time. Otherwise, the proposal will lapse. What is reasonable time depends upon the nature of the subject matter of the offer.

5. Acceptance must be given only by the offeree: An offer made to a particular person can be accepted by him alone. If any other person accepts it, there is no valid acceptance. An offer made to a class of persons can be accepted by any member of that class. Any offer made to the world at large may be accepted by any person who had the knowledge of such an offer.

6. Acceptance must be after an offer: There can be no acceptance without an offer. The acceptor must be aware of the proposal at the time of acceptance. Thus, acceptance must succeed the offer. In other words, acceptance should follow the offer and not precede it.

7. Acceptance must be given before the offer lapses or its revocation:Offer must exist at the time of acceptance. If an offer had already lapsed or been revoked, subsequent acceptance will be of no effect.

8. Acceptance cannot be implied from silence:The acceptance of an offer cannot be implied from the silence of the offeree, unless the offeree has, by his previous conduct inducted that his silence means the acceptance.

Revocation

Meaning – State of being cancelled.

Types of Revocation

1. Notices of Revocation – offers is revoked once the offerer gives notice of revocation to the offeree. Notice must be given by the offerer anytime before its acceptance as against him.

2. Lapse of time – offer lapses if it is not accepted within prescribed time where definite time is stipulated, or with in reasonable time where no time limit is stipulated for acceptance.

3. Failure to accept conditions precedent – where the offer is subjected to a conditions precedent there to it lapses on failure to accept it without ulfilling the condition.

4. Death or Insanity of offer – an offer lapses on the death or insanity of the offerer provided that the fact comes to the knowledge of the offeree before he makes his acceptance.

Communication

The communication of proposals, the acceptance of proposals, and the revocation of proposals respectively, are deemed to be made by any (a) act or (b) omission of the party proposing, accepting or revoking. Such act or omission must however have the effect of communicating such offer, acceptance or revocation.

Thus installation of a weighing machine at a public place is an offer, putting a coin in the slot of the machine is the acceptance of the offer, and switching off the machine amounts to revocation of the offer.

CONSIDERATIONConsideration forms an essential part of an agreement without which the agreement is void. This is because, in the absence of consideration, there is no legal obligation formed between the parties and, therefore, in such a scenario, they are not bound by the terms of the agreement

Definition:

Consideration Sec 2 (d) : When, at the desire of the promisor, the promise or any Other person has clone or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such Act or abstinence or promise is called a consideration for the promise.

Legal rules as to Consideration

1. The desire of the promisor:An act constituting consideration must have been done at the desire or request of the promisor if it is done at the desire of the third party or without the desire of the promisor it will not be a good consideration.

E.g., A saves B goods from a fire accident without being asked to do so. A cannot demand consideration for his services.

2. From the Promisee or any other Person: Consideration may move from the Promisee or any other Person, i.e., even a stranger. This means that as long as there is a consideration for a promise it is immaterial who has furnished it. But a stranger to the consideration will be able to sue only if he is a party to the contract.

3. Act, Abstinence or Forbearance or a return promise: Therefore consideration may be,• An act: Doing something. • An abstinence or forbearance: Refraining from doing something.

Case law: L filed a suit against T his tenant, for possession of premises and arrears of rent. The suit was decreed in his favor. In execution, L obtained an order for attachment of movables of T. In consideration of T agreeing not to appeal against the decree, L allowed him one month’s time to pay the balance of decretal amount and vacate the premises. Held, the agreement was valid.

4. Past, Present or Future:a. Past consideration: when the consideration by the party for the present promise

was given in the past, i.e., before the date of promise, it is said to be past consideration.

b. Present consideration: when consideration is given simultaneously with promise, i.e., at the time of the promise, it is said to be present consideration. E.g., cash sale.

c. Future consideration: when consideration for one party to the other is to pass subsequently to the making of the contract, it is future consideration.

5. It need not be adequate: The law requires that the contract must be supported by consideration and not the adequate consideration. The adequacy of the consideration is to be determined by the parties to the contract at the time of entering into it, but the court has no right to determine the adequacy of the consideration.

6. It must be real: although consideration need not be adequate, it must be real and of some value in the eye of law.

7. It must be lawful: The consideration given for an agreement must not be unlawful. A consideration to the contract must not be against Public Policy, Immoral and illegal

Legal Capacity to Contract

a. Minor Any person who is less than 18 years is called as Minor

POSITION OF MINOR’S AGREEMENT ( Effects/ Nature of minor agreement)

1. An agreement made with minor is altogether void – Contract with or by a minor is altogether void. The Act provides that a person who is a major is competent to contract. An agreement by a minor involves a promise on his part and he is incapable of giving a promise imposing a legal obligation.

2. Minor can be a beneficiary – Though a minor is not competent to contract. There is nothing, which prevents him from accepting benefits from other party. The minor though incompetent to contract may accept a benefit

3. Ratification on attaining majority is not allowed – As a minor’s agreement is void he cannot validate it by ratification on attaining majority. For instance, a minor borrows money and executes a promissory note

4. Minor can always plead minority - A minor’s agreement is void. Any money advanced to a minor on a promissory note or otherwise, cannot be recovered. Even when a minor procures a loan by falsely representing that he is full age, he can plead his minority in a suit intended to recover the amount from him

5. He cannot enter into a contract of Partnership: But he can be a beneficiary.6. He cannot be adjudged insolvent: Because he is incapable of entering into

contracts.7. He can be an agent along with guardian8. Contract by guardian

b. Unsound PersonA person of unsound mind is incapable of entering into a contract. An agreement by a person who is not of sound mind is void.

- Incapable of understanding the contract - forming a rational judgment as to its effect upon his interest.

c. CONTRACT BY DISQUALIFIED PERSONS – Besides minors and persons of unsound mind, there are also other persons who are disqualified from contracting, partially or wholly. Contracts by such person and with such persons are void

1. An alien enemy during war cannot enter into a contract with an Indian subject. He cannot sue in Indian Courts without a licence from the Central Government Contracts made before the war may either be suspended or disallowed if they are against the public policy or if their performance would benefit the enemy.

2. Similarly, a statutory corporation cannot enter into a contract which is ultra vires its memorandum. Likewise, municipal bodies are disqualified from entering into contracts which are not within their statutory powers.

3. Sovereign States, Ambassadors and Diplomatic Couriers enjoy certain special privileges with the result that they cannot be legally proceeded against in Indian Courts and Indian Citizen has to obtain a prior sanction of the Central Government to enable him to sue them in our law courts. However, they can, at their will enter into contracts which may be enforceable in Indian Courts.

Insolvents: When a debtor is adjudged insolvent, his property vested in the official receiver or the official assignee. As such the insolvent is deprived of his power to deal in that property It is only the official receiver or the official assignee who can enter into contract in respect of that property and can sue and be sued on his behalf.

Convict: - A convict while undergoing imprisonment is incapable of entering into contract. This incapacity to contract comes to an end when the period of sentence expires or when he is pardoned.

FREE CONSENT

A. CoercionSection 15 of the Indian Contract Act 1872 defines ‘coercion’ as: “Coercion” is the committing, or threatening to commit, any act forbidden by the Indian Penal Code, 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 forbidding by the Indian Penal Code- Unlawful Detaining of property

Effects of Coercion:

1. The contact becomes voidable at the option of the aggrieved person/party. Therefore the aggrieved party/person has two options,

a. may compel the other party for specific performance (if deems fit) b. may set aside the contract

2. If the aggrieved party decides to set aside the contract he must restore any benefits received by him under such contract

A. Undue influence A contract is said to be induced by "undue influence" where the relation 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.

B. Fraud‘Fraud’ means and includes any of the following acts committed by a party to a contract (or with his connivance or by his agent) with intent to deceive another party thereto or 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 itto 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.

- A representation must be a fact- The representation must have been made with the intention of including the other party to act upon it- The party subjected to fraud must have suffered some loss

C. MisrepresentationMisrepresentation is incorrect or false statement but the falsity or inaccuracy is not due to any desire to deceive or defraud the other party. It is innocent. The party making it believes it to be true

Essentials: 1. The representation must be made innocently with an intention that it shall be believed to be true.2. Representation statement must be false and it must relate to the subject matter. 3. At the time of contract the false representation must be believed to be true by parties 4. No intention of the parties to deceive each other 5. It must occur before the execution of the contract 6. The parties must have acted according to the false information

D. MISTAKEMistake may be defined as an erroneous belief concerning something.

(I) MISTAKE OF FACTA mistake of fact may either be: (a) bilateral or (b) unilateral.

(a) Bilateral MistakeWhen both the parties to the agreement are under a mistake of fact essential to the agreement, the mistake is called a bilateral mistake of fact and the agreement is void.Example:A agrees to buy from B a certain horse. It turns out that the horse was dead atthe time of the bargain, though neither party was aware of the fact. The agreementis void.

The various cases which fall under bilateral mistake are as follows1. Mistake as to the subject matter: Where both the parties to an agreement are working

under a mistake relating to the subject-matter, the agreement is void. 2. Mistake as to the possibility of performing the contract: Consent is nullified if both

the parties believe that an agreement is capable of being performed when in fact this is not the case. The contract in such a case is void on the ground of impossibility

(b) Unilateral MistakeSection 22 reads, ‘‘A contact is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.’’

- Mistake is as to the nature of the contract- Mistake as to the quality of the promise- Mistake as to identify of the person contracted with

II Mistake of Law

- Mistake of law of the land- Mistake of foreign law

DISCHARGE OF CONTRACTS

A. BY PERFORMANCE

The obvious mode of discharge of a contract is by performance, that is, where the parties have done whatever was contemplated under the contract, the contract comes to an end. Thus where ‘A’ contracts to sell his car to ‘B’ for Rs. 85,000 as soon as the car is delivered to ‘B’ and ‘B’ pays the agreed price for it, the contract comes to an end by performance.

B. BY MUTUAL CONSENT (Section 62)If the parties to a contract agree to substitute a new contract for it, or to rescind it or alter it, the original contract is discharged.

A contract may terminate by mutual consent in any of the followings ways:1. Novation‘Novation’ means substitution of a new contract for the original one.

Examples:A who owes B Rs. 20,000 enters into an arrangement with him thereby giving B a mortgage of his estate for Rs. 15,000. This arrangement constitutes a newcontract and terminates the old.

2. RescissionRescission means cancellation of all or some of the terms of the contract. Where parties mutually decide to cancel the terms of the contract, the obligations of the parties there under terminate.

3. AlterationIf the parties mutually agree to change certain terms of the contract, it has the effect of terminating the original contract. There is, however, no change in the parties.

4. Remission (Section 63)Remission is the acceptance of a lesser sum than what was contracted for or a lesser fulfillment of the promise made.

Examples: (1) A owes B Rs. 5,000. A pays to B who accepts in satisfaction of the whole debtRs.

2,000 paid at the time and place at which the Rs. 5,000 were payable. The whole debt is discharged.

5. MergerA contract is said to have been discharged by way of ‘merger’ where an inferior right possessed by a person coincides with a superior right of the same person.

C. BY SUBSEQUENT IMPOSSIBILITY (Section 56)

Impossibility in a contract may either be inherent in the transaction or it may beintroduced later by the change of certain circumstances material to the contract.

Examples of Inherent ImpossibilityA promises to pay B Rs. 50,000 if B rides on horse to the moon. The agreementis void.

Contract is deemed to have become impossible of performance1. Destruction of subject-matter of the contractWhere the subject-matter of a contract is destroyed, for no fault of the promisor, the contract becomes void by impossibility.

2. By the death or disablement of the partiesWhere the performance of the contract must be executed personally by the promisor, his death or physical disability to perform shall render the contract void and thus exonerate him from the obligation.

3. Declaration of warIf war is declared between two countries subsequent to the making of the contract, the parties would be exonerated from its performance

D.BY OPERATION OF LAW

Discharge under this head may take place as follows:1. By death: Death of the promisor results in termination of the contract in cases involving personal skill or ability.

2. By insolvency: The Insolvency Acts provide for discharge of contracts under certain circumstances. So, where an order of discharge is passed by an Insolvency Court, the insolvent stands discharged of liabilities of all debts incurred previous to his adjudication.

3. By merger: When between the same parties, a new contract is entered into, and a security of a higher degree, or a higher kind is taken, the previous contract merges in the higher security, for example, a right of action on an ordinary debt which would be merged in the right of suing on a mortgage for the same debt.

4. By the unauthorised alteration of terms of a written document: Where any of the parties alters any of the terms of the contract without seeking the consent of the other party to it, the contract terminates._ E. BY BREACH OF CONTRACTA contract terminates by breach of contract. Breach of contract may arise in two ways:(a) Anticipatory breach, and (b) Actual breach.

a. Anticipatory Breach of ContractAnticipatory breach of contract occurs, when a party repudiates it before the time fixed for performance has arrived or when a party by his own act disables himself from performing the contract.Examples(1) A contracts to marry B. Before the agreed date of marriage he married C. B isentitled to sue A for breach of promise

b. Actual Breach of ContractThe actual breach may take place (a) at the time when performance is due, or (b) during the performance of the contract.

Actual breach of Contract, at the time when performance is due. If a person does not perform his part of the contract at the stipulated time, he will be liable for its breach.

REMEDIES FOR BREACH OF CONTRACT

As soon as either party commits a breach of the contract, the other party becomesentitled to any of the following reliefs1. Rescission of the Contract.2. Damages for the loss sustained or suffered.3. A decree for specific performance.4. An injunction.5. Suit on Quantum Meruit

1. Rescission of the Contract./ Cancellation When a breach of Contract is committed by one party, the other party may sue to treat the contract as rescinded. In such a case, the aggrieved party is freed from all his obligations under the contract.Example: A promises B to supply 100 bags of rice on a certain date and B promises to pay the price on receipt of the goods. A does not deliver the goods on the appointed day, B need not pay the price.

2. Damages, generally speaking, are of four kinds:A. Ordinary Damages,B. Special Damages,C. Vindictive, or Punitive or Exemplary Damages, andD. Nominal Damages.

A. Ordinary Damages (Section 73)Ordinary damages are those which naturally arose in the usual course of things from such breach. The measure of ordinary damages is the difference between the contract price and the market price at the date of the breach.

B. Special Damages (Section 73)Special damages are claimed in case of loss of profit, etc. When there are certain special or extraordinary circumstances present and their existence is communicated to the promisor, the non-performance of the promise entitles the promisee to not only claim the ordinary damages but also damages that may result therefrom.

c. Nominal DamagesNominal damages are awarded in cases of breach of contract where there is only atechnical violation of the legal right, but no substantial loss is caused thereby. The damages granted in such cases are called nominal because they are very small, for example, a rupee or a shilling.

3.Specific Performance

Where damages are not an adequate remedy, the court may direct the party in breach to carry out his promise according to the terms of the contract. This is called ‘specific performance’ of the contract.

Some of the instances where Court may direct specific performance are: a contract for the sale of a particular house or some rate article or any other thing for which monetary compensation is not enough because the injured party will not be able to get an exact substitute in the market.

4. InjunctionInjunction means an order of the Court. Where a party is in breach of a negative term of contract (i.e., where he does something which he promised not to do), the Court may, by issuing an order, prohibit him from doing so.

5. Quantum MeruitThe phrase ‘Quantum Meruit’ means as much as is merited’ (earned). The normal rule of law is that unless a party has performed his promise in its entirely, it cannot claim performance from the other. To this rule, however, there are certain exceptions on the basis of ‘Quantum Meruit’. A right to sue on a ‘quantum meruit’ arises where a contract, partly performed by one party, has become discharged by the breach of the other party.