INDIAN CONTRACT ACT, 1872

Act lays down principles of - formation, - performance, - enforceability of contracts

And, rules relating to Special type of contracts, viz., indemnity, guarantee, bailment,

pledge & agency.

Law of ContractCONTRACT – S.2(h)

“An agreement enforceable by law” or, an agreement made with an intention to create a legal obligation

(enforceable by law)

AGREEMENT – S.2(e) “Every promise and every set of promises

forming the consideration for each other”

PROMISE: S.2(b) “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”

An agreement is an accepted proposal.

What is a Contract?

Sec.2(h) – A contract is an agreement enforceable by law.

The contract must be definite & its purpose should create a legal relationship.

The agreements must satisfy two things viz., i) Intention to be bound, &ii) consideration

Essentials of Contracts 1. Agreement 2. Legal Obligation 3. Free & Genuine Consent 4. Parties Competent to Contract 5. Lawful Consideration 6. Lawful Object 7. Agreement not declared Void 8. Certainty of Meaning 9. Possibility of Performance 10. Necessary Legal formalities

Agreement Has 2 elements viz., i) A proposal/offer, and ii) Acceptance of that proposal/offerOfferor and Offeree – 2 partiesSame thing in same sense – consent A contract which is an agreement enforceable

in law has two elements viz; i) An agreement ii) Legal obligation

AgreementOffer or Proposal When a person indicates to another, his willingness to do or abstain from doing

anything, with a view to obtaining an assent of that other person to such act or abstinence,

he said to make a proposal or offer

Acceptance when the person to whom the proposal is

made signifies his assent thereto, the proposal is said to be accepted.

In other words, acceptance is the manifestation of the offeree of his consent to the terms of the offer.

Legal Obligation

Intention to create legal relationship

Belfour Vs Belfour Case (1919) –Social/Domestic agreements not contract. Parties didn’t intend to create legal relations

Commercial or social, domestic agreements must have some presumptions to show legal obligations to be a contract

Free & Genuine Consent

Contract should not be obtained by - misrepresentation - Fraud - Undue influence - Coercion - mistakeIf any of above flaw exists in a contract it will

be held as void

Parties Competent to Contract

Who is a competent party?

Of majority age i.e., not a minor Of sound mind – lunatic, idiot,

drunkenness, status Not disqualified by any law to which he is

subject

Flaw if any, contract becomes unenforceable, except in exceptional circumstances

Lawful ConsiderationIs price for the promise of the other – need

not be in terms of money

If not supported by consideration – bare consideration – nudum pactum – contract not enforceable

Must be real & lawful

Each party must promise something and receive something

Lawful Object

OBJECT Not disapproved by lawDoes not defeats any provision of lawWhere it is not fraudulentNot injurious to another person or propertyNot immoralNot opposed to public policy

Agreement not declared VoidAlthough an agreement contains all the

elements yet, certain agreements are declared illegal or void agreements, such as;Restraining marriageRestraining tradeRestraining legal proceedingsWagering agreements

Certainty of Meaning

Specific (say cloth, oil type)

Shouldn’t be vague

Punit Beriwala Vs. Suva Sanyal (1998) – Agreement to agree

Possibility of Performance

Agreement to do an act impossible –cannot be enforced

Eg; Discover treasure by magic

Based on the maxim – Law does not compel to do what is impossible

(Lex non cogit ad aimpossibilia)

At the time of entering into contract, was capable of being performed, but subsequently become impossible or unlawful – Known as doctrine of supervening impossibility, doctrine of frustration

Necessary Legal formalitiesContract may oral or in writingHowever, certain cases documented, comply

with formalities of writing, registering, attestation, stamp duty

Made in presence of a witnessAgreements which must be writing - time barred debt - arbitration agreement - lease agreement for more than 3 yrs. - contract of insurance - negotiable instruments - memorandum & article of association - transfer of immovable property & so on

Necessary Legal formalities

Contracts which must be registered: - promise w/o consideration out of natural

love & affection between parties of near relation

- documents u/s 17 of Registration Act - transfer of immovable properties under

TPA,1882 - Memorandum & Art. Of Association,

Mortgage and Charges under Co.Act,1956

Necessary Legal formalities Instruments those chargeable under

Indian Stamps Act,1894 - Negotiable instruments - Insurance Policy - Partition Deed - Share/ Debenture Certificates - Pledge - Mortgage Deeds Unstamped or under stamped ,

improperly stamped instruments not admitted in evidence

All essential elements must exist together in a contract, to be a legal and valid agreement or simply called a contract

But, if any one of the elements is missing, the contract is either voidable, void, illegal or unenforceable in law

Types of Contracts

Contracts are classified in terms of their :

1. Validity or enforceability

2. Mode of formation

3. Performance

1. Validity or enforceable contracts

Valid Contract - Has all essential elements

Voidable Contract

Void Contract

Illegal Contract

Unenforceable Contract - Some elements are missing

Voidable Contract

Affected by a flaw, say misrepresentation, fraud, coercion, undue-influence, mistake

which may repudiated at the option of of aggrieved party

Till it is set aside, it remains valid & binding (patient-medical attdt-undue infl.)

Void Contract - S.2(i)An agreement not enforceable by either

of the parties to it, is void (restitution)

Such agreement is w/o any legal effect ab-initio (eg; engaging auditorium, destroyed – fire before function)

eg, contract with minor, mistake of fact, unlawful object/consideration, w/o consideration, restraint of marriage/trade/legal proceedings, uncertain /wagering/impossible agreements, agreement to entering into agreement in future

Contract valid at formation, becoming void later – subsequent impossibility/illegality

Illegal Contract

Where object or consideration is:

Forbidden by law Defeats provision of a law (Contract for wheat-Govt. ordnanace-sale wheat only from fair price shop)

Fraudulent Involves injury to person/property Immoral under law Opposed to public policy Wagering agreement (in Mumbai)

(agreemnt div. of gains acqrd by fraud/promise-employt for payment)

(A bets with B, losses, reqst C 4 loan, C pays B/settles A’s loss. C cannot recover from A)

Unenforceable Contract

They are neither void or voidable

Cannot be enforced in court as it lacks some item of evidence such as writing, registration or stamping

Unstamped /under stamped, if stamp required for merely revenue, defect can be cured by affixing required stamp/penalty.

Technical defects cannot be cured. Remains unenforceable eg, un-stamped negotiable instrument

2. Mode of FormationExpress Contract Where the terms of the contract are

stated clearly in words – written or spoken

Implied Contract Where terms of contract are inferred from

conduct of parties or circumstances (Bus travel)

Quasi-contracts (Essence of a valid contract is on agreement)

Sometimes, obligation is created by law, where an obligation is imposed on a party & action is allowed to be brought by another party

(providing necessaries for minor/ leaving goods in another’s place by mistake-use)

3. PerformanceExecuted Contract Where parties have completely performed their

obligations & nothing remains to be done

Executory Contract Where parties have still to perform their share of

obligation; something has been left out still to be performed by both the parties. (Union of India Vs. Chaman lal Loona(1957)

Uni-lateral (pays bus fare-one party has fulfilled his part)

Bi-lateral (A contract is a contract from the time it is made & not from

the time of performance is due.Performance can be at the time contract is made or it can be postponed either in full or part)

OFFER

‘When one person signifies to another, his willingness to do or to abstain from

doing anything, with a view to obtaining the consent of that other person towards such act or abstinence, he is said to be

making an offer or proposal.’

Types of Offer

Express Offer Implied Offer Specific Offer General Offer

The offer is the starting point in the process of making an agreement

Every agreement begins with one party offering to do/sell something or to provide a service etc

Essentials of an Offeri) Terms of must be definite, unambiguos, & certain or

capable of being made certain ii) Every offer should be communicated, ie., offeree

must have the knowledge of the offer iii) An offer cannot contain a term, the non-compliance

of which would to amount to acceptanceiv) Offer must have a intention of creating a binding,

mere statement does not amount to an offerv) Must have intention to create a legal relationshipvi) Must be made with a view to obtain assent theretovii) If no time is fixed within which the offer is to be

accepted, the offer does not remain open for an indefinite period

viii) A offer must be distinguished from a mere invitation to offer

ix) Offer may be ‘positive’ or ‘negative’x) Two identical cross-offers do-not result in a contract

AcceptanceDefinition:‘An acceptance is the act of manifestation by the

offeree of his intention to the terms of offer and willingness to be bound by the terms of the

offer communicated to him.’

An agreement emerges from the acceptance of an offer.

Acceptance is the second stage of a contract.

Essentials of Valid Acceptance

i) Must be absolute & unqualified & according to the terms of offer

ii) To be made by the offereeiii) Communicated to the offeroriv) After receiving the offerv) Before the offer lapses-within the time

periodvi) Mode of Communication, if any, must be

as prescribed in the offervii) In case of rejection of offer – a renewal

of offer required

Consideration Definition:

It is the price for which the promise of the other is bought.

A contract is basically a bargain between two parties, each receiving ‘something’ of benefit to them. This ‘something’ is described as consideration.

Eg., Price for the goods sold

Essentials of Consideration

Essentials for a valid Consideration:i) At the desire of the promisorii) May move from the promisee or any other

personiii) Must be an act, abstinence or promiseiv) May be past ,present or futurev) Need not be adequate vi) Must be real & competentvii) Must be legal

No Consideration, No Contract

The general rule : ‘ex-nudo-pacto non-oritur actio’ i.e.,Out of a

naked pact, no cause of action can arise.An agreement without consideration is void.

A promise in order to be enforceable must have consideration, because only a consideration can establish legal obligation & create legal rights between the parties

No Consideration, No Contract

Consideration is the very essential element of any contract to create legal rights between the parties

The law insists on existence of consideration if a promise is to be enforced as legal obligation

The law provides no remedy to compel a party to perform his promise on an agreement made without consideration

A promise without consideration is null & void.

Exceptions to the RuleRule: (Sec.25) Agreement without consideration is

voidHowever, consideration not necessary in:i) Agreement made on account of love &

affectionii) Compensation for past voluntary serviceiii) Promise to pay a time-barred debtiv) Giftsv) Agency

Doctrine of Privity of Contract

Relationship subsisting between the parties with contractual obligations.

Implies mutuality of will & creates a legal bond or tie between the parties

It has 2 consequences:1. Person not party to a contract cannot sue,

even though the contract is for his benefit & he has provided consideration.

2. A contract cannot confer rights or impose obligation arising under it on any person other than the parties to it. Eg, if there is contract between A & B, C cannot enforce it.

Capacity of PartiesEssential element of enforceability agreement:Parties should possess contractual capacity (S.10)Contractual Capacity: Not defined A person who is major, of sound mind, and

is not disqualified from contracting by law is competent to enter into a valid contract

(S.11) – inference of contractual capacity: contracting parties should be capable of understanding it and of form a rational judgment of its effect on their interest. They should also not be disqualified by law to enter into a contract

Persons Not Competent to Contract

(S.11)Mental Deficiencyi) Minorsii) Of Unsound Mind a) Idiots b) Insane c) Drunkards/intoxicated

Legal Disabilityiii) Disqualified by law a) Aliens b) Foreign sovereigns & ambassadors c) Convicts

d) incorporated institutions like joint stock companies, societies, trusts etc. e) insolvents f) married women (prior to 1956)

Minor

A contract with a minor is void ab-initio (In England- minor contract is voidable at the option of minor)A minor cannot be asked to refund any benefit received under

a void agreementHe is not estopped to plead minority even where he falsely

represents himself to be of full ageA minor ‘s contract cannot be ratified by him on attaining

majorityHe cannot be a partner in a partnership firm. He can be

admitted to the benefits of an already existing partnership Minor can be a promisee or a beneficiary, He cannot bind

himself by a contract, but there nothing in Act which prevents him from making other party to be bound to the minor.

His estate is liable to a person who supplies necessaries of life to him

His parents/guardians are not liable to a minor’s creditor’s on his breach of contract

He can be an agent

Free Consent(S.13) defines consent as “ Two or more persons

are said to consent when they agree upon the same thing in the same sense.”

Free Consent (S.14): consent is said to be free when it is not caused by –

i) Coercionii) Undue influenceiii) Fraudiv) Misrepresentationv) Mistake

A contract to be valid it is not only necessary that parties consent, but also that they consent freely

Where there is consent, but not free consent, the contract is voidable at the option of the party whose consent was not free

Coercion

Coercion is a committing or threatening to commit some act which is contrary to law

Consent is said to be caused by coercion when it is obtained by either of the following acts:

i) Committing or threatening to commit any act forbidden by the IPC, or

ii) Unlawful detaining or threatening any property

Duress: English equivalent of coercionConsequence of Coercion: when consent is caused

by coercion, the contract is voidable at the option of the party whose consent was obtained.

Undue Influence

A contract is said to induced by undue influence where:

i) A party is in a position to dominate the will of the other, and

ii) Is in a position to obtain unfair advantage over the other

Dominating position may be:i) One dominating, holds a real or apparent authority

over other eg. Master-servantii) Dominator stands in fiduciary relation to other eg,

father –soniii) Dominator makes a contract with a person whose

mental capacity is temporarily/permanently affected eg, old illiterate person

It’s a voidable contract

FraudFraud is a misrepresentation of facts made

to induce to enter into a contract with intention to deceive or cheat.

includes:a) The suggestion, as a fact, of that which

is not true by one who does not believe it to be true.

b) Active concealment of a fact by one having knowledge or belief of the fact

c) A promise made without intention of performing it

d) Any other act fitted to deceivee) Any such act or omission which law

declares to be fradulent

MisrepresentationMisrepresentation means an innocent mis- statement

of fact to the contract made by one party to induce the other to enter into a contract. (no desire of deceiving or defraud)

Classified into 3 groups: 1. A +ve assertion, in a manner not warranted (by

the information of the person making it), of that which is not true, though believes it to be true.

2. Any breach of duty which, without intent to deceive gives advantage to the person committing it, by misleading another to his pre-judice

3. Causing, however innocently, a party to an agreement to make a mistake as to the substance of thing which is subject of agreement

MisrepresentationConsequences:Party wronged can;1. Avoid agreement, or 2. Insist contract be performed & he be put in position in

which he would have been, if the representation made had been true

Unlike fraud, misrepresentation doesn’t entitle a party to claim damages (subject to exceptions)

Exceptions: Breach of warranty of authority of an agent. Where agent

believes that he has authority to represent the principal, while in fact he has no such authority, agent liable to damages, though he is guilty of innocent representation

Negligent representation made by one person to another between whom a confidential relation exists, solicitor – client, father – daughter.

However, if the party whose consent was caused by misrepresentation had means of discovering truth with ordinary diligence, he has no remedy.

Distinction between Misrepresentation & Fraud

1. Fraud is committed with intention to deceive while entering into contract, whereas in misrepresentation is due to innocence, without intention to deceive or gain advantage.

2. Both voidable at the option of the wronged. But, in case fraud, party wronged gets additional remedy to sue for damages. In misrepresentation claim for damages arises only in exceptional cases.

3. In both cases contract can be avoided. However, in case of misrepresentation, if the

party whose consent is caused had the means of discovering the truth with ordinary diligence, contract cannot be avoided.

MistakeMistake means erroneous belief or wrong notion

concerning some fact.

Consent is not free when agreement is entered into under mistake. Parties entering into contracts should not be under any error

They must agree on the same thing in the same sense‘Consensus ad-idem’ must be presentSalomon describes contracts as “error in cause”

Consequence:Mistakes render a contract void. Party complaining of

the mistake may repudiate it, i.e., need not perform it.If executed, party receiving any advantage must restore

, or compensate for it, as soon as the contract is discovered to be void.

Types MistakesTwo types:1. Mistake of Law2. Mistake of Facts

Mistake of Lawi) Mistake of the law of the landii) Mistake of foreign lawiii) Mistake of private right of the parties

Mistake of FactI) Bilateral mistakeII) Unilateral mistake

Mistake of Law

1. Mistake of law of land: The rule is “ignorance of law is no excuse” A contract is not voidable because it was caused by a mistake

as to any in force in India.

2. Mistake of foreign law:The maxim “ ignorance of law is no excuse” applies only to

law of the country & not to foreign law.The mistake of foreign law is treated as mistake of factS.21 – “A mistake as to a law not in force in India has the

same effect as a mistake of fact.”

3. Mistake of Private right of the parties:Mistake of the private right of the parties is also

excusable. Such mistake stands on the same footing as the mistake of fact & the contract can be avoided on the ground of mistake

Mistake of Fact

1. Bilateral mistake: When both parties are under a mistake of

fact essential for the agreement, the mistake called bilateral mistake of fact & the agreement is void

(An erroneous value of the thing which forms subject matter is not to be deemed a mistake as to matter of fact)

Bilateral mistake may be:A) Mistake as to the subject matterB) Mistake as to the possibility of performance

Mistake of Fact

Mistake as to the subject matterThe subject matter may be of reg:

i) Existenceii) Identityiii) Titleiv) Qualityv) Quantityvi) Price

Mistake as to the possibility of performance If both parties believe that the agreement is

capable of being performed though it is not, the agreement is void

Mistake of FactUnilateral mistake:When one of the contracting parties is at mistake it

is known as unilateral mistake. Generally in such situation the contract is not invalid.

S.22- “A contract is not voidable merely because it was caused by one of the parties to it under a mistake as to a matter of fact”

A party cannot be allowed to avoid a contract merely on the ground of his own mistake which may be due to his own negligence or carelessness

However, there are exceptions

Mistake of FactExceptions (Unilateral mistakes):

1. Mistake as to the identity of the person contracted with

2. Mistake as to nature of the contract

3. Mistake as to quality of the promise

Quasi Contract“Under certain circumstances, the law

imposes, certain rights & obligations similar to that arises from a true contract, even though there is no

contract, express or implied, between parties.”

Such contracts are termed as quasi- contracts (Dr.Jenks)

This is based on maxim that ‘no man must grow rich out of another person’s cost’.

It is based on equitable principal, ‘ that a person shall not be allowed unjustly to enrich himself at the expense of another’

Kinds of Quasi ContractsClaim for necessaries supplied to a person

incapable of contracting on his account(S.68)Reimbursement of a person paying money

due by another in payment of which he is interested (S.69)

Obligation of person enjoying benefit of a non-gratuitous act (S.70)

Rights and liabilities of the finder of lost goods(S.71)

Liability of persons to whom money is paid or things delivered by mistake or coercion(S.72)

Distinction between Quasi & General Contracts

In General Contract obligation is created by the consent of parties , whereas in quasi contract it is imposed by law.

As far as claims for damages – there is similarity between because in case of breach of a quasi contract (S.73) ensures same obligations as of general contract

The injured party is entitled to same compensation on default

Legality of Object In a contract consideration and object have very

little difference. One affects the other. An agreement will not be enforceable if its

object or consideration is unlawful

According to (S.23) the consideration and the object of an agreement are unlawful in following cases;

1. If it is forbidden by law2. If is of such a nature that if permitted, it

would defeat provisions of any law3. If it is fraudulent4. If it involves or implies injury to the

person or property of another5. If the court regards it as immoral or

opposed to public policy

Performance of ContractA contract creates obligations‘Performance of Contract’ means carrying

out these obligations(S.37) parties to contract must either perform

or offer to perform their respective promises, unless such performance is dispensed or excused under provisions of the Act or any other law

Tender or Offer of Performance

When a promisor offers performance of his obligation at the proper time & place, it is known as tender

(S.38) If valid tender is made & is not accepted by the promisee, the promisor shall not be responsible for non-performance (nor shall he loose his rights under the contract)

Conditions for a Valid Tender

1. Must be unconditional

2. Must be made at proper time & place, where promisee has reasonable opportunity of ascertaining that the promisor is able & willing there and then to do the whole of his promise

3. The promisee must have reasonable opportunity to see that the thing offered is the thing contracted for

Persons entitled to demand performance

1. Promisee

2. Legal Representative

3. Joint Promisee

4. Third Party

Persons bound to perform1. By the Parties (S.37)

2. Promisor (S.40)

3. Representatives (S.37)

4. Agent (S.40)

5. Third Party (S.41)

Rule: The personal cause of action dies with person concerned

Contracts which Need not be Performed

1. If the parties mutually agree to substitute the original contract by a new contract or rescind or alter it (S.62)

2. If promisee dispenses with or remits wholly or partly or extends the time or accepts any satisfaction for it (S.63)

3. If the person at whose option the contract is voidable, rescinds it (S.64)

4. If promisee neglects or refuses to afford promisor reasonablefacility for performance (S.67)

Termination of ContractTermination is the discharge of contractual

relationship between partiesModes of Termination of Contract:1. By Performance or Tender2. By Mutual consent3. Subsequent Impossibility of Performance4. By Operation of Law 5. By lapse of Time6. By Breach of Contract

Termination of Contract

1. By Performance or Tender Where parties have fulfilled whatever

contemplated – contract ends

Tender: Tender has the same effect of as performance. If promisor tenders performance of his promise but the other party refuses to accept, the promisor stands discharged of his obligation

Termination of Contract2. By Mutual consent:

i) Novation ( Substitution)

ii) Rescind (Cancel)

iii) Alteration

iv) Remit (Lesser fulfillment)

v) Waiver (Relinquish)

vi) Merger (discharge by a inferior right to superior right)

Termination of Contract3. Subsequent Impossibility:Inherent – void ab-initioVoid due to subsequent impossibility (Doctrine of

frustration)i) Destruction of subject matter of contract (for no fault of

promisor)ii) By death or disablement of the parties (personal causation)iii) By subsequent illegalityiv) By declaration of warv) Non-existence of particular state of things

(Exceptions where impossibility does not render contract as void: difficulty-expensive, commercial loss, failure of third person, strike-lockout-civil disturbance, failure of an object)

Termination of Contract4. By Operation of Law:

i) By death

ii) By insolvency

iii) By merger

iv) By the unauthorised alteration of terms

Termination of Contract

5. By lapse of Time: Contracts must be performed within the period of

limitation (Limitation Act)

The Limitation Act prescribes different limitation period for different kinds of contract

If contract is not performed & the party aggrieved does not enforce his rights within limitation period, he is debarred from enforcing the contract

After expiry period court will not enforce contract, thus contract gets discharged

Termination of Contract

5. By Breach of Contract:

Refusal of performance is a breach. When one party refuses to perform, other party is discharged from its liability

i) Anticipatory breach- breach before the due date of actual performance by refusal to perform or does an act which makes the performance impossible

Consequences of anticipatory breacha) Rescind & sue for damages at onceb) Treat contract as operative & wait for time of

performance & hold party liable for non-performance‘anticipatory breach’ does not by itself become

discharge of contract. Discharge becomes effective on party aggrieved elects to rescind the contract

Termination of Contractii) Actual breach – a) at the time when performance is dueb) During the course of performance

When promisor offers to perform subsequently, whether it should be accepted or refused by the promisee & sue for breach would depend on whether

time was an essence of the contractIf time is an essence of the contract is voidable at the

option of the promiseeIn case time is not essence of contract, it is not voidable,

the promisee is entitled to compensation for breach

Remedies for Breach of Contract

The relief available are:

i) Rescission

ii) Damages for loss sustained

iii) Decree for Specific Performance

iv) Injunction

v) Suit on ‘Quantum Meruit’

Remedies for Breach of Contract

i) Rescission Aggrieved party may sue to treat contract as rescinded

Aggrieved party is freed from all liabilities under the contract

Aggrieved party is entitled to compensation(S.75) for loss sustained on breach of contract

ii) Damages

a. Ordinaryb. Specialc. Vindictive /punitive/exemplaryd. nominal

Remedies for Breach of Contract

iii) Specific Performance: Where damages is not a adequate remedy,

court may direct the party to breach to carry out his promise

S.P not granted- a) Monetary compensation is adequate, b) Contract of Personal nature – to marry, c) Contract beyond objects laid in Mem. of Association

iv) Injunction:A party to breach of negative terms of contract (party does

something which he is not supposed to do), Court may prohibit him from doing so, through an order known as injunction

Remedies for Breach of Contract

v) Suit on ‘Quantum Meruit’:

The phrase means ‘as much as is merited (earned)’

Rule- A party which has not performed its promise to its entirety, cannot claim performance from the other

However, there is an exception to this rule on the basis of ‘Quantum Meruit’

Right to claim/sue on ‘Quantum Meruit’ arises where a contract partly performed has been discharged by the breach of the other party