Indian Contract

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Indian Contract ActIndian Contract Act


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CONTRACTCONTRACT

A contract is an agreement made betweenA contract is an agreement made between

two or more parties which the law willtwo or more parties which the law will

enforce.enforce.

A Contract is an agreement enforceable byA Contract is an agreement enforceable by

law. sec 2(h)law. sec 2(h)

CONTRACT = AGREEMENT + ENFORCEABILITYCONTRACT = AGREEMENT + ENFORCEABILITY


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AGREEMEAGREEME

NTNT Every promise and every set of promises,Every promise and every set of promises,

forming consideration for each other. forming consideration for each other. sec 2(e)sec 2(e)

Agreement = Offer + AcceptanceAgreement = Offer + Acceptance


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CONSENSUS ADCONSENSUS ADIDEMIDEM

The essence of an agreement is theThe essence of an agreement is the MeetingMeeting

of the Mindsof the Minds of the parties in full and finalof the parties in full and final

agreement .agreement .

An agreement, to become a contract, mustAn agreement, to become a contract, must

give rise to agive rise to a Legal ObligationLeg

al Obligation ..

OBLIGATIOBLIGATIONON


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An OfferAn Offer

When one person signifies to another hisWhen one person signifies to another his

willingness to do or to abstain from doingwillingness to do or to abstain from doinganything, with a view to obtaining the assentanything, with a view to obtaining the assent

of that other to such act or abstinence, he isof that other to such act or abstinence, he is

said to make a proposal. Sec 2(a)said to make a proposal. Sec 2(a)


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An AcceptanceAn Acceptance

When a person to whom the proposal isWhen a person to whom the proposal ismade signifies his assent thereto, themade signifies his assent thereto, the

proposal is said to be accepted. Sec 2(b)proposal is said to be accepted. Sec 2(b)


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Some vital points :Some vital points :

All contracts are agreements but allAll contracts are agreements but all

agreements are not contracts.agreements are not contracts.

A legal obligation having its source in anA legal obligation having its source in an

agreement only will give rise to a contract.agreement only will give rise to a contract.

Law of contracts creates rights inLaw of contracts creates rights in personampersonam

nor rights innor rights in remrem ..


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Agreement VsAgreement VsContractContract An agreement is a promise or set of promises (s). A contract is

essentially an agreement, i.e., a promise or set of promise (s).

Differences

Enforceability An agreement may or may not be enforceable at law. For example,

social agreements are generally not enforceable while businessagreements are enforceable at law.

A contract is an agreement which is enforceable at law.

Effect An agreement is not always a binding on the concerned parties. A contract is always concluded and binding on the concerned parties,

Scope

All agreements are not contracts. All contracts are agreements.


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ESSENTIALS OF VALIDESSENTIALS OF VALIDCONTRACTCONTRACT Offer and acceptanceOffer and acceptance Intention to create legal relationshipIntention to create legal relationship Lawful considerationLawful consideration Capacity of partiesCapacity of parties Free and genuine consentFree and genuine consent Lawful objectLawful objectAgreement not declared VoidAgreement not declared Void Certainty & possibility of performanceCertainty & possibility of performance Legal formalitiesLegal formalities


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Free ConsentFree Consent

Consent is said to be free when it is not caused byConsent is said to be free when it is not caused by

any of the following :any of the following :

Coercion (sec 15)Coercion (sec 15) Undue Influence (sec 16)Undue Influence (sec 16)

Fraud (sec 17)Fraud (sec 17)

Misrepresentation (sec 18)Misrepresentation (sec 18) Mistake (sec 20 & 21)Mistake (sec 20 & 21)


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Coercion (sec 15)Coercion (sec 15)

Coercion is the commitment of threatening to commit any act forbiddenCoercion is the commitment of threatening to commit any act forbidden

by the Indian penal code or unlawful detaining or threatening to detainby the Indian penal code or unlawful detaining or threatening to detain

any property to the prejudice of any person whatever with the intentionany property to the prejudice of any person whatever with the intentionof causing the person to enter into an agreement.of causing the person to enter into an agreement.

Effect of coercionEffect of coercion :: An agreement under coercion is voidable at the option of the partyAn agreement under coercion is voidable at the option of the party

whose consent was so obtained.whose consent was so obtained.


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Undue Influence (sec 16)Undue Influence (sec 16) A contract is said to be induced by undue influence where the relations subsisting between theA contract is said to be induced by undue influence where the relations subsisting between the

parties are such that one of the parties is in a position to dominate the will of the other and usesparties 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 otherthat position to obtain an unfair advantage over the other ..

Ability to dominate the will of other party :Ability to dominate the will of other party : Such a will is said to exists where a person -Such a will is said to exists where a person -

Holds a real and apparent authority over the other eg, Income tax authority andHolds a real and apparent authority over the other eg, Income tax authority andassessee, police and accusedassessee, police and accused Stands in a fiduciary relation (relation of trust and confidence)Stands in a fiduciary relation (relation of trust and confidence)

Eg. Solicitor and client, spiritual guru and devotee, husband and wifeEg. Solicitor and client, spiritual guru and devotee, husband and wife Makes a contract with a person whose mental capacity is temporarily or permanentlyMakes a contract with a person whose mental capacity is temporarily or permanently

affected by reason of age, illness or mental or bodily distressaffected by reason of age, illness or mental or bodily distress The following relationships raise the assumptions of undue influence :The following relationships raise the assumptions of undue influence :

Parent and childParent and child

Guardian and wardGuardian and ward Trustee and beneficiaryTrustee and beneficiary Religious advisors and devoteesReligious advisors and devotees Doctor and patientDoctor and patient Solicitor and clientSolicitor and client Fianc and fianceFianc and fiance


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Burden of proof:Burden of proof: The plaintiff who wants to avoid the contract entered into underThe plaintiff who wants to avoid the contract entered into under

undue influence has to establish thatundue influence has to establish that The other party was in a position to dominate the willThe other party was in a position to dominate the will

The other party actually used the influence to obtain the consentThe other party actually used the influence to obtain the consent

on the contracton the contract

The contract is unreasonableThe contract is unreasonable

Effect of undue influence :Effect of undue influence : Contract is voidable at the option at the party whose consent isContract is voidable at the option at the party whose consent is

not freenot free


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Fraud (sec 17)Fraud (sec 17)

Fraud means and includes any of the following actsFraud means and includes any of the following acts

committed by a party to a contract or connivance or by hiscommitted by a party to a contract or connivance or by his

agent with the intent to deceive or to induce a person to enteragent with the intent to deceive or to induce a person to enter

into a contract .into a contract . The suggestion that a fact is true when it is not true and theThe suggestion that a fact is true when it is not true and the

person making the suggestion does not believe it to be true.person making the suggestion does not believe it to be true.

The active concealment of a fact by a person having knowledgeThe active concealment of a fact by a person having knowledge

or belief of the factor belief of the fact

A promise made without any intention of performing itA promise made without any intention of performing it Any other act aimed to deceiveAny other act aimed to deceive

Any such act of omission as the law specially declares to beAny such act of omission as the law specially declares to be

fraudulentfraudulent


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FraudFraud

There should be a suggestion as to a factThere should be a suggestion as to a fact

The fact suggested should not be trueThe fact suggested should not be true

The suggestion should have been made by the person who does notThe suggestion should have been made by the person who does not

believe it to be truebelieve it to be true

The suggestion should have been made by the person with an intentionThe suggestion should have been made by the person with an intentionof inducing the other party to enter into the contractof inducing the other party to enter into the contract

Contracts of Uberrimae Fidei :Contracts of Uberrimae Fidei :

Contracts on which law imposes a special duty to act with utmost faith toContracts on which law imposes a special duty to act with utmost faith to

disclose all material information. eg. Contracts of insurance, Companydisclose all material information. eg. Contracts of insurance, Companyprospectus inviting public to subscribe for shares, contract of sale ofprospectus inviting public to subscribe for shares, contract of sale of

land, contract of family arrangementsland, contract of family arrangements

Effects of fraud:Effects of fraud:

Voidable contractVoidable contract


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Misrepresentation (secMisrepresentation (sec18)18)

Misrepresentation is the innocent or unconscious presentation of wrongMisrepresentation is the innocent or unconscious presentation of wrongfacts by one party which are taken into account by the other party beforefacts by one party which are taken into account by the other party beforeentering into a contract.entering into a contract.

Sec 18 defines misrepresentation to be existingSec 18 defines misrepresentation to be existing When a person positively asserts that a fact is true when his informationWhen a person positively asserts that a fact is true when his informationdoes not warrant it to be, though he believes it to be so .does not warrant it to be, though he believes it to be so .

The misrepresentation should be made before the conclusion of theThe misrepresentation should be made before the conclusion of thecontract and with the intention of inducing the other party to act upon itcontract and with the intention of inducing the other party to act upon it

The other party should have acted upon the misrepresentationThe other party should have acted upon the misrepresentation

Consequences :Consequences : The aggrieved party may avoid or rescind the contract or accept theThe aggrieved party may avoid or rescind the contract or accept thecontract while insisting that he shall be placed in the position in which hecontract while insisting that he shall be placed in the position in which hewould have been if the representation made had been true.would have been if the representation made had been true.


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Mistake (sec 20 and 21)Mistake (sec 20 and 21)

Mistake may be of two types :Mistake may be of two types :

Mistake of LawMistake of Law Ignorance of law is no excuseIgnorance of law is no excuse (ignorantia juris non-excusat)(ignorantia juris non-excusat)

Mistake of law :Mistake of law :Mistake of the law of the countryMistake of the law of the countryMistake of foreign lawMistake of foreign lawMistake of private rightsMistake of private rights

Mistake of factMistake of fact Mistake of foreign law and mistake of private rightsMistake of foreign law and mistake of private rights

are treated as mistake of facts and may be declaredare treated as mistake of facts and may be declaredas void.as void.


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Bilateral MistakeBilateral Mistake

Bilateral MistakeBilateral MistakeAs per sec 20 where both the parties to an agreementAs per sec 20 where both the parties to an agreement

are under a mistake as to the matter of fact essential toare under a mistake as to the matter of fact essential tothe agreement . Such a contract is declared as void.the agreement . Such a contract is declared as void.

An agreement is void on ground of mistake if :An agreement is void on ground of mistake if : The mistake is mutualThe mistake is mutual

The mistake relates to a matter of fact essential to theThe mistake relates to a matter of fact essential to theagreement.agreement.

Bilateral mistake may be :Bilateral mistake may be :Mistake as to subject matterMistake as to subject matterMistake as to the possibility of performanceMistake as to the possibility of performance


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Mistake of factMistake of fact

Unilateral mistake :Unilateral mistake :Where one of the parties to the contract is under aWhere one of the parties to the contract is under a

mistake it is called Unilateral mistake. The one sidedmistake it is called Unilateral mistake. The one sidedmistake with regard to either the subject matter, termsmistake with regard to either the subject matter, terms

of contract or legal implications of the contractof contract or legal implications of the contract

Effect :Effect : Sec 22 provides that a contract is not voidable merelySec 22 provides that a contract is not voidable merely

because it is caused by one of the parties to it beingbecause it is caused by one of the parties to it beingunder a mistake of fact.under a mistake of fact.

In the following cases unilateral mistake will render aIn the following cases unilateral mistake will render acontract void :contract void : Identity of persons contracted withIdentity of persons contracted with Nature of contract or character of document that is beingNature of contract or character of document that is being

signedsigned


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CLASSIFICATION OFCLASSIFICATION OFCONTRACTSCONTRACTS

Classification according toClassification according to validityvalidity :: Valid Contract -Valid Contract - According to section 2(i), it isan agreement enforceable by

law, an agreement becomes enforceable by law when all the essentialelements of a valid contract

Void contract -Void contract - Section 2(j) defines: A contract which ceases to be enforceable

by law becomes void, when it ceases to be enforceable.

Voidable contract-Voidable contract- According to section 2(i), an agreement which isenforceable by law at the option of one or more of the parties thereto, butnot at the option of the other or others, is a voidable contract.

Unenforceable contract -Unenforceable contract - An unenforceable contract is one which is valid initself, but is not capable of being enforced in a court of law because of sometechnical defect such as absence of writing, registration, requisite stamp,etc., or time barred by the law of limitation.

Classification according toClassification according to formationformation Express contract -Express contract - Where both the offer and acceptance constituting an

agreement enforceable at law are made in words spoken or written, it is anexpress contract.

Im lied contract -Im lied contract - Where both the offer and acce tance constitutin an

A i ddi iA t i dditi


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A note in addition :A note in addition :Illegal Vs VoidIllegal Vs Void

Similarities - These agreements are not enforceable at law.

Differences - Scope

The illegal agreements are narrower in scope. All illegal

agreements are void. The void agreements are wider in scope. An agreement

may be void because of a reason other than illegality.

Effect on collateral transaction Collateral transaction of an illegal contract also becomes

illegal and contract cannot be enforced. Collateral transaction of an agreement which is void for a

reason other than illegality are enforceable at law.

Punishment Parties may be punished for making illegal agreement.

Being void does not make a contract punishable.


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Classification according toClassification according to performanceperformance Executed contract a contract where both the parties have duly fulfilled theirExecuted contract a contract where both the parties have duly fulfilled their

obligations in the contract.obligations in the contract.

Executory contract a contract where the work is not wholly performed or inExecutory contract a contract where the work is not wholly performed or inwhich something still remains to be done.which something still remains to be done.

Unilateral contract Unilateral contract a contract wherein at the conclusion of the contracta contract wherein at the conclusion of the contractthere is an obligation yet to be performed on the part of one party only.there is an obligation yet to be performed on the part of one party only.

Bilateral contract -Bilateral contract - a contract where there is obligation on the part of botha contract where there is obligation on the part of bothto do or to refrain from doing the particular thing. These are similar toto do or to refrain from doing the particular thing. These are similar to

executory contracts.executory contracts.

Classification according toClassification according to English LawEnglish Law Formal contractFormal contract Simple contractSimple contract

CLASSIFICATION OF CONTRACTSCLASSIFICATION OF CONTRACTS


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Void AgreementsVoid Agreements

Agreements by incompetent parties (sec 11)Agreements by incompetent parties (sec 11) Agreements made under a mutual mistake of fact (sec 20)Agreements made under a mutual mistake of fact (sec 20) Agreements the object or consideration of which is unlawfulAgreements the object or consideration of which is unlawful

(sec 23)(sec 23)

Agreements the object or consideration of which is unlawfulAgreements the object or consideration of which is unlawfulin part (sec 24)in part (sec 24) Agreements made without consideration (sec 25)Agreements made without consideration (sec 25) Agreements in restraint of marriage (sec 26)Agreements in restraint of marriage (sec 26) Agreements in restraint of trade (sec 27)Agreements in restraint of trade (sec 27) Agreements in restraint of legal proceedings (sec 28)Agreements in restraint of legal proceedings (sec 28) Agreements the meaning of which is uncertain (sec 29)Agreements the meaning of which is uncertain (sec 29) Agreements by way of wager (sec 30)Agreements by way of wager (sec 30) Agreements to do impossible acts (sec 56)Agreements to do impossible acts (sec 56)


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Exceptions to the Agreements inExceptions to the Agreements inrestraint of traderestraint of trade

Sale of goodwill. The seller of the goodwill of a business can berestrained from carrying on a similar business, within specified locallimits, so long as the buyer, or any person deriving title to the goodwillfrom him, carries on a like business therein, provided the restraint isreasonable in point of time and space (Exception to Sec. 27).

Partners agreements. An agreement in restraint of trade among thepartners or between any partner and the buyer of firms goodwill is validin certain circumstances.

Trade combinations. An agreement, the primary object of which is to

regulate business and not to restrain it, is valid. Thus, an agreement inthe nature of a business combination between traders or manufacturerse.g., not to sell their goods below a certain price, to pool profits or outputand to divide the same in an agreed proportion, does not amount to arestart of trade and is perfectly valid


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Restitution (sec 64 & 65)Restitution (sec 64 & 65)

Restitution implies restoration or return.Restitution implies restoration or return. Sec 65 gives a right of restitution under twoSec 65 gives a right of restitution under two

circumstances :circumstances :When an agreement is discovered to be voidWhen an agreement is discovered to be void

When a contract after its formation becomesWhen a contract after its formation becomes

subsequently voidsubsequently void

Sec 65 does not apply to persons who are whollySec 65 does not apply to persons who are wholly

incompetent to enter into contract.incompetent to enter into contract.

Sec 65 does not apply to agreements which wereSec 65 does not apply to agreements which were

known to be void when they were entered into.known to be void when they were entered into.


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Discharge of ContractDischarge of Contract

Discharge of contract meansDischarge of contract meansterminationtermination ofof rights andrights and

obligationsobligations arising out of aarising out of acontract.contract.


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Modes of discharges ofModes of discharges ofcontractcontract Following are the modes of discharge ofFollowing are the modes of discharge of

contract :contract :

By Act of the partiesBy Act of the parties

By Operation of lawBy Operation of law

Di h f C B A fDi h f C t t B A t f


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Discharge of Contract By Act ofDischarge of Contract By Act ofthe partiesthe parties

By Performance (sec 37)By Performance (sec 37) By tender (sec 38)By tender (sec 38)

By breach of contract (sec 39)By breach of contract (sec 39) By agreement :By agreement :

NovationNovationRescissionRescission

AlterationAlterationRemissionRemissionWaiverWaiverMergerMerger


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Discharge of ContractDischarge of Contract

By Operation of law a contract may beBy Operation of law a contract may be

discharged in any of the following ways :discharged in any of the following ways : By death (sec 37)By death (sec 37)

By impossibility (sec 56)By impossibility (sec 56)

By non existence of a state of thingsBy non existence of a state of things

P f f C


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Performance of ContractPerformance of Contract

Performance may be :Performance may be :Actual PerformanceActual Performance

Attempted performance Attempted performance when one of the parties to the contractwhen one of the parties to the contract

Offers to perform the contract but,Offers to perform the contract but,

The other party does not accept it,The other party does not accept it,

There is an attempted performance.There is an attempted performance.


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Essentials of a valid tender

(an attempted performance)an attempted performance) It must be unconditional It must be made at proper time and place. It must be made by the person who is able and willing. In case of tender of goods it must be for the

quality/quantity of goods agreed upon. In case of tender of goods reasonable opportunity

must be given to the promisee to examine the goods. It must be made to the promisee or his authorized

agent.


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Who must perform theWho must perform thepromise?promise?

By the promisor himself (para 1 of sec 40)By the promisor himself (para 1 of sec 40)

By the agent (para 2 of sec 40)By the agent (para 2 of sec 40)

By the legal representative (sec 37)By the legal representative (sec 37)

By the third parties (sec 41)By the third parties (sec 41)

By Joint promissors (sec 43)By Joint promissors (sec 43)


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Who can demandWho can demandperformance ?performance ? TheThe promiseepromisee can demand performance.can demand performance.

In case of death of promisee theIn case of death of promisee the legallegal

representativerepresentative of that person can demandof that person can demand

performance.performance.

In case of joint promisee then the right toIn case of joint promisee then the right to

demanddemand performance is to be exercisedperformance is to be exercised

jointly.jointly.


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Time and place ofTime and place ofperformanceperformance WhereWhere no timeno time for performance isfor performance is fixedfixed

Performance is to be donePerformance is to be done withoutwithout anyanyrequestrequest of the promisee,of the promisee,

The promise is to be performedThe promise is to be performed within awithin areasonable time.reasonable time.


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Time and place ofTime and place ofperformanceperformance Promise is to be performedPromise is to be performed on a certain dayon a certain day

andand

The promisor has undertaken to perform itThe promisor has undertaken to perform it

without requestwithout request by the promiseeby the promisee

Then the promisor can perform the obligationThen the promisor can perform the obligation

within the official hours of business on suchwithin the official hours of business on such

day and at the place stated.day and at the place stated.

i d l f


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Time and place ofTime and place ofperformanceperformance Promise is to be performed on aPromise is to be performed on a certain daycertain day

At the requestAt the request of the promisee,of the promisee,

The promisee must apply for performance atThe promisee must apply for performance at

a proper place and within usual hours.a proper place and within usual hours.

i d l f


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Time and place ofTime and place ofperformanceperformance When a promise is to be performedWhen a promise is to be performed withoutwithout

requestrequest by the promiseeby the promisee

No place is fixedNo place is fixed for its performancefor its performance

It is the duty of the promiser to apply to theIt is the duty of the promiser to apply to the

promisee to appoint a reasonable place forpromisee to appoint a reasonable place for

the performance of the promise and tothe performance of the promise and to

perform it at such place.perform it at such place.

Ti d l f


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Time and place ofTime and place ofperformanceperformance The performance of the promise may beThe performance of the promise may be

made in any manner or at any time which themade in any manner or at any time which the

promisee prescribes or sanctionspromisee prescribes or sanctions


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Discharge by NovationDischarge by Novation

::

Novation :Novation :A novation takes place whenA novation takes place when

parties to a contract agree to substitute a new contract inparties to a contract agree to substitute a new contract inplace of an old oneplace of an old one

Either between the old parties orEither between the old parties or

The new partiesThe new parties

With the consent of the parties to the contract.With the consent of the parties to the contract.


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Discharge of contract byDischarge of contract byrescissionrescission

Rescission : It means cancellation of all or someRescission : It means cancellation of all or some

of the terms of contract or one party fails toof the terms of contract or one party fails to

perform the contract and other party rescinds theperform the contract and other party rescinds the

contract.contract.


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Discharge by alterationDischarge by alteration

Changing material terms of theChanging material terms of the

contractcontractBilateral alterationBilateral alteration

Unilateral alterationUnilateral alteration


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Discharge by remissionDischarge by remission

Remission Exempting the party to perform theRemission Exempting the party to perform the

contract. It may be full or partial.contract. It may be full or partial.

Di h b W iDi h b W i


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Discharge by WaiverDischarge by Waiverand Mergerand Merger

Waiver Refers to the giving up or foregoingWaiver Refers to the giving up or foregoing

certain rights . Its same as remissioncertain rights . Its same as remission

Merger When inferior rights of a person underMerger When inferior rights of a person under

a contract merge with the superior rights undera contract merge with the superior rights undera new contracta new contract

i h b b hDi h b b h


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Discharge by breachDischarge by breach

Actual Breach when the party refuses toActual Breach when the party refuses to

perform the contract on the date of contract.perform the contract on the date of contract.

The promisee is discharged but not theThe promisee is discharged but not the

promisor.promisor.Anticipated Breach It takes place before theAnticipated Breach It takes place before the

date of actual performance.date of actual performance.

ExpressExpress ImpliedImplied


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Discharge by deathDischarge by death

Contracts of personal nature comes to anContracts of personal nature comes to an

end by the death of promisor.end by the death of promisor.

sc arge y mposs tysc arge y mposs y


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sc arge y mposs tysc arge y mposs y

(Doctrine of Frustration)(Doctrine of Frustration)

Impossibility arising subsequent to theImpossibility arising subsequent to the

formation of the contractformation of the contractBy death of partyBy death of party

By destruction of subject matterBy destruction of subject matterObject becoming illegal or unlawfulObject becoming illegal or unlawful

Out-break of warOut-break of war

By non-existence of a state of things theBy non-existence of a state of things thecontinued existence of a state formed thecontinued existence of a state formed the

basis of contract.basis of contract.

Remedies for breach ofRemedies for breach of


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Remedies for breach ofRemedies for breach ofcontractcontract Right of rescissionRight of rescission Right to claim compensation or damagesRight to claim compensation or damages

Ordinary damagesOrdinary damages

Special damagesSpecial damages Vindictive or exemplary damagesVindictive or exemplary damagesNominal damagesNominal damagesDamages for personal inconvenience and discomfortDamages for personal inconvenience and discomfort

Specific performanceSpecific performance Injunction orderInjunction order

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