INDIAN CONTRACT ACT 1872 April 28, 20151santhi narayanan

INDIAN CONTRACT ACT 1872

April 18, 20231 santhi narayanan

Introduction Law of contract – Foundation upon which the

superstructure of modern business is built

Business – promise made between parties – performance follows later

Breaking of a promise – without incurring liability – endless complications


Contd - Law of contract lays down legal rules relating

to promises, their formation, performance and enforcement

Applicable not only to business community but others


Definitions Anson – Legally binding agreement between

two or more person by which rights are acquired by one or more to Act or forbearance on the part of the other.

Salmond – an agreement creating and defining obligation between parties

Pollock – Every agreement and promise enforceable at law is a contract


CONTRACT Sec 2(h) – “ An agreement enforceable by

law is a contract”.

Two elements - An Agreement Legal obligation ie, a duty enforceable by law.


Agreement Section 2(e) – “Every promise and every

set of promises forming the consideration for each other, is an agreement.”

Promise – What is a promise?

Sec 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


Example Ram offers to sell his car for Rs 1,00,000 to

Shyam. Shyam accepts this offer. This offer after acceptance becomes promise and this promise is treated as an agreement between Ram and Shyam

Therefore, an agreement consists of an offer by one party and its acceptance by the other.

Agreement = Offer + Acceptance of offer


Enforceability of Agreement An agreement is said to be enforceable by

law if it creates a legal obligation. If an agreement is incapable of creating a

duty enforceable by law, it is not a contract.

Thus, an agreement is a wider term than contract.



Contract Act “All contracts are agreement but all

agreements are not contracts”. Agreements of moral, religious or social

nature are not contracts they are not likely to create a duty enforceable by

law parties never intend to create a legal obligation.


Contd - Ex;

X invites his friend Y to a dinner and Y accepts the invitation. If Y fails to turn up for the dinner. Can he take his friend to Court????X cannot go to the court to claim his loss.

A father promises to pay his son Rs 1000 as pocket allowance. Later he refuses to pay. Can the son recover the Amount???The son cannot recover as its is a

domestic agreement and there is no intention on the part of the parties to create legal relations


Case Balfour vs Balfour [(1919) 2 K.B. 571]

A promise by the husband to pay his wife 30 pounds every month . Later Husband refuses to pay. Wife goes to court. Held: unenforceable as parties never

intended it to be bound by legal obligations.


contd In commercial or business agreements an

intention to create legal relations is presumed.

Thus, an agreement to buy and sell goods intends to create legal relationship, hence is a contract, provided other requisites of a valid contract are present.

But if the parties have expressly declared their resolve is not to create a legal obligation, even a business agreement does not amount to a contract.


Case Rose&Frank Co. vs Corruption Bros

[1925 AC 445] There was an agreement between R company

and C company by means of which the former was appointed as the agent of the latter. One clause in the agreement was: ”This agreement is not entered into….as a formal or legal agreement and shall not be subject to legal jurisdiction in the law courts.” HELD - There was no binding contract as there

was no intention to create legal relationship


Distinction between an agreement and a

contract

Agreement◦ Offer and its

acceptance constitute an agreement

◦ An agreement may or may not create a legal obligation

◦ Every agreement need not necessarily be a contract

◦ Agreement is not concluded or binding contract

Contract◦ Agreement and its

enforceability constitute a contract

◦ A contract necessarily create a legal obligation

◦ All contracts are necessarily agreements.

◦ Contract is concluded and binding on the concerned parties


Enforceability Method of Formation

Extent of performance

Obligation to perform

Valid

Voidable

unenforceable

Illegal

Void

Executed

Executory

Express

Formal

Simple

Implied StandardForm

ContingentQuasi

Bilateral

Unilateral

Classification of Contract


Valid Contract

Essentials


Essential elements of a valid contract

Proper offer and its proper acceptance Intention to create legal relationship Free Consent Capacity to contract Lawful consideration Lawful object Agreement not expressly declared void Certainty of meaning Possibility of performance Legal formalities


Offer and acceptance OFFER An offer is the starting point in the making

of an agreement. An offer is also called ‘proposal’ Sec 2(a) – “ A person is said to have made

the proposal when he signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of that offer to such act or abstinence.”


OFFER An offer involves the following essential

elements; It must be made by one person to another

person It must be an expression of readiness or

willingness to do (i.e., a positive act) or to abstain from doing something (i.e., a negative act)

It must be made with a view to obtain the consent of that other person to proposed Act or abstinence


Contd Offeror – The person making the proposal is

called the ‘offeror’ or ‘proposer’. Offeree – The person to whom the proposal is

made is called the ‘offeree’ or the ‘proposee’.


Types of offer


Cases General offer

Carlil vs Carbolic Smoke ball Co (1893) 1 QB 258 Harbhajan lal vs. Harcharan lal (AIR All 539)


Contd- Intention to create legal relationship

An offer must be such that when it is accepted it will create a legal relationship

Certain and unambiguous terms If the terms of the offer are vague or indefinite, its

acceptance cannot create any contractual relationship.


Legal rules as to offer

April 18, 2023santhi narayanan25

Contd - Different from a mere declaration of

intention Mere declaration of intention

indicates that an offer will be made or invited in the future

A declaration of intention by a person does not give right of action to another.


Case Harrison vs Nickerson An auctioneer advertised in a newspaper that a

sale of office furniture would be held. A broker came from a distant place to attend that auction, but all the furniture was withdrawn. The broker thereupon sued the auctioneer for his loss of time and expenses.

Held - A declaration of intention to do a thing did not create a binding contract with those who acted upon it, so that the broker could not recover.


Contd - Different from an invitation to offer

In an invitation to offer the person making an invitation invites others to make an offer to him

It is prelude to an offer inviting negotiations or preliminary discussions

Case – Pharmaceutical Society of Great Britian vs

Boots cash chemists Ltd (1953) 1 QB 401 Harvey vs facey


Contd- Offer must be communicated

An offer must be communicated to the person to whom it is made.

An offer is complete only when it is communicated to the offeree

Acceptance is not possible unless offer is brought to the knowledge of the offeree. i.e., One can accept the offer only when he knows about it.

Acceptance in ignorance of offer confers no right. i.e., An offer accepted without its knowledge does not confer any legal rights on the acceptor.

Case: Lalman Shukla vs. Gauri Dutt


Contd - No term of non-compliance of which

amounts to acceptance The offer must not contain a term, the non-

compliance of which amount to acceptance Ex: A offers by post to sell his horse to B for Rs

2000. He writes, “ If you do not reply, I shall assume you have accepted the offer.” There would be no contract even if B does not reply


Contd While making the offer, the offeror cannot say

that if the offer is not accepted before a certain date, it will be presumed to have been accepted

Communication of special terms or standard terms of contract Special terms of the offer must also be

communicated along with the offer. If the special terms of the offer are not

communicated, the offeree will not be bound by those terms.


Acceptance Acceptance means giving consent to the

offer. It is an expression by the offeree of his

willingness to be bound by the terms of the offer.

Sec 2(b) – “ A proposal is said to be accepted when the person to whom the proposal is made signifies his assent thereto. A proposal when accepted becomes a promise.”

Acceptance is the consent given to offer. April 18, 202332 santhi narayanan

Contd- Who can accept

In case of a specific offer – To be accepted by that definite person

or that particular group of persons to whom it has been made and non else.

In case of general offer – An offer made to the world at large or

public in general can be accepted by any person having the knowledge of the offer by fulfilling the terms of the offer.


Contd - How to make acceptance –

Express acceptance – An express acceptance is one in which is made

by words spoken or written Implied acceptance –

An implied acceptance is one which is made otherwise than in words.

It is inferred from the conduct of the parties or the circumstances of a particular case


Legal rules of valid acceptance

Absolute and unqualified Manner Communication By whom To whom Before the lapse of the offer


Communication of offer and acceptance

Must be complete so as to bind the concerned parties because as soon as the communication is complete the parties loose the right of withdrawal or revocation. (a) Communication of offer – It is complete when it

comes of the knowledge of the person to whom it is made.


Contd - Communication of acceptance –

As against the proposer – When it is put in a course of transmission to him, so as to be out of the power of the acceptor.

As against the acceptorWhen it comes to the knowledge of the proposer.


Revocation of offer and acceptance

Taking back, withdrawal (sec 5) Time for revocation of proposal – A proposal

may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.


Contd - Time for revocation of acceptance – An

acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards.


CAPACITY TO CONTRACT


Minor Person domiciled in India, who is under 18

years of age. Law protects minor’s rights because they are

not mature and may not possess the capacity to judge what is good or what is bad


Position of minor’s agreement

Validity – An agreement with a minor is void-ab-intio Case – Mohiri Bibee vs Dharmdas Ghosh


Position of persons of unsound mind Who is a person of unsound mind

Sec 12 - A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, he is capable – (a) to understand the terms of the contract. (b) to form a rational judgment as to its effect upon his

interests Ex ; idiots, lunatic, drunken person


Position of agreements with persons of unsound mind Persons of unsound

mind

1. Lunatic

(a) while he is of unsound mind

Capacity to contract

He cannot enter into any contract. Any agreement entered into by him during this period is altogether void and he cannot be held liable thereon.


Contd- b) While he is of sound

mind

(II) Idiots

He can enter into a valid contract and he is liable for such contract.

He cannot enter into any contract. Any agreement entered by him is void and he is liable thereon.


Contd Drunken person He cannot contract

while such delirium or drunkness lasts


Persons disqualified by law Alien enemies – cannot enter into any

contracts Foreign sovereigns and ambassadors –

can enter into contracts enforce those contracts in our courts but cannot be sued in our courts without the sanction

of the central government

Convicts – Cannot enter into any contract during the period of the sentence


Contd - Company –

Contractual capacity is determined by the ‘object clause’ of the memorandum of association.

Any act done in excess of the power given is ultra vires [(i.e) beyond the power] and hence void.

Insolvent – Cannot sue and be sued. Cannot enter into contracts relating to his

property. When the insolvent is discharged the

disqualification is removed.


Effect of Contract entered into by a minor

A minor’s agreement can not be ratified by the minor on his attaining majority.

If a minor has received any benefit under a void contract, he can not be asked to refund the same.

A minor is always allowed to plead minority. (Doctrine of estoppel)

A minor cannot be a partner in a partnership.

A minor’s estate is liable to a person who supplies necessaries of life to a minor, or to one whom minor is legally bound to support (goods and services both).

Minor’s parents/guardians are not liable to a minor’s creditor for the breach of contract by the minor whether the C is for necessaries or not.

A minor can act as an agent and bind his principal by his acts without incurring personal liability.

Consideration Without which no single promise is

enforceable A technical term used in the sense of quid

pro quo (i.e., something in return). When a party promises to do something he

must get ‘something in return’. This something is defined as consideration.


Section 2(d) “When at the desire of the promisor, the

promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise”.


Contd -

Ex – X promises to deliver the goods to Y and Y promises to pay Rs 1000 on delivery. In this case, the consideration for each of these promises is as under: For X’s promise - Y’s promise to pay Rs 1000

on delivery For Y’s promise – X’s promise to deliver the

goods


Essential elements Move at the desire of the promisor – An act

constituting consideration must have been done at the desire or request of the promisor. Case – Durga Prasad vs. Baldeo

May move from any person – immaterial as to who furnishes the consideration Case – Chinnayya vs. Ramayya


Contd - It may be past present or future It must be of some value. It must be real and not illusory Something other than the promisor’s existing

obligation Case – Ramachandra Chintamana vs. Kala

Raju


Stranger to contract A stranger to consideration – can sue

because the consideration can be furnished or supplied by any person whether he is a promisee or not

A stranger to the contract - cannot sue because of the absence of the privity of the contract Case – Dunlop P tyre Co ltd vs Selfridge&Co Ltd


Contracts without consideration(Exceptions to general rule, no consideration, no contract )

Agreements made on account of natural love and affection

Promise to compensate for past voluntary service

Promise to pay a time barred debt Completed gift Agency


Elements of valid consideration


Free consent It is essential to the creation of the contract

that the parties are ad idem,ie, they agree upon the same thing in the same sense at the same time and their consent is free and real.

Consent means an act of assenting to an offer.


Sec 13 “Two or more persons are said to consent

when they agree upon the same thing in the same sense.”

Effect of absence of consent – When there is no consent at all, the agreement is void ab-intio, ie, it is not enforceable at the option of either party.


Free consent Sec 14

Consent is said to be free when it is not caused by (a) coercion (b)undue influence (c)fraud (d)misrepresentation or (e) mistake

No free consent – contract is usually voidable


Contd-


Coercion Sec 15

A contract is said to be caused by coercion if it is obtained by (a) committing any act which is forbidden by the Indian

Penal Code (b) threatening to commit any act which is forbidden by

the Indian Penal Code (c) Unlawful detaining of any property (d) threatening to detain any property


Case Case 1 Ranganayakam vs Alwar Shetty, (1889) 13

Mad 214 The relatives of a young widow threatened her

that they would not allow her to cremate the dead body of her husband unless she consented to the adoption of a boy as her son.

Held: The adoption is not binding on her on account of coercion


Case Muttiah Chettiar vs. Koruppen Chetty (1927) 50 Mad 786 A person secured a release from liabilities

from his principal by refusing to hand over the books of account. The release deed was held to be voidable of the option of the principal.

Effect of coercion: Contract is voidable at the option of the party whose consent has been caused by coercion.


Undue influence Dominating the will of the other person to obtain

an unfair advantage over the other Sometimes the parties to the agreement are

related in such a way that one of them is able to dominate the will of the other.

It creates a mental or moral fear created by coercion. Consequently the party on whom undue influence is exercised is indirectly compelled to enter into the contract


Ex: A, having money advanced money to his son B during his minority, upon B’s coming of age, obtains by parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence


In coercion, contract is obtained by committing or threatening to commit an act punishable under Indian Penal code.

In undue influence the consent is obtained by dominating the will of other.

Difference between undue influence and coercion

Fraud-Sec 17 "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 of 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 it to 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.


Making a false suggestion. The active concealment of a fact by a

person who has knowledge or belief of the fact.

A promise made without performing it. The party acting on the representation

should have been deceived and suffered damage.

Active concealment of the facts amounts to fraud.

Essentials of Fraud

Contd- Explanation.- Mere silence as to facts

likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.


Illustrations

a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A.

(b) B is A's daughter and has just come of age. Here, the relation between the parties would make it A's duty to tell B if the horse, is unsound.


Contd- (c) B says to A - "If you do not deny it, I shall

assume that the horse is sound." A says nothing. Here, A's silence is equivalent to speech.

(d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B.


Effect Suit for recession Suit for damages for fraud

Right of recession lost if— Affirmation of the contract even after

becoming aware of the fraud


Misrepresentation A false representation of fact made innocently

or non-disclosure of a material fact without the intention to deceive the other party

Aggrieved party can avoid or rescind the contract


Contd- Ex: A tells B, without checking records, that in

his factory 1000 tons of indigo is manufactured every month. A believes his assessment to be true. The actual production is found to be only 830 tons. A is guilty of misrepresentation.

Effect: Right to rescind the contract


MISTAKE Erroneous belief about something Mistake of law Mistake of fact


Mistake


Sec21. Effect of mistakes as to law A contract is not voidable because it was

caused by a mistake as to any law in force in India; but a mistake as to a law not in force in [India] has the same effect as a mistake of fact.

Illustration A and B make a contract grounded on the

erroneous belief that a particular debt is barred by the Indian Law of Limitation: the contract is not voidable.


Legality of the object and consideration Object and consideration of contract must

be lawful, otherwise the agreement is void Consideration or object of contract is

unlawful in the following cases: (a) If it is forbidden by law (b) If it defeats the provision of any law (c) If it is fraudulent (d) If the court regards it as immoral or opposed to

public policy


Agreements opposed to the public policy Agreements of trading with the enemy Agreement of stifling prosecution Agreement in restraint of paternal rights Agreement in restraint of personal liberty Agreements in restraint of trade


Other essentials Certainty of meaning – terms of contract

must be unambiguous Possibility of performance – An agreement

to do an impossible act is void Legal formalities - Must comply with

necessary formalities like writing, registration and stamping


Quasi contracts


Meaning

Not a contract at all One or the other essentials of a

contract are absent An obligation imposed by law upon a

person for the benefit of the other even in the absence of a contract.

Based on the principle of equity


Features Imposed by law and does not arise from any

agreement Duty of a party and not the promise of any

party is the basis of such contract Right under it is always a right to money Right under it is available against specific

persons and not against the whole world


Types of quasi contracts Right to recover the price of necessaries

supplied Right to recover money paid for another

person Right to recover for non-gratuitous Act Responsibility of finder of goods Right to recover from a person to whom

money is paid or thing is delivered, by mistake or under coercion


Quantum meruit

“as much as earned’ Payment in proportion to the amount

of work done. When a person has begun the work

and before he could complete it, the other party terminates the contract or does something which make it impossible for the other party to complete the contract, he can claim for work done under the contract.


Contd- He may also recover the value of the work

done where the further performance of contract becomes impossible.

The party claiming relief has to establish the following: He has been ready and willing to perform the

contract. He has made a part performance of the contract

for which the remuneration is due.


Cases in which the claim of quantum meruit can arise In case of void agreement or contract that

becomes void In case of non gratuitous act In case of preventing the completion of the

contract In case of divisible contract In case of indivisible contract performed

completely but badly.


Performance of contract


Meaning A contract is said to have performed when the

parties to the contract either perform or offer to perform their respective promises.

Sec 37 : “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 provision of the Act, or any other law.”


Contd - Types of performance:

Actual performance

Attempted performance


Contd - Persons who can demand performance

Promisee Legal representatives Third party Joint promisee

Persons who must perform Promisor Promisor’s agent Legal representative Third party Joint promisors


Time and place of performance The contract must be performed within a

reasonable period of time.

The promise must be performed in the manner and at the time prescribed by the promisee.


Contd-

Time as essence of contract – It is essential for the parties to a contract to perform their respective promises within the specified time.


Discharge of contract


Discharge of a contract Discharge of a contract means the termination

of contractual relations between the parties to a contract. A contract is said to be discharged when the rights and obligations of the parties under the contract come to an end.


Modes of discharge of contract Discharge by performance

(a) By actual performance (b) By attempted performance

Discharge by mutual agreement: (a) Novation – Substitution of a new contract (b) Rescission – Cancellation of contract (c) Alteration – Change in terms of contract with mutual

consent of parties. (d) Remission – Acceptance by promisee of a lesser

fulfillment of the promise made


Contd - (e) Waiver – Intentional relinquishment of a right

under the contract.

Discharge by operation of law – (a) By death of promisor (b) By insolvency (c) By unauthorized material alteration (d) By the identity of the promisor and promisee


Contd - Discharge by impossibility of performance

Effect of initial impossibility Effect of supervening impossibility


Breach of contract


Contd- Breaking of contract means a breaking of the

obligation which a contract imposes Breach of contract is of two types:

Actual breach of contract Anticipatory breach of contract


Actual breach of contract At the time when the performance is due During the performance of the contract


Anticipatory breach of contract Ex; A undertakes to supply certain goods to B

on 1st January. Before this date, he informs B that he is not going to supply goods. This is an anticipatory breach of contract

Anticipatory breach does not necessarily discharge the contract, unless the promisee (the aggrieved party) so chooses.


Remedies for breach of Contract

When a contract is broken the injured party has one or more of the following remedies. Rescission of the contract Suit for damages Suit for quantum meruit Suit for specific performance of the contract Suit for injunction


Rescission A right not to perform obligation The aggrieved party is discharged from all the

obligations under the contract. He is entitled to claim compensation for

damage which he has sustained for the non performance of the contract


Suit for damages Monetary compensation allowed for the loss

suffered by the aggrieved party due to the breach of the contract.

Case; Hadley vs Baxendale


Contd -

Rule ; Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be as such as may fairly and reasonably be considered either arising naturally i.e., according to usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in contemplation of both the parties, at the time they made the contract, as the probable result of the breach of it.


Section 73 Deals with compensation for loss

Ordinary damages Special damages Exemplary damages Nominal damages Damages for inconvenience and discomfort Liquidated damages and penalty Stipulation for interest Forfeiture of security deposit


Suit for specific performance

Demanding the court’s direction to the defaulting party to carry out the promise according to the terms of the contract


Suit for injunction

Demanding court’s stay order Injunction means an order of the court

which prohibits a person to do a particular act.


Suit for quantum meruit Right to claim compensation for the work

already done. Ex: C an owner of a magazine engaged P to

write a book to be published by installments in his magazine. After a few installments were published, the publication of the magazine was stopped. It was held that P could claim payment for the part already published.


Contract of indemnity


Definition A contract by which one party promises to

save the other from loss caused to him by the promisor himself or by the conduct of any other person, is called a contract of indemnity. (Sec 124)

It is entered into with the object of protecting the promisee against anticipated loss.

Contd - A lost his share certificate. He applied to the

company for the issue of a duplicate certificate. The company asked A to furnish an ‘indemnity bond’ in its favor to protect it against any claim that may be made by any person on the original certificate. A, accordingly executed the indemnity bond. It is a contract of indemnity between A and the Company. A is the indemnifier and the Company is the indemnified or indemnity holder.

Rights of indemnity holder when sued. Right against the indemnifier He is entitled to recover all the damages which he

may be compelled to pay in respect of suit to which the promise to indemnify applies.

He is entitled to recover all the costs reasonably incurred.

He is also entitled to recover all sums which he may have paid under any compromise of any such suit.

Contracts of Guarantee

116

The term guarantee may be defined as an

undertaking by one person to pay the amount due from another person

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

Eg – A lends money to B and C promises A that if B fails to repay he will pay the money.

Continued…

117

• The person who gives the guarantee is called the "surety“.

• The person in respect of whose default the guarantee is given is called the "principal debtor “.

• The person to whom the guarantee is given is called the "creditor“.

• A guarantee may be either oral or written.

Essentials of a Guarantee

118

1. There must be a debt existing, which should be recoverable.

2. Existence of 3 parties ie. Principal debtor, creditor & surety.

3. There should be some consideration4. The liability must be legally

enforceable.

Continued…

119

5. The principal debtor must be primarily liable. Surety’s liability is secondary.

6. There must be a distinct promise, oral or written by the surety to pay the debt in case of default by principal debtor.

7. All essentials of a contract.

Documents

INDIAN CONTRACT ACT 1872 April 28, 20151santhi narayanan