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INDIAN CONTRACT ACT, 1872
1. MEANING AND NATURE OF CONTRACT
The law relating to contracts is governed by the Indian Contract Act, 1872. The Act came into force on the first day of September, 1872. The preamble to the Act says that it is an Act “to define and amend certain parts of the law relating to contract”. It extends to the whole of India except the State of Jammu and Kashmir. As per section 2(h) of the Indian Contract Act, 1872, contract means “an agreement enforceable by law”. Essential elements of a valid contract Sec. 10 of Indian Contract Act says, “All, agreements are contracts if it includes:
- Offer and Acceptance
- Intention to create legal relationship
- Lawful consideration and object
- Capacity to contract
- Free consent
- Lawful object
- Agreement not expressly declared void.
- Consensus -ad- idem i.e. meeting of minds
- Certainty of meaning
- Possibility to perform
- Legal formalities
2. CHARACTERISTICS OF AN AGREEMENT
(a) Plurality of persons: There must be two or more persons to make an agreement because one person cannot enter into an agreement with himself.
(b) Consensus ad idem: The meeting of the minds is called consensus-ad-idem. It means both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time.
3.RIGHTS AND OBLIGATIONS
A agrees with B to sell his car for Rs 10,000 to him. In this example, the following rights and obligations have been created: (i) A is under an obligation to deliver the car to B. B has a corresponding right to receive the car. (ii) B is under an obligation to pay Rs 10,000 to A. A has a correlative right to receive Rs 10,000.
4. OFFER OR PROPOSAL
As per Section 2(a) of the Indian Contract Act defines proposal or offer as “when one person signifies to another his willingness to do or 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”. The person making the proposal or offer is called the proposer or offeror and the person to whom the proposal is made is called the offeree.
Rules Governing Offers
(a) An offer must be clear, definite, complete. It must not be vague. For example, a promise to pay an increased price for a horse if it proves lucky to promisor, is vague and is not binding.
STANDING/ CONTINUING / OPEN OFFER
Offer which is made to the public at large and kept open for public acceptance for a certain time period. It refers to a tender to supply goods as and when required. Each successive order given creates a separate contract. It does not binds either party unless and until such orders are given.
6. AN OFFER MUST BE DISTINGUISHED FROM
(a) An invitation to treat or an invitation to make an offer: e.g., an auctioneer's request for bids (which are offered by the bidders), the display of goods in a shop window with prices marked upon them, or the display of priced goods in a self service store or a shopkeeper's catalogue of prices are invitations to an offer. (b) A mere statement of intention: e.g., an announcement of a coming auction sale. Thus, a person who attended the advertised place of auction could not sue for breach of contract if the auction was cancelled. (c) A mere communication of information in the course of negotiation: e.g., a statement of the price at which one is prepared to consider negotiating the sale of a piece of land
7. LAPSE OF OFFER
(a) it is not accepted within the specified time (if any) or after a reasonable time, if none is specified.
(b) it is not accepted in the mode prescribed or if no mode is prescribed in some usual and reasonable manner, e.g., by sending a letter by mail when early reply was requested; (c) the offeree rejects it by distinct refusal to accept it; (d) either the offeror or the offeree dies before acceptance; (e) the acceptor fails to fulfill a condition precedent to an acceptance. (f) the offeree makes a counter offer, it amounts to rejection of the offer and an offer by the offeree may be accepted or rejected by the offeror
8. ACCEPTANCE
Under Section 2(b) of the Contract Act when a 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.
Rules Governing Acceptance
(a) Acceptance may be expressed i.e. by words spoken or written or implied from the conduct of the parties. (b) If a particular method of acceptance is prescribed, the offer must be accepted in the prescribed manner. (c) Acceptance must be unqualified and absolute and must correspond with all the terms of the offer. (d) A counter offer or conditional acceptance operates as a rejection of the offer and causes it to lapse, e.g., where a horse is offered for Rs 1,000 and the offeree counter-offers Rs 990, the offer lapses by rejection. (e) Acceptance must be communicated to the offeror, for acceptance is complete the moment it is communicated. Where the offeree merely
10. CONTRACTS OVER THE TELEPHONE -
In this case, an oral offer is made and an oral acceptance is expected. It is important that the acceptance must be audible, heard and understood by the offeror. - If during the conversation the telephone lines go “dead” and the offeror does not hear the offered word of acceptance, there is no contract at the moment. - If the whole conversation is repeated and the offeror hears and understands the words of acceptance, the contract is complete (Kanhaiyalal v Dineshwarchandra)
11. COMPLETION & REVOCATION OF OFFER &
ACCEPTANCE
- An offer is made only when it actually reaches the offeree and not before, i.e., when the letter containing the offer is delivered to the offeree.
- An acceptance is made as far as the offeror is concerned, as soon as the letter containing the acceptance is posted, to the offeror's correct address; it binds the offeror, but not the acceptor.
- An acceptance binds the acceptor only when the letter containing the acceptance reaches the offeror. The result is that the acceptor can revoke his acceptance before it reaches the offeror.
- An offer may be revoked by the offeror at any time before acceptance. Like any offer, revocation must be communicated to the offeree, as it does not take effect until it is actually communicated to the offeree.
- The revocation must reach the offeree before he sends out the acceptance.
- An offer may be revoked before the letter containing the acceptance is posted. An acceptance can be revoked before it reaches the offeror.
12. AGREEMENT
As per Section 2(e) of the Indian Contract Act “every promise and every set of promises, forming the consideration for each other, is an agreement.
13. ” ALL AGREEMENTS ARE NOT CONTRACTS
An agreement to become a contract must give rise to legal obligation. If an agreement is incapable to be enforced by law, it remains only agreement and not contract, such as: (a) Social Agreements (b) Agreements without legal intention (c) Agreements without consideration.
14. INTENTION TO CREATE LEGAL RELATIONS
The second essential element of a valid contract is that there must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. If there is no such intention on the part of the parties, there is no contract between them. Agreements of a social or domestic nature do not contemplate legal relationships. As such they are not contracts.
15.CONSIDERATION
Consideration is identified as “quid pro quo”, i.e. “something in return”. Section 2(d) of the Indian Contract Act, 1872 defines consideration thus: “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 to abstain from doing something, such act or abstinence or promise is called a consideration for the promise”. It must be noted that:
The leading English case on this point is Tweddle v. Atkinson. In this case, the father of a boy and the father of a girl who was to be married to the boy, agreed that each of them shall pay a sum of money to the boy who was to take up the new responsibilities of married life. After the demise of both the contracting parties, the boy (the husband) sued the executors of his father- in-law upon the agreement between his father-in-law and his father. Held: the suit was not maintainable as the boy was not a party to the contract.
Exception to the doctrine of privity of contract:
- A beneficiary under an agreement to create a trust can sue upon the agreement, though not a party to it.
- An assignee under an assignment made by the parties, or by the operation of law (e.g. in case of death or insolvency), can sue upon the contract for the enforcement of his rights, title and interest.
- In cases of family arrangements or settlements between male members of a Hindu family which provide for the maintenance or expenses for marriages of female members, the latter though not parties to the contract, possess an actual beneficial right which place them in the position of beneficiaries under the contract, and can therefore, sue.
- In case of acknowledgement of liability, e.g., where A receives money from B for paying to C, and admits to C the receipt of that amount, then A constitutes himself as the agent of C.
RULES GOVERNING CONSIDERATION
(a) Every simple contact must be supported by valuable consideration otherwise it is formally void subject to some exceptions. (b) Consideration may be an act of abstinence or promise. (c) There must be mutuality. (d) Consideration must be real, indefinite and not vague, or illusory, e.g., a son’s promise to “stop being a nuisance” to his father, being vague, is no consideration. (e) Although consideration must have some value, it need not be adequate. (f) Consideration must be lawful, e.g., it must not be some illegal act such as paying someone to commit a crime. (g) Consideration must be something more than the promisee is already bound to do for the promisor.
WHEN CONSIDERATION NOT NECESSARY
Thus, an agreement without consideration is valid in the following cases:
- If it is expressed in writing and registered and is made out of natural love and affection between parties standing in a near relation to each other; or
- If it is made to compensate a person who has already done something voluntarily for the promisor, or done something which the promisor was legally compellable to do; or
- If it is a promise in writing and signed by the person to be charged, or by his agent, to pay a debt barred by the law of limitation.
The parties must agree on the terms of their contract. They must make their intentions clear in their contract. The Court will not enforce a contract the terms of which are uncertain. Thus, an agreement to agree in the future (a contract to make a contract) will not constitute a binding contract e.gA promise to pay an actress a salary to be “mutually agreed between us” is not a contract since the salary is not yet agreed.
18. CLASSIFICATION OF CONTRACT/AGREEMENT
Void Agreement
A void agreement is one which is destitute of all legal effects. It cannot be enforced and confers no rights on either party. It is ‘void ab initio’ i.e. not exist in the eyes of law. For example an agreement without consideration is void.
Void Contract
A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. For example throat cancer, a singer refused to sing for the musical concert for which he was agreed to for six month without knowing his disease. The only remedy is whatever is advanced can be restored.
Voidable Contract
A contract which is enforceable by law at the option of one or more parties but not at the option of the other or others is a voidable contract. A contract becomes voidable when the consent of the parties are induced by coercion, undue influence, misrepresentation or fraud.
Illegal Agreement
An agreement with an unlawful object and consideration is known as illegal agreement. The object and consideration is said to be unlawful if –
- it is forbidden by any law time being in force - it defeats the provisions of any law
- it is fraudulent - it is injurious to a person or property - it is immoral
- it is opposed to public policy Parties to an unlawful agreement cannot get any help from a Court of law, for no polluted hands shall touch the pure fountain of justice. On the other hand, a collateral transaction is also considered as void agreement.
Quasi/Implied Contract
Certain relations resembling those created by contract” are known as quasi contracts. Such contracts do not involve either offer or acceptance but are still considered as contracts.
Express Contract
A contract where the proposal acceptance and conditions are made in words either written or oral is an express contract.
Tacit Contract
A contract in which offer and acceptance are expressed other than words i.e. conduct of the parties, circumstances is a tacit contract. For example, withdrawing money from an ATM machine is a tacit contract.
19. CONTRACTUAL CAPACITY
(c) Estoppel is an important principle of the law of evidence. A minor can always plead a minor and is not stopped from doing so even where he had produced a loan or entered into some other contract by falsely representing that he was major and competent to contract, when in reality he was a minor. But where the loan was obtained by fraudulent representation by the minor or some property was sold by him and the transactions are set aside as being void, the Court may direct the minor to restore the property to the other party. For example, a minor fraudulently overstates his age and takes delivery of a motor car after executing a promissory note in favour of the trader for its price. The minor cannot be compelled to pay the amount to the promissory note, but the Court on equitable grounds may order the minor to return the car to the trader, if it is still with the minor. (d) A minor's estate is liable to pay a reasonable price for necessaries supplied to him or to anyone whom the minor is bound to support (Section 68 of the Act). However minor is not liable personally, such contracts are considered as quasi contracts. The necessaries supplied must be according to the position and status in life of the minor and must be things which the minor actually needs. The following have also been held as necessary in India. Costs incurred in successfully defending a suit on behalf of a minor in which his property was in jeopardy; costs incurred in defending him in a prosecution; and money advanced to a Hindu minor to meet his marriage expenses have been held to be necessary. (e) An agreement by a minor being void, the Court will never direct specific performance of the contract. (f) A minor can be an agent, but he cannot be a principal nor can he be a partner. He can, however, be admitted to the benefits of a partnership. (g) Since a minor is never personally liable, he cannot be adjudicated as an insolvent.
(h) An agreement by a parent or guardian entered into on behalf of the minor is binding on him provided it is for his benefit or is for legal necessity. For, the guardian of a minor may enter into a contract for marriage on behalf of the minor, and such a contract would be good in law and an action for its breach would lie, if the contract is for the benefit of the minor.
20. AGREEMENT BY PERSON OF UNSOUND MIND
(SECTION 2)
- A person is of unsound mind if at the time when he makes the contract, he is incapable of understanding it and of forming rational judgment as to its effect upon his interests.
- A person of unsound mind cannot enter into a contract. A lunatic's agreement is therefore void. But if he makes a contract when he is of sound mind, i.e., during lucid intervals, he will be bound by it.
- A sane man who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or form a rational judgement as to its effect on his interests cannot contract whilst such delirium or state of drunkenness lasts. A person under the influence of hypnotism is temporarily of unsound mind. Mental decay brought by old age or disease also comes within the definition.
- Agreement by persons of unsound mind are void. But for necessaries supplied to a lunatic or to any member of his family, the lunatics estate, if any, will be liable. There is no personal liability incurred by the lunatic.
Married Women
In India there is no difference between a man and a woman regarding contractual capacity. A woman married or single can enter into contracts in
the same ways as a man.
FREE IN CONSENT
Consent is not free when it has been caused by coercion, undue influence, misrepresentation, fraud or mistake. These elements, if present, may vitiate the contract. When this consent is wanted, the contract may turn out to be void or voidable according to the nature of the flaw in consent.
COERCION
The committing or threatening to commit any act forbidden by the Indian Penal Code, or 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. If A at the point of a pistol asks B to execute a promissory note in his favour and B to save his life does so he can avoid this agreement as his consent was not free.
UNDUE INFLUENCE
A contract is said to be produced 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 uses that position to obtain an unfair advantage over the other. A person is deemed to be in a position to dominate the will of another – (a) Where he holds a real or apparent authority over the other or where he stands in a fiduciary relation to the other, e.g., minor and guardian; trustee
and beneficiary; solicitor and client. There is, however, no presumption of undue influence in the relation of creditor and debtor, husband and wife (unless the wife is a pardanashin woman) and landlord and tenant. (b) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress e.g., doctor and patient.
Transaction with parda-nishin women
The expression 'parda-nishin' denotes complete seclusion. Thus, a woman who goes to a Court and gives evidence, who fixes rents with tenants and collects rents, who communicates when necessary, in matters of business, with men other than members of her own family, could not be regarded as a parda-nishin woman (Ismail Musafee v. Hafiz Boo). The principles to be applied to transactions with parda-nishin woman are founded on equity and good conscience and accordingly a person who contracts with parda-nishin woman has to prove that no undue influence was used and that she had free and independent advice, fully understood the contents of the contract and exercised her free will.
Unconscionable transactions
An unconscionable transaction is one which makes an exorbitant profit of the others distress by a person who is in a dominant position. Merely the fact that the rate of interest is very high in a money lending transaction shall not make it unconscionable. But if the rate of interest is very exorbitant and the Court regards the transaction unconscionable, the burden of proving that no undue influence was exercised lies on the creditor.
