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Introduction –
- INDIAN CONTRACT ACT, 1872 governs law relating to contracts in India.
- The Act was passed by British India and is based on the principles of English Common Law.
- This Act is applicable to whole of India including Jammu and Kashmir.
- The Act came into effect from 1st September, 1872 and applies to all contracts in India.
Important Definitions under the Act –
1) Proposal – Sec 2(a) When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. 2) Acceptance – 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 Person making the proposal is called the “ promisor ”, and the person accepting the proposal is called the “ promisee ”. 3) Agreement – Sec 2(e) Every promise and every set of promises, forming the consideration for each other, is an agreement. **In simple words, Agreement = Offer + Acceptance
- Void Agreement – Sec 2(g)** An agreement not enforceable by law is said to be void. 5) Contract – Sec 2(h) An agreement enforceable by law is called as contract. **In simple words, Contract = Agreement + Enforceability
- Voidable Contract –** An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others.
Is every agreement contract?
- No, every agreement is not a contract.
2) An agreement to become a contract must give rise to a legal obligation (duty)
Indian Contract Act, 1872
- An agreement can be – a) An agreement giving rise to social obligation is not a contract. b) Not covered under ICA, 1872 (Indian Contract Act, 1872)
- Every contract is an agreement, but every agreement is not a contract Difference Between Agreement and Contract – BASIS FOR COMPARISON
AGREEMENT CONTRACT
Meaning When a proposal is accepted by the person to whom it is made, with requisite consideration, it is an agreement. When an agreement is enforceable by law, it becomes a contract. Elements Offer and Acceptance Agreement and Enforceability Defined in Section 2 (e) Section 2 (h) In writing Not necessarily Normally written and registered Legal obligation Does not creates legal obligation Creates legal obligation One in other Every agreement need not be a contract. All contracts are agreement Scope Wide Narrow Essential elements of a valid contract – Legal obligation Social obligation a) Agreement giving rise to legal obligation is a contract b) Covered under ICA, 1872 Example – a) An agreement between two persons to go together to the cinema, or for a walk, or for a dinner is an agreement of social nature and not covered under Indian Contract Act, 1872. b) Domestic agreement between husband and wife is also not a contract.
8) Intention to create legal relationships –
The intention of the parties to a contract must be to create a legal relationship between them. Example: A husband promising his wife to buy her a ‘necklace’ on occasion of her birthday is not a contract.
9) Possibility of performance –
The agreement should be capable of being performed Example - if A promises B to bring rainfall through magic. Such agreement cannot be enforced
10) Legal formalities –
Legal formalities if any required for particular agreement such as registration, writing, they must be followed Offer –
A) Definition – Section 2(a)
When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal
B) Types of offer –
1) General Offer - It is an offer to the whole world. 2) Specific offer - It is an offer made to a particular person or group of persons. 3) Express offer - It is an offer which is made by words either oral or in writing. 4) Implied offer - It is an offer which is made by conduct or gesture of the parties. 5) Counter offer - When a person to whom the offer is made does not accept the offer [as it is] he counters the condition. This is called counter offer. 6) Cross offer - When two offers of same terms and conditions cross each other at same time, it is called cross offer. 7) Standing offer - An offer is a standing offer if it is intended to remain open for a specified period
C) Essentials of valid offer –
1) Offer may be expressed or implied – An offer may be expressed or may be implied from the conduct of the parties or circumstances of the case. 2) Offer may be specific or general – a) A specific offer is one which is made to a particular person. It can be accepted by the person to whom it has been made, no one else can accept such an offer. b) A general offer is an offer made to the public at large. 3) Offer must create Legal Relations –
An offer to be valid must create legal relationship between the parties. Say for example a dinner invitation extended by A to B is not a valid offer. 4) Offer must be Clear, not Vague – The terms of an offer should not be vague (not clear / confusing) **For e.g. - A offers to sell B fruits worth Rs 5000/-. This is not a valid offer since what kinds of fruits or their specific quantities are not mentioned.
- Offer must be Communicated to the Offeree –** No offeree can accept the proposal without knowledge of the offer ( Lalman Shukla v. Gauri Dutt .) 6) A statement of price is not an offer 7) Offer cannot contain a Negative Condition – The non-compliance of any terms of the offer cannot lead to automatic acceptance of the offer Example : A offers to sell his cow to B for 5000/-. If the offer is not rejected by Monday it will be considered as accepted. This is not a valid offer. 8) A mere statement of intention is not an offer. Thus, a person who attended the advertised place of auction could not sue for breach of contract if the auction was cancelled 9) Offer must be distinguished from an invitation to offer – BASIS FOR COMPARISON
OFFER INVITATION TO OFFER
Meaning When one person expresses his will to another person to do or not to do something, to take his approval, is known as an offer. When a person expresses something to another person, to invite him to make an offer, it is known as invitation to offer. Defined in Section 2(a) of the Indian Contract Act, 1872. Not Defined Objective To enter into contract. To receive offers from people and negotiate the terms on which the contract will be created. Essential to make an agreement Yes No Consequence The Offer becomes an agreement when accepted. An Invitation to offer, becomes an offer when responded by the party to whom it is made. Harvey v Facey Facts –
COMMUNICATION OF OFFER & ACCEPTANCE AND REVOCATION – Section 4 & 5
1. Communication of offer is complete when it comes to the knowledge of offeree. 2. Communication of acceptance is complete As against Offeror As against Offeree 3. Revocation (withdrawal / cancellation) of offer – Revocation of offer is valid before offeree puts the acceptance in course of transmission and it is out of his reach to stop it. 4. Revocation of acceptance – Revocation of acceptance is valid before acceptance comes to the knowledge of offeror Contracts over the Telephone – Contract over telephone can be a valid contract. 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 offeree’s 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 How revocation of proposal is made – Section 6 When offeree puts the acceptance in a course of transmission and it is beyond his reach to stop it When the acceptance comes to the knowledge of offeror
Consideration (quid pro quo)
A) Definition – 2(d)
‘When at the desire of the promisor, the promisee or any other person had 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.’
B) Meaning –
a) Consideration means something in return b) It may be an act or abstinence or promise Note – As per Section 25 of the Indian Contract Act, 1872 “An agreement made without consideration is void”
C) Types of consideration –
- By the communication of notice of revocation by the proposer to the other party;
- By the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance
- By the failure of the acceptor to fulfil a condition precedent to acceptance; or
- By the death or insanity of the proposer , if the fact of his death or insanity comes to the knowledge of
the acceptor before acceptance.
- offer is not accepted in the prescribed mode and if no mode is prescribed, in some usual and reasonable manner or
- The offeree makes a counter-offer Past Consideration – In case of past consideration, the promisor had received the consideration before the date of promise Future Consideration (Executory consideration)– when consideration is to move at a future date then it is called as future consideration Present consideration (Executed consideration) – Present consideration is one in which one of the parties to the contract has performed his part of the promise, which Constitutes the consideration for the promise by the other side it is known as present consideration.
The consideration or object of an agreement is lawful, unless — It is forbidden (prohibited) by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy NO CONSIDERATION – NO CONTRACT- Section 25
A) Meaning –
The general rule is ex-nudopacto non oritur actio i.e. an agreement made without consideration is void. Example – If Salman promises to pay Aishwarya ` 1000 without any obligation from Aishwarya then it will be void contract as there is no consideration from Aishwarya towards Salman.
B) Exceptions –
1) Promise made on account of natural love and affection –
An agreement made without consideration is valid – a) It is expressed in writing. b) It is registered under the law. c) It is made on account of natural love and affection. d) It is between parties standing in near relation to each other.
2) Promise to compensate for voluntary services –
Voluntary service means service done without any request. It will be valid if the following conditions are satisfied – a) The service should have been done voluntarily. b) The service should have been done for the promisor. c) The promisor must have been in existence at the time when the service was done. d) The intention of promisor must have been to compensate the promisee. Exceptions - Under following cases, a contract will be valid even without consideration
- Promise made on account of natural love and affection
- Promise to compensate for voluntary services
- Promise made to pay a time barred debt
- Completed Gifts
- Creation of agency
- Contract of Guarantee
- Remission
e) The service rendered must also be legal. Example: Jethalal finds Babita’s purse and gives it to ‘her. Babita promises to give Jethalal 50 rupees. This is a valid contract.
3) Promise to pay time-barred debt –
a) A promise by a debtor to pay a time-barred debt is also a valid contract. b) But the promise must be in writing. c) It must be signed by the promisor or his authorised agent. d) The promise may be to pay the whole or part of the debt. Example: Ram owes Laxman 1,000 rupees but the debt is barred by the Limitation Act. Ram signs a written promise to pay 500 rupees on account of the debt. The promise will be valid and binding without any fresh consideration.
4) Creation of Agency –
a) No consideration is necessary to create an agency. b) Thus, when a person is appointed as an agent, his appointment is valid even if there is no consideration.
5) Completed Gifts –
a) Gifts once made cannot be recovered on the ground of absence of consideration. b) Absence of consideration will not affect the validity of any gift already made. Example: Virat gave a watch as a gift to Anushka on his birthday. Later on Virat cannot demand the watch back on the ground that there was no consideration.
6) Contract of guarantee –
Contract of guarantee needs no consideration.
7) Remission –
Remission means lesser performance of the contract than what is actually to be performed. DOCTRINE OF PRIVITY OF CONTRACT / STRANGER TO CONTRACT – Doctrine of privity of contract means stranger to contract cannot sue Dunlop Pneumatic Tyre Co. v. Selfridge Ltd – D supplied tyres to a wholesaler X, on condition that any retailer to whom X re-supplied the tyres should promise X, not to sell them to the public below Ds list price. X supplied tyres to S upon this condition, but nevertheless S sold the tyres below the list price. Held: There was a contract between D and X and a contract between X and S. Therefore, D could not obtain damages from S, as D had not given any consideration for Ss promise to X nor was he party to the contract between D and X.
Exceptions –
In the following cases, stranger to a contract can also sue
1. Beneficiary of a trust –
A trust is created for the benefit of a beneficiary. Hence, the beneficiary can enforce the provisions of the trust even though he is a stranger to the contract.
Coercion – Section 15
A) Meaning of coercion – Coercion means – a) committing or threatening to commit any act forbidden (prohibited) by Indian Penal Code against another person; or b) unlawful detaining or threatening to detain the property of another person c) with a view to obtain consent of another person B) Who can exercise coercion – Coercion may come from a person party to the contract or even third person not connected with the contract directly. C) Important points – a) Prosecution – A mere (only) threat to prosecute a man or file suit against him does not constitute a coercion. b) High prices and high interest Rates – Charging high interest rate, high price etc. is not a coercion as the same is not prohibited under the Indian Penal code. c) A threat to commit suicide – Consent to an agreement may at times be obtained by threatening to commit suicide. Threat to commit suicide also amounts to coercion. D) What will be the effect if the consent is caused by coercion – Section 19 a) Agreement is voidable at the option of aggrieved party. b) Aggrieved party has the option to cancel (rescind) the contract. c) If the aggrieved party decides to rescind the contract, he must return (restore) all the benefits received by such person.
Undue Influence – Section 16
A) Meaning of undue influence – As per section 14 of the Contract act consent is said to be free when following are absent –
(Section 20, 21,
A contract is said to be induced (caused) by “undue influence” where the relations subsisting (existing) between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. B) When a person is deemed to be in a dominating position? a) Where he holds a real or apparent authority over the other (e.g. master and servant) b) where he stands in a fiduciary (trust) relation to the other (e.g. Doctor and patient) c) 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 (pain) Note – The burden of proving that the contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other C) There is presumption of undue influence in the following relationships – a) Parent and child b) Guardian and ward c) Doctor and patient d) Solicitor and client e) Trustee and beneficiary f) Religious advisor and disciple g) Fiancé and fiancée D) However, there is no presumption of undue influence in case of relationship of — a) landlord and tenant b) debtor and creditor c) husband and wife. E) What will be the effect if the consent is caused by Undue influence – Section 19 a) Agreement is voidable at the option of aggrieved party. b) Aggrieved party has the option to cancel (rescind) the contract. c) If the aggrieved party decides to rescind the contract, he must return (restore) all the benefits received by such person
Fraud – Section 17
A) Meaning of fraud – “Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party or his agent, or to induce him to enter into the contract:
a) A representation when wrongly made either innocently or intentionally is a misrepresentation. When it is made innocently or unintentionally it is misrepresentation and when made intentionally or willfully it is fraud. b) Misrepresentation means making any statement as true but actually that statement is false. B) What will be the effect if the consent is caused by Undue influence – Section 19 d) Agreement is voidable at the option of aggrieved party. e) Aggrieved party has the option to cancel (rescind) the contract. f) If the aggrieved party decides to rescind the contract, he must return (restore) all the benefits received by such person Mistake of law – Section 21 Mistake Mistake of law Indian law Foreign law Mistake of fact Bilateral mistake Unilateral mistake Valid Void Void Valid Mistake of law of foreign country –
- Such a mistake is treated as mistake of fact and agreement is such case is void. 2) Ignorance of foreign law may be excused Mistake of law of the country – 1) When a party enters into a contract, without the knowledge of law in the country, the contract is valid and not void. 2) A contract is not voidable because it was caused by a mistake as to any law in force in India. 3) The reason here is that Ignorantia juris non excusat (ignorance of law is not an excuse at all). 4) However, if a party is induced (influenced) to enter into a contract by the mistake of law then such a contract may be avoided.
Mistake of fact – Section 20 A) Bilateral mistake -
- Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.
- Mistake must be mutual i.e. both the parties should misunderstand each other Types of mistakes falling under bilateral mistake are as follows – (a) Mistake as to existence of subject matter: If both the parties are at mutual mistake as to existence of the subject matter the agreement is void. (b) Mistake as to identity of subject matter: It usually happens when both the parties have different subject matter of contract in their mind. The contract is void due to mistake of identify of subject matter. (c) Mistake as to the quality of the subject matter: If the subject matter is something essentially different from what the parties thought to be, the agreement is void. (d) Mistake as to quantity of subject matter: Bilateral mistake as to quantity of subject matter would render the contract void. (e) Mistake as to title of subject matter: The agreement is void due to bilateral mistake as to title of the subject matter. (f) Mistake as to price of the subject matter: Mutual mistake as to price of the subject matter would render the agreement void. (g) Mistake as to possibility of performance of Contract - Impossibility may be: Physical impossibility: A contract is void if it is identified to be non-feasible (not possible) due to physical factors, like time, distance, height, etc. Legal impossibility: A contract is void if it provides that something shall be done which as a matter of law cannot be done. B) Unilateral Mistake as to fact – Section 22
- A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact.
- A unilateral mistake is not allowed as a defense in avoiding a contract unless the mistakes brought about by another party’s fraud or misrepresentation. Legality of Object – Section 23 5) The principle in this case is ignorance of law is not an excuse.
Void Agreements – Following agreements have been expressly declared to be void by the Indian Contract Act –
- Agreement made by incompetent person - Agreement in restraint of marriage – Section 26
- Agreement made under a bilateral mistake of fact – Section 20 - Agreement in restraint of trade – Section 27
- Agreement of which the consideration or object is unlawful – Section 23 - Agreement in restraint of legal proceedings – Section 28
- Agreement of which the consideration or object is unlawful in part – Section 24 - Agreements void for uncertainty – Section 29
- Agreement made without consideration
- Agreement to do impossible acts a) Agreement by a minor (section 11) or a person of unsound mind (section 12). b) Agreement of which the consideration or object is unlawful – Section 23 c) Agreement made under a bilateral mistake of fact material to the agreement – Section 20 d) Agreement of which the consideration or object is unlawful in part and the illegal part cannot be separated from the legal part – Section 24 e) Agreement in restraint of marriage – Section 26 Agreement is restraint of marriage is void. Exceptions: a) Minors; b) Restraint for particular reasonable period is valid f) Agreement in restraint of trade is void. Exceptions – An agreement through which an outgoing partner will not carry on the business of the firm for a reasonable time will be valid, though it is in restraint of trade Where a person sells his business along with the goodwill to another person, agrees not to carry on same line of business in certain reasonable local limits, such an agreement is valid. An agreement of service through which an employee commits not to compete with his employer is not in restraint of trade Trade Combinations are valid as long as they are not creating monopoly are valid g) Agreement in restraint of legal proceedings – Section 28 An agreement which restricts or waives one’s right to sue or limits the time of justice is void. Exceptions : A contract by which the parties agree that any dispute between them shall be referred to arbitration and will not be taken to the court is a valid contract. h) Agreements void for uncertainty – Section 29 Agreements, the meaning of which is not certain, or capable of being made certain are void
i) Agreement by way of wager – Section 30 Payment of money or money’s worth upon ascertainment of future uncertain event is known as wagering. Wagering Agreements – A) Meaning of wagering agreements – The literal meaning of the word “wager” is a “bet”. Wagering agreements are nothing but ordinary betting agreements. Example – A and B enter into an agreement that if England’s Cricket Team wins the test match, A will pay B Rs.100 and if it loses B will pay Rs.100 to A. This is a wagering agreement and nothing can be recovered by winning party under the agreement. B) Essentials of wagering agreements – a) One party should win and one part should loose b) There should be mutual chance of gain or loss c) No parties should have control over the event. Performance of contract
Meaning –
a) Every contract has certain obligations (duties) which are to be performed by the parties to the contract. b) When both the parties to the Contract fulfill their obligations towards each other, the contract is said to be performed. c) When both the parties to the contract have performed their obligations, the contract is said to be discharged by performance Who will perform the contract? - Section 40 1.Promisor himself Legal Representative However, if the contract involves personal skills and if the promisor dies, the contract becomes void 1.Agent of promisor Third persons, if promise permits
