MODULE 1

THE INDIAN CONTRACT ACT, 1872

Indian Contract Act 1872, is the main source of law regulating contracts in Indian Law. It
determines the circumstances in which promise made by the parties to a contract shall be legally
binding on them. It extends to the whole of India except the state of Jammu and Kashmir, and
it come into force on the first day of September, 1872. This Act deals with firstly the general
principles of the Law of Contract and secondly some special contract also.

CONTRACT – MEANING AND DEFINITION

A contract may be defined as an agreement between two or more persons intended to create
legal obligations between them and to be legally enforceable.

According to section 2(h) of the Indian Contract Act, 1872 ‘An agreement enforceable by law
is a contract’.

In other words, an agreement which can be enforced in a court of law is known as a contract.

AGREEMENT

According to section 2(e) of the Indian Contract Act as ‘Every promise and every set of
promises, forming the consideration for each other.

NATURE AND ESSENTIAL ELEMENTS OF CONTRACT

• OFFER AND ACCEPTANCE

In order to create a valid contract, there must be an agreement between two parties. An
agreement involves, a lawful offer by one party and lawful acceptance of the offer by the other
party or parties.

• INTENTION TO CREATE LEGAL RELATIONSHIP

When the two parties enter into an agreement, their intention must be create legal relationship
between them. If there is no such intention on the part of the parties there is no contract between
them. Agreements of social or domestic nature do not contemplate legal relations.

• LAWFUL CONSIDERATION

Consideration has been defined as the price paid by one party for the promise of the other. In
simple words, it means something in return.

• CAPACITY OF PARTIES
The parties to an agreement must be capable of entering into a valid contract, otherwise it
cannot be enforced by a court of law. To create a valid contract, the person must be a major,
must be of sound mind and must not be declared disqualified from contracting by any law
which he is subject. Accordingly, the following persons are incompetent to contract minors,
persons of unsound mind, persons disqualified by law to which they are subject.

• FREE CONSENT

A consent may not be free either on account of mistake in the minds of the parties or on account
of the consent being obtained by some unfair means like coercion, fraud, misrepresentation or
undue influence. If the consent is obtained by unfair means the contract would be voidable,
while in the case of mutual mistake the contract would be void.

• LAWFUL OBJECT

The object of the agreement must be lawful, i.e, it must not be illegal, immoral, or opposed to
public policy. If the object is unlawful the agreement is void.

• LEGAL FORMALITIES

Essential elements of a valid contract is that it must be in written, attested or registered contract
as per the provision of the concerning acts.

“ All contracts are agreements , but all agreements are not contracts” : All contracts are
agreements enforceable at law . Here the enforceability is very essential. There are a lot of
domestic agreements that are not enforceable at law and thus cannot be treated as valid contract

But in order to create a valid contract a valid agreement and its enforceability is must

CLASSIFICATIONS OF CONTRACTS

1) ACCORDING TO VALIDITY OR ENFORCEABILTY

A) VALID CONTRCTS: An agreement enforceable by law is a valid contrct

B) VOID CONTRACTS: It is a contract which has no legal effects at all. It’s a contract which
was valid when entered into but which subsequently became void due to impossibility of
performance, changes of law or some other reasons. For eg; a contract between a citizens of
Pakistan and India is a valid contract during peace, but if war breaks out between these
countries the agreement become void contract
C) VOID AGREEMENT: An agreement which is not enforceable by law is said to be void. Its
“void ab initio” that is void right from the beginning. An agreement with a minor is void ab
initio

D) VOIDABLE CONTRACT: A voidable contract, unlike a void contract, is a valid contract

which may be either affirmed or rejected at the option of one of the parties. At most, one party
to the contract is bound. The unbound party may repudiate (reject) the contract, at which time
the contract becomes void.

Typical grounds for a contract being voidable include coercion, undue

influence, misrepresentation or fraud. A contract made by a minor is often voidable, but a minor
can only avoid a contract during his or her minority status and for a reasonable time after he
reaches the age of majority. After a reasonable period of time, the contract is deemed to be
ratified and cannot be avoided. Other examples would be real estate contracts, lawyer
contracts, etc.

When a contract is entered into without the free consent of the party, it is considered a voidable
contract. The definition of the act states that a voidable contract is enforceable by law at the
option of one or more parties but not at option of the other parties. A voidable contract may be
considered valid if it is not cancelled by the aggrieved party within a reasonable time.

ACCORDING TO FORMATION

A) Express Contract

A contract is said to be an express contract, if the terms of a contract are expressly agreed upon
between the parties (either by words spoken or written) at the time of formation of the contract.
An express promise results in express contract. A promise is said to be an express promise,
when the offer or acceptance of any promise is made in words.

B) Implied Contract

An implied contract is one for which the proposal or acceptance is made otherwise than in
words. Where the proposal or acceptance of any promise is made otherwise than in words, the
promise is known as implied promise. Implied contracts are inferred from the circumstances of
the case and conduct of the parties.For example, when A takes a cup of milk in a hotel, there
is an implied contract.

C) Quasi Contract
A quasi-contract is one, which is created by law. In the quasi-contract, there is no intention on
either side to make a contract. In a quasi contract, rights and obligations arise not by an
agreement but by operations of law.

For example, where certain letters are delivered to a wrong addressee, the addressee is under
an obligation to return

ACCORDING TO PERFORMANCE

A) Unilateral Contract

It is also called as one-sided contract. In a unilateral contract, only one party has to satisfy his
obligation at the time of the formation of it, the other party having fulfilled his obligation at the
time of the contract or before the contract comes into existence.

For example, A takes a public auto to go to Mount Road. A contract comes into existence as
soon as A was dropped in Mount Road. By that time, auto man has fulfilled his obligation, only
A has to fulfill his obligation i.e. paying the auto- man.

B) Bilateral Contract

A contract is said to be a bilateral contract where the obligations of both the parties to the
contract are pending at the time of formation of the contract. In this type of contract, a promise
on one side is exchanged for a promise on the other.

For example, A promises to stitch a blouse and 0 promises to pay Rs.30. Here A promises to
stitch the blouse and 0 promises to pay. Thus each party is both a promisor and a promisee.

ACCORDING TO EXECUTION

A) Executed Contract

A contract is said to be executed contract when both the parties to contract have performed
their share of obligation.

B) Executory Contract

An executory contract is one, which is either wholly unperformed, or something remains in

there to be done by both the parties to contract. Sometimes, a contract may be partly executed
and partly executory.

Other Contracts
Besides the above said classification, there are other types of contract also. Contingent Contract
is one such type.

A) Contingent Contract

Contingent contract is one, which is collateral to do or not to do something, if some event

collateral to such contract, does or does not happen. For example, A agrees to sell a certain
piece of land to B, in case he succeeds in his litigation concerning that land. This is a contingent
contract.

DISTINCTION BETWEEN AGREEMENT AND CONTRACT

DIFFERENCE BETWEEN VOID AGREEMENTS AND VOIDABLE CONTRACTS

1.A voidable contract is voidable at the option of one of the parties thereto. But a void
agreement cannot be enforced by any one of the parties thereto.

2.The defect in the case of voidable contract is curable and may be condoned, whereas a void
agreement is void ab initio, and its defects are not curable.
3.A voidable contract does not become void unless the party at whose option it is voidable
repudiates it. But a void agreement is void ab initio.

4.A voidable contract implies a contract, in which the consent of one of the parties to contract
is not free, whereas a void agreement denotes an agreement, which does not fulfill the essentials
of a valid contract.

5.In case of a voidable contract, a person is entitled to compensation for loss or damages
suffered by him on account of the non-performance of contract. But in a void agreement, as it
is unenforceable at law there does not arise any question of compensation due to the non-
performance of the agreement.

DIFFERENCE BETWEEN VOID CONTRACTS AND VOIDABLE CONTRACTS

OFFER AND ACCEPTANCE

To form a contract, there must be an offer by one party, an acceptance by another party, and an
exchange of consideration (something of value). The person who proposes the terms of an
agreement makes an offer, and is called an "offeror" in contract law. The person to whom the
offer is made is known as the "offeree." While an offer can be as simple as a one-sentence
verbal statement, both parties generally benefit from a more detailed (and written) assessment
of the offer and terms.

FEATURES OF OFFER

1.It may be express or implied:

An offer may be made either by words or by conduct. An offer, which is made by words spoken
or written, is called an express offer. The offer, which is made by the conduct of a person, is
called an implied offer.

2. It must create legal relation:

The offer must be made in order to create legal relations otherwise, there will be no agreement.
If an offer does into give rise to legal obligations between the parties it is not a valid offer in
the eye of law.

3.It must be definite & clear:

An offer must be definite and clear, if the terms of an offer are not definite and clear, it cannot
be called a valid offer. If such offer is accepted it cannot create a binding contract.

4. It is different from invitation to offer:

An offer is different from an invitation to offer. It is also called invitation to treat or invitation
to receive offer. An invitation to offer looks like offer but legally it is not offer.

In the case of an invitation to offer, the person sending out the invitation does not make an offer
but only invites the other party to make an offer. His object is to inform that he is willing to
deal with anybody who after getting such information is willing to open negotiations with him.
Such invitations for offers are not offers according to law and so cannot become agreement by
acceptance.

5. It may be specific or general:

When an offer is made to a specified person or group of persons, it is called specific offer. Such
an offer can be accepted only by the person or persons to whom it is made. A general offer, on
the other hand, is one, which is made to public in general and it may be accepted by any person
who fulfils the conditions mentioned in it. Both specified and general offers are valid.

6.It must be communicated to the offeree:

An offer is effective only when it is communicated to the offeree. If an offer is not
communicated to the offeree it cannot be accepted. Thus an offer, which is not communicated,
is not a valid offer. It applies to both specific and general offers.

7. It should not contain negative condition:

An offer should not contain a condition the non-compliance of which may be assumed as
acceptance. An offeror cannot say that if acceptance is not communicated up to a certain date,
the offer would be presumed to have been accepted. If the offeree does not reply, there is no
contract, because no obligation to reply can be imposed on him, on the ground of justice no
agreement because such condition cannot be imposed on the offeree. It is only a one sided
offer.

8. It may be subject to any terms & conditions:

An offeror may attach any terms and conditions to the offer he makes. He may even prescribe
the mode of acceptance. There is no contract, unless all the terms of the offer are accepted in
the mode prescribed by the offeror. It must be noted that if the offeror asks for sending the
acceptance by telegram and the offeree sends the acceptance by letter, and the offeror may
reject such acceptance.

9.It must not contain cross offers:

When two parties make similar offers to each other, in ignorance of each other’s such offers
are called cross-offers. The acceptance of cross-offers does not result in complete agreement.

ACCEPTANCE

Acceptance is an act or implication that provides an acceptance of an offer which then forms a
binding contract. In legal terms, when someone accepts an offering they are agreeing to comply
with the terms made in the offer

ESSENTIALS OF VALID ACCEPATANCE

1.It must be given by the Offeree:

An offer can be accepted only by the person to whom it is made. It cannot be accepted by an
other person without the consent of offeror. If anyone attempted to accept it no contract with
that person arises.

2.It must be Absolute & Unconditonal:

In order to convert the offer into an agreement the acceptance must be absolute and
unconditional. If the offeree imposes any condition in his acceptance it is not a valid acceptance
but a counter offer.

3.It must be in a Prescribed Manner:

If the offeror in his offer has prescribed any particular manner of acceptance it must be given
according to all that particular manner. If no particular manner is prescribed in the offer then
acceptance should be made in a reasonable manner.

4.It must be Communicated to the Offeror:

In order to form a contract, the acceptance must be communicated to the offeror in a clear
manner by the offeree or his authorized agent. Mere expression of intention to accept an offer
is not a valid acceptance.

5.It may be Express or Implied:

When an acceptance is given by words spoken or written, it is called express acceptance. When
it is given by conduct, it is called implied acceptance. Sometimes the proposal instead of being
made to a definite person is made to the public.

TYPES OF OFFER

1 Express offer: – It is an offer that is done through words that can be either oral or written.
The oral offer can be made face to face or via telephone. The written offer can be made via text
messages, advertisements, letters or e-mail.

2 Implied Offer: – It is an offer conveyed through acting or signs. But if a party observes a
silence over the offer then that offer cannot be valid.

3 Specific Offer: -It is the offer made to a specific person or group of persons and can be
accepted by the same, not anyone else.

4.General Offer: -It is the offer made to public at large and not to any particular person. it can
be accepted by anyone by abiding by the terms of it.

5. Cross Offer: -When both the parties involved makes a similar offer to one another without
knowing the each other’s offer then it is called Cross offer.

6 Standing or Open Offer: The offer that is continuous in nature is the standing offer.
 CONSIDERATION

Something of value given in exchange for something else of value, usually in the context of a
contract. Consideration is the benefit that each party receives, or expects to receive, when
entering into a contract. Consideration is often monetary, but it can be a promise to perform a
specific act, or a promise to refrain from doing something. In order for a contract or agreement
to be legally binding, every party to the contract must receive some type of consideration. In
other words, a contract is a two-way street, so each party must receive something of value from
the other party or parties. Illegal or immoral acts are not legally considered to serve as
consideration.

ESSENTIALS OF VALID CONSIDERATION

(i)Consideration must move at the desire of the promisor

Consideration can be offered by the promisee or a third-party only at the request or desire of
the promisor. If an action is initiated at the desire of the third-party, it is not a consideration.

(ii)Consideration may move from the promisee to any other person

If you look at the definition of consideration according to section 2 (d) of the Indian Contract
Act. 1872, it explicitly states the phrase ‘promisee or any other person…’ This essentially
means that in India, consideration may move from the promise to any other person. However,
it is important to note that there can be a stranger to consideration but not a stranger to the
contract.

(iii)It must have value in the eyes of the law

While the law allows the parties to decide an ‘adequate’ consideration for them, it must be real
and have value in the eyes of law. While the Court will not consider inadequacy, it will look at
it to determine if the consent was given by the party with free-will or not.

(iv)It should be over and above the Promisors’ existing obligations

If the promisor is already obligated either by his promise or law to perform or abstain from a
certain act, then it is not a good consideration for a promise.

(v)It cannot be Unlawful

A consideration that is against the law or public policies is not valid.

 CAPACITY OF PARTIES

Indian Contract Act, 1872, defines the capacity to contract of a person to be dependent on three
aspects; attaining the age of majority, being of sound mind, and not disqualified from entering
into a contract by any law that he is

1]Attaining the Age of Majority

According to the Indian Majority Act, 1875, the age of majority in India is defined as 18 years.
For the purpose of entering into a contract, even a day less than this age disqualifies the person
from being a party to the contract. Any person, domiciled in India, who has not attained the
age of 18 years is termed as a minor.

Let’s look at certain laws governing a minor’s agreement:

A Contract made with a Minor is Void

Since any person less than 18 years of age does not have the capacity to contract, any agreement
made with a minor is void ab-initio (from the beginning).

Contract by Guardian

Under certain circumstances, a guardian of a minor can enter into a valid contract on behalf of
the minor. Such a contract, which the guardian enters into, for the benefit of the minor, can also
be enforced by the minor.

However, guardians cannot bind a minor by a contract for buying immovable property. But, a
contract entered into by a certified guardian of a minor, appointed by the Court, with approval
from the Court for the sale of a minor’s property can be enforced.

Insolvency

A minor cannot be declared insolvent as he cannot avail debts. Also, if some dues are pending
from the properties of the minor and he is not personally liable for the same.

2]Person of Sound Mind

According to Section 12 of the Indian Contract Act, 1872, for the purpose of entering into a
contract, a person is said to be of sound mind if he is capable of understanding the contract and
being able to assess its effects upon his interests.
It is important to note that a person who is usually of an unsound mind, but occasionally of a
sound mind, can enter a contract when he is of sound mind. No person can enter a contract
when he is of unsound mind, even if he is so temporarily. A contract made by a person of an
unsound mind is void.’

•Idiocy:

An Idiot is a person with no intervals of saneness. He is in capable. His mental powers of

understanding even ordinary matters are absent because of lack of development of brain. The
agreement with an idiot is void.

•Lunacy or Insanity:

It is disease of brain. A lunatic loses the use of his reason due to some mental strain or disease.
He may have Lucid Intervals of sanity. He can enter into contract during that period when he
is of sound mind.

•Drunkenness:

It produces temporary incapability till the man is under the effect of intoxication creating
impotence of mind. He stands on the same footing as a lunatic.

3] Disqualified Persons

Apart from minors and people with unsound minds, there are other people who cannot enter
into a contract. i.e. do not have the capacity to contract. The reasons for disqualification can
include, political status, legal status, etc. Some such persons are foreign sovereigns and
ambassadors, alien enemy, convicts, insolvents, etc.

CONSENT

In the Indian Contract Act, the definition of Consent is given in Section 13, which states that
“it is when two or more persons agree upon the same thing and in the same sense”. So the two
people must agree to something in the same sense as well. Let’s say for example A agrees to
sell his car to B. A owns three cars and wants to sell the Maruti. B thinks he is buying his
Honda. Here A and B have not agreed upon the same thing in the same sense. Hence there is
no consent

Elements of Free Consent

1]Coercion (Section 15)

Coercion means using force to compel a person to enter into a contract. So force or threats are
used to obtain the consent of the party under coercion, i.e it is not free consent. Section 15 of
the Act describes coercion as

• committing or threatening to commit any act forbidden by the law in the IPC

• unlawfully detaining or threatening to detain any property with the intention of causing
any person to enter into a contract

2]Undue Influence (Section 16)

Section 16 of the Act contains the definition of undue influence. It states that when the relations
between the two parties are such that one party is in a position to dominate the other party, and
uses such influence to obtain an unfair advantage of the other party it will be undue influence.

The section also further describes how the person can abuse his authority in the following two
ways,

• When a person holds real or even apparent authority over the other person. Or if he is
in a fiduciary relationship with the other person

• He makes a contract with a person whose mental capacity is affected by age, illness or
distress. The unsoundness of mind can be temporary or permanent

3]Fraud (Section 17)

Fraud means deceit by one of the parties, i.e. when one of the parties deliberately makes false
statements. So the misrepresentation is done with full knowledge that it is not true, or recklessly
without checking for the trueness, this is said to be fraudulent. It absolutely impairs free
consent.

So according to Section 17, a fraud is when a party convinces another to enter into an agreement
by making statements that are

• suggesting a fact that is not true, and he does not believe it to be true

• the active concealment of facts

• a promise made without any intention of performing it

• any other such act fitted to deceive

4]Misrepresentation (Section 18)

Misrepresentation is also when a party makes a representation that is false, inaccurate,
incorrect, etc. The difference here is the misrepresentation is innocent, i.e. not intentional. The
party making the statement believes it to be true.

PERFORMANCE OF CONTRACT

The term ‘Performance of contract‘ means that both, the promisor, and the promisee have
fulfilled their respective obligations, which the contract placed upon them. For instance, A
visits a stationery shop to buy a calculator. The shopkeeper delivers the calculator and A pays
the price. The contract is said to have been discharged by mutual performance.

WHOM MAY PERFORM THE CONTRACT?

a) Promisor Performs the Promise

If a contract indicates that the parties intended for the promisor to fulfil the promise himself,
then the promisor is obligated to perform the promise. Usually, these include promises which
involve personal skills, experience, or expertise and are usually based on trust between the
promisor and the promisee.

b) Agent Performs the Promise

If the contract does not require the personal consideration of the promisor, then the promisor
can employ a competent person to perform the promise.

c) Legal Representatives Perform the Promise

If the promisor dies before performing the promise, then the legal representatives become
responsible for the same. If the promise involves the utilization of personal skills or expertise,
then the consideration ceases with the death of the promisor.

However, in all other scenarios, the legal representatives are obligated to perform the promise
unless the contract has a contrary intention specified. Also, the liability of the legal
representatives is limited to the value of the property inherited by them.
 BREACH OF CONTRACT

A business contract creates certain obligations that are to be fulfilled by the parties who entered
into the agreement. Legally, one party's failure to fulfill any of its contractual obligations is
known as a "breach" of the contract

REMEDIES OF BREACH OF CONTRACT

1]Recession of Contract

When one of the parties to a contract does not fulfil his obligations, then the other party can
rescind the contract and refuse the performance of his obligations.

As per section 65 of the Indian Contract Act, the party that rescinds the contract must restore
any benefits he got under the said agreement. And section 75 states that the party that rescinds
the contract is entitled to receive damages and/or compensation for such a recession.

2]Sue for Damages

Section 73 clearly states that the party who has suffered, since the other party has broken
promises, can claim compensation for loss or damages caused to them in the normal course of
business.

Such damages will not be payable if the loss is abnormal in nature, i.e. not in the ordinary
course of business

3]Sue for Specific Performance

This means the party in breach will actually have to carry out his duties according to the
contract. In certain cases, the courts may insist that the party carry out the agreement.

So if any of the parties fails to perform the contract, the court may order them to do so. This is
a decree of specific performance and is granted instead of damages.

4]Injunction

An injunction is basically like a decree for specific performance but for a negative contract. An
injunction is a court order restraining a person from doing a particular act.

So a court may grant an injunction to stop a party of a contract from doing something he
promised not to do. In a prohibitory injunction, the court stops the commission of an act and in
a mandatory injunction, it will stop the continuance of an act that is unlawful.
5]Quantum Meruit

Quantum meruit literally translates to “as much is earned”. At times when one party of the
contract is prevented from finishing his performance of the contract by the other party, he can
claim quantum meruit.

So he must be paid a reasonable remuneration for the part of the contract he has already
performed. This could be the remuneration of the services he has provided or the value of the
work he has already done.