UNIT 2 :

INDIAN CONTRACT ACT,

1872
 Introduction

• Law of contract is the most important and basic part of Mercantile law.
• It is not only a trader or merchant but every person who lives in the organized
society, consciously or unconsciously enters into contracts everyday.

• Such contracts create legal relations giving rise to certain rights and
obligations.
 The law of contract is mainly concerned with three questions:

(1) Is there an agreement?

(2) Can the parties to such agreement enforce it in a court of law?

(3) How can they enforce it?

The object of law of contract is to ensure that the rights and obligations created
by a contract are honored.
 An Overview of Indian Contract Act
• The Act came into force with effect from September 1, 1872.
• It is applicable to the whole of India except the State of Jammu & Kashmir.
 DEFINITIONS

• A contract is an agreement to do or not to do an act. It is a legally binding

agreement, which is, enforceable at law.

• “Contract is an agreement creating and defining obligations between the

parties.” – Salmond

• Section 2(h) of the Contract Act defines a Contract as “an agreement

enforceable by law”.
 TWO COMPONENTS OF A CONTRACT

AGREEMENT

ENFORCEABILITY
 AGREEMENT

• According to sec 2 (e), “Every promise and every set of promises, forming
consideration for each other, is an agreement.”

• A promise is defined in sec 2 (b) as, “a proposal when accepted becomes a

promise.”

• Thus an agreement is an accepted proposal or offer where one party makes the
proposal and the other party accepts it.
• Hence an agreement consists of the following elements:
a) Offer
b) Acceptance.
• It requires existence of two or more persons i.e., plurality of persons
because a person cannot enter into an agreement with himself.

• It also implies that the parties should be thinking of the same thing in
the same time.

• Thus, an agreement is the outcome of two consenting minds i.e.

‘consensus ad idem.’
 OFFER

The contract is a combination of agreement and enforceability by law. The first or

the initial step of agreement consist of offer and acceptance. The contract comprises
of at least two party one is the offeror and the other is the offeree.

According to Indian Contract Act, 1872 (Act No.9 of 1872) “Offer” is define
under-
“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”.
 Essentials of a valid offer

1. Offer must be communicated

2. Must create legal relationship
3. Definite, unambiguous and certain in nature
4. It must distinguished from invitation to offer
5. It may be general or specific in nature
6. Offer must be made with a view to obtain the assent
 1. Offer must be communicated :-

In case of Lalman Shukla v. Gauri Dutt

The High Court of Allahabad said that knowledge and acceptance of a proposal
must be communicated to people are the basic essentials in order to constitute a
valid contract. The person can claim reward if he gives his consent and perform the
terms of the proposal.
 2. Must create legal relationship

In case of Balfour v. Balfour

They were married couple. Husband promised to his wife to send £30 per month.
But husband failed to do so. Then wife filed the case against him and it was held
that there was no intention to create legal relation. Thus the agreement was not
valid.
 3.Definite, unambiguous and certain in nature

For example : Mitesh offered to sell his car to Tanmay. Mitesh is owned two cars
one is of Ford & other is of BMW and Mitesh offered his Ford car to Tanmay but
Tanmay thought Mitesh if offering him his BMW one. As in the offer it was not
definite which car Mitesh wants to sell, thus this is not a valid offer.
 4. It must distinguished from invitation to offer:-

For example : A suit was displayed with a price tag in a shop. This is not a offer it
is invitation to offer.
 5. It may be general or specific in nature:-

The offer can be given to public at large in general by advertisement in newspaper

etc. or it can be given specific person too.
 6. Offer must be made with a view to obtain the assent :-

The offeror must obtain consent which should be “free” in nature as define under
Section 14 as it define it should not be taken under coercion [section 15], undue
influence [Section 16], fraud [Section 17], misrepresentation [Section 18] &
Mistake [Section 20, 21 and 22].
 ENFORCEABILITY

• An agreement to become a contract must give rise to a legal obligation.

• the common acceptance formed and communicated between the two parties
must create legal relations and not merely the relations which are purely
social or domestic.
 CONTRACT

AGREEMENT +
ENFORCEABILI
TY

AGREEMENT

PROMISE

OFFER AND
ACCEPTANCE
 CONTRACT = AGREEMENT + ENFORCEABILITY
AT LAW

Therefore, All contracts are agreements but all agreements are not contracts.
 DEFENDAN
PLAINTIF
T
F
Plaintiff and Defendant
Defendant
 VOID AGREEMENT, VOIDABLE
CONTRACT,VOID
•
CONTRACT
Void Agreement: Sec 2(g), “An agreement which is not enforceable by law by either of the parties is void”.

• No legal rights can arise out of a void agreement. A Void Agreement WAS Never Valid

• Its is Void ab initio i..e, from inception. Eg- smuggling. agreement that is not enforceable by law

• A voidable contract is a formal agreement between two parties that may be rendered unenforceable for a number of
legal reasons. Reasons that can make a contract voidable include: Failure by one or both parties to disclose a material
fact. A mistake, misrepresentation or fraud. Undue influence or duress.

• A void contract is a contract that isn't legally enforceable, starting from the time it was created. While both
a void and voidable contract are null, a void contract cannot be ratified. In a legal sense, a void contract is treated as
if it was never created and becomes unenforceable in court.

• Discharge of the contract- if one party dies

 VOID CONTRACT
• Section 2 (j) A contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable.

• Void contract – Taylor v. Caldwell

• Defendant: owner of a theatre
• Plaintiff wanted to perform a musical performance.
• Previous day of performance, theatre burnt down
• Taylor asks Caldwell for compensation for loss
• Court: no compensation as the contract is impossible to perform
Basis of difference Void Contract Voidable Contract

Contract ceases to be Contract is enforceable at the

Definition
enforceable by law. option of the aggrieved party.

Contract becomes void either

Contract becomes voidable
because of sudden and
when it is caused by coercion,
Nature unexpected events or of law
undue influence, fraud and
changes, before the
misrepresentation.
performance becomes due.

The parties gets a right to

Does not provide any legal
declare the contract void
Rights remedy for the parties to the
otherwise it remains valid.
contract.
 ESSENTIALS OF A VALID CONTRACT

Sec 10- “All agreements are contracts, if they are made by the free
consent of the parties, competent to contract, for a lawful
consideration and with lawful object and are not here by declared to
be void”.
Offer, Acceptance, Consideration, Performance
 ESSENTIALS
1. Offer and Acceptance
2. Intention to create legal relationships
3. Free consent
4. Contractual capacity
5. Lawful Consideration
6. Lawful object
7. Not expressly declared void
8. Possibility of performance
9. Legal formalities
 1. Offer and Acceptance
• An agreement is preliminary to a contract.
• An agreement is the result of offer and acceptance.
 OFFER

• Sec 2 (a) of the Act defines a Proposal/ Offer, “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”.

• sec 2 (c), “ the person making the proposal is called ‘the promisor’ and the
person accepting the proposal is called ‘the promisee’ ”.
 CLASSIFICATION OF OFFER

GENERAL SPECIFIC CROSS

OPEN/
COUNTER STANDIN
G
 Types
• Specific Offer
• Where an offer is made to a particular and specified person.

• Only that person can accept such specific offer

• General Offer
• It is an offer made to public at large with or without any time limit

• Anyone performing the conditions of the offer can be considered to have accepted the offer

• Until the general offer is retracted or withdrawn, it can be accepted by anyone at any time as it is a
continuing offer.
• Carlill v. Carbolic Smoke Ball Co
• Cross Offer
• Occurs when parties make identical offers to each other in ignorance of each others offer
• A cross offer cannot be treated as mutual acceptance and therefore no binding contract

• Counter Offer
• The offered on receiving the offer imposes conditions.
• Modifies offer □ counter offer
• Amounts to rejecting the first offer
• Hyde v/s Wrench

• Open Offer
• Made to Public at large, open for a certain period of time
 ACCEPTANCE

• The offeree’s willingness to be bound by the terms of the offers is known as

“Acceptance”.

• Sec 2(b) defines Acceptance: “ when the person t whom the proposal is made
signifies his assent there to, the proposal is said to be accepted. A proposal
when accepted becomes a promise”.
 RULES GOVERNING ACCEPTANCE

• Acceptance may be expressed or implied

• It must be made by the offeree
• It must be unconditional and absolute
• It must be according to the mode prescribed
• It must be communicated
• It must be given before the offer expires or revoked.
2. Intention to create legal relationships

• Balfour v/s Balfour

 3. Free consent

• “Consensus ad idem”- Two parties thinking about the same at the same time.
• Consent must also be free.
• Sec 14 provides, “The consent is said to be free when, it is not covered by
coercion or undue influence or fraud or misrepresentation or mistakes”.
 COERCION

• Coercion means forcibly compelling a person to enter into a Contract.

Coercion is a threat or force used by one party against the other for making
him to enter into an agreement.

• Sec 15 “Coercion is the committing, or threating to commit, any act forbidden

by the Indian Penal Code or the 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 an agreement caused due to coercion

□Voidable at the option of the party whose consent was so caused.

• Ranganayakamma v. Alwar Shetty

• Chikkam Amiraju v. Chikkam Seshamma

• Burden of Proof: lies on the party who wants to relieve himself/herself of the
consequences of coercion.
 UNDUE INFLUENCE

• Sec 16(1)
• The relation subsisting between 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 said to dominate the will of another:
a. Where he/she holds a real or apparent authority over the other .ex:
master and servant, police officer and accused
b. Where he stands in a fiduciary relationship to the other □ mutual trust
and confidence
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. Ex: doctor and patient
 If an agreement caused due to undue influence

□Voidable at the option of the party whose consent was so caused

Burden of proof: lies with the person who is in a position to dominate the will
of the other

• Manu Singh v. Umadat Pandey

 FRAUD

• Fraud may be defined as an intentional, deliberate or wilful

misstatements of facts, which are material for the formation of the
contract.
 Fraud (Sec 17)
• Fraud means and includes any of the following act committed by a party to a
contract or with his connivance or by his agent with intent to deceive another party
thereto or his agent or to induce him to enter into the contract.
1) the suggestion, as to a fact, of that which is not true by one who does not believe it
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; and
5) any such act or omission as to law specially declared to be fraudulent
 Voidable at the option of the party whose consent was so caused
or
can insist the contract be
performed as if representation
had been true

FRAUD (AND)

Aggrieved party can sue

for damages
 MISREPRESENTATION

• It is false statement made innocently i..e, without any intention of deceiving

the other party.

• Misrepresentation’ does not involve deception but is only an assertion of

something by a person which is not true, though he believes it to be true.
 Sec 18
• "Misrepresentation" means and includes -
(1)the positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true;

(2)any breach of duty which, without an intent to deceive, gains an advantage to the
person committing it, or anyone claiming under him; by misleading another to his
prejudice, or to the prejudice of any one claiming under him;

(3)causing, however innocently, a party to an agreement, to make a mistake as to the

substance of the thing which is subject of the agreement.
Voidable at the option of the party whose consent was so caused
or
can insist the contract be performed as if
representation had been true

*If the party to whom the misrepresentation had been made had means of
discovering the truth with ordinary diligence □ Contract not nvoidable

Ordinary diligence: diligence as a reasonable prudent man would consider

necessary having regard to the nature of the transaction
• A correct belief that leads one party to misunderstands the other.
• The term is understood in a different sense.

MISTAKE
 Mistake
• Mistake of fact
• Agreement void where both parties are under mistake as to matter of fact
essential to contract

• 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.
• Mistake of Law
• A contract is not voidable because it was caused by a mistake as to any law in
force in India

• Mistake as to a law not in force in India has the same effect as a mistake of
fact.
 4. Contractual capacity
• Sec 11 ,” Every person is competent to contract, who is of the age of majority
according to the law to which he is subject, and who is of sound mind and is
not disqualified from contracting by any law which he is subject”.

• The following persons are incompetent to contract.

• (a). Minors
• (b). Persons of unsound mind
• (c). Persons disqualified by law to which they are subject.
 Contractual Capacity of Minors
1) Contract with a minor is said to be Void ab initio.

1) No estoppel against a minor

2) No liability in contract

3) No ratification

4) Beneficial contracts

5) Minor as an agent

6) Minor as a partner

7) Minor as shareholder

8) Insolvency

9) Liability for necessaries [Robert v. Gray]

10) Contract by guardian

 Sound mind

• A person will be considered to be of sound mind if he at the time of entering

into a contract is capable of understanding it and forming a rational
judgment as to its effect upon his interest.
 Contract by disqualified persons

• Alien Enemy
• Convict – while undergoing imprisonment
• Insolvent
 5. Lawful Consideration

• Consideration is the price for which the promise of another is brought.

• It is known as quid pro-quo or something in return.
• Sec 25 provides that an agreement without consideration is void
• “Nudo Pacto” – A bare contract.
 Legal Rules

1. Consideration must move at the desire of the promisor

2. Consideration may move from the promisee or any other person
3. Consideration may be past , present or future
• Past consideration □ X renders service in Jan. In March Y promises to compensate X
□valid according to Indian contract Act

• Present Consideration/Executed Consideration □ moves simultaneously with promise. X

receives money from Y to deliver goods

• Future Consideration/Executory Consideration □X will deliver goods to Y in a week and

Y will pay after 2 weeks
4.Consideration need not be adequate
5.Consideration must be real not illusionary

• Must have some value in the eyes of the law

6. Discharge of a pre-existing obligation is no consideration
• Consideration must be something more than what the promisee is already bound to do

7.Consideration must not be unlawful, immoral, or opposed to public

policy
 Exceptions
• An agreement made without consideration is void, unless
1. An agreement made on account of natural love and affection
• A written and registered agreement based on natural love and affection among near
relatives

2. Compensation paid for past voluntary services

• A promise to compensate wholly or in part a person who has already voluntarily done
something for the promisor does not require consideration to be enforced
3. Time barred debt:
• A promise in writing to pay a time barred debt is valid without consideration.

4. Agency
• No consideration is necessary to create an agency

5. Completed gift
• Nothing in this section shall affect the validity, as between the donor and donee, of any
gift actually made.

• For a gift, not being an agreement to make a gift, no consideration is necessary.

 Legality of object/consideration
• Agreements in which there is no legality of object and/or consideration □
void

• The consideration or object of an agreement is lawful unless

• It is forbidden by law
• Is of such nature that, if permitted, it would defeat the provisions of any law
• Is fraudulent
• involves or implies, injury to the person or property of another
• The Court regards it as immoral, or opposed to public policy.
 6. Lawful Object
• The object of an agreement must be lawful. The old partnership
deed stands discharged by an agreement.
• The object is said to be unlawful if-
• (a). It is forbidden by law
• (b). If permitted it would defeat the provisions of any law
• (c). It is fraudulent
• (d). It involves an injury to the person or property of any other;
• (e). The court regards it as immoral or opposed to public policy.
 7. Not expressly declared void
Sec 24 to 30 of Indian Contract Act specify certain types of agreements
which have been expressly declared to be void some of agreements are:

• An agreement in restrain of marriage.

• An agreement in restrain of trade.
• An agreement in restrain of legal proceedings.
• A wagering agreement.
 8. Possibility of performance

• An agreement to do an impossible act( an act impossible to perform

physically or legally) is said in sec 56 of this Act.

• It lays down that an agreement to do act impossible by itself is void.

• Ex: A agrees with B o discover treasure by magic, the agreement is void as it
cannot be performed physically.
 Remedies to breach of contract
• Breach: Failure, without legal excuse, to perform any promise that comprises
the whole or part of the contract. One party's failure to fulfill any of its
contractual obligations.

• Remedies
• Damages
• Injunction
• Specific performance
• Quantum Meruit
• Restitution and Cancellation
1. Damages – compensation in money for loss suffered by injured party
• General Damage: ordinary damage that arises as a natural consequence of breach
• Special Damages: Arise out of special circumstances. Said circumstance has to be known
to both parties
2. Injunction: order passed by court ordering party to do or not to do something.
An authoritative action asking an individual to refrain from carrying out an
action.

3. Specific performance – compels the defendant to perform contract

4. Quantum Meruit: “as much as is earned”

• Right to claim compensation for work already done