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THE INDIAN CONTRACT ACT, 1872 NOTES

THE INDIAN CONTRACT ACT, 1872 NOTES – UPDATED

The Indian Contract Act, 1872 codifies the legal principles that govern ‘contracts’. The Act basically identifies the ingredients of a legally enforceable valid contract in addition to dealing with certain special type of contractual relationships like indemnity, guarantee, bailment, pledge, quasi contracts, contingent contracts etc

All agreements are not studied under the Indian Contract Act, 1872, as some of those are not contracts. Only those agreements, which are enforceable by law, are contracts.

Contract: A Contract is an agreement enforceable by law [Section2(h)]. An agreement is enforceable by law, if it is made by the free consent of the parties who are competent to contract and the agreement is made with a lawful object and is for a lawful consideration, and is not hereby expressly declared to be void [Section10]. All contracts are agreements but all agreements are not contracts. Agreements lacking any of the above said characteristics are not contracts. A contract that ceases to be enforceable by law is called ‘void contract’, [Section2(i)], but an agreement which is enforceable by law at the option of one party thereto, but not at the option of the other is called ‘voidable contract’ [(Section 2(i)].

Offer and Acceptance: Offeror undertakes to do or to abstain from doing a certain act if the offer is properly accepted by the offeree. Offer may be expressly made or may even be implied in conduct of the offeror, but it must be capable of creating legal relations and must intend to create legal relations. The terms of offer must be certain or at least be capable of being made certain.

Acceptance of offer must be absolute and unqualified and must be according to the prescribed or usual mode. If the offer has been made to a specific person, it must be accepted by that person only, but a general offer may be accepted by any person.

Communication of offer and acceptance, and revocation thereof-
(a) Communication of an offer is complete when it comes to the knowledge of the offeree.
(b) Communication of an acceptance is complete: As against the offeror when it is put in the course of transmission to him as against the acceptor, when it comes to the knowledge of the offeror.
(c) Communication of revocation of an offer or acceptance is complete: It is complete as against the person making it, when it is put into a course of transmission so as to be out of power of the person making it and as against the person to whom it is made, when it comes to his knowledge.

Meaning of certain terms

Meaning of certain terms
Proposal [(i.e., offer) 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 either to-
    • such act; or
    • abstinence,
  • he is said to make a proposal (i.e. offer).
Promise [Section 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.

Agreement [Section 2(e)]
  • Every promise and every set of promises,
  • forming consideration for each other,
  • is an agreement
Contract [Section 2(h)] An agreement enforceable by law is a contract.
Promisor and Promisee [Section 2(c)] When the proposal is accepted-

  • the person making the proposal is called as ‘promisor’; and
  • the person accepting the proposal is called as ‘promisee’
Consideration [Section 2(d)] When, at the desire of the promisor,
the promisee– has done or abstained from doing something; or
– does or abstains from doing something; or any other person
– promises to do or abstain from doing something,Such act, abstinence or promise is called a consideration for the promise.
Void agreement [Section 2(g)] An agreement not enforceable by law is said to be void. A void agreement is not enforceable from the very beginning, i.e. it is void ab initio.
Voidable Contract [Section 2(i)] An agreement is a voidable contract if-
– it is enforceable by law at the option of one or more of the parties thereto,
– it is not enforceable by law at the option of the other or others. Simply speaking, a contract which can be set aside (i.e. terminated or repudiated or avoided) at the option of the aggrieved party is a voidable contract. Until the contract is repudiated, it remains a valid contract. As per Section 64, the aggrieved party must restore the benefit that he has received under the contract. The other party is freed from his obligation to perform the contract.
Void contract [Section 2 (j)]
  • A contract
  • which ceases to be enforceable by law
  • becomes void when it ceases to be enforceable.

Simply speaking, a contract which, when entered into, was valid, but subsequently became void due to impossibility of performance or change in circumstances or change in law or some other reason (termed as supervening impossibility), is termed as void contract.

CONSIDERATION

(a) Consideration is a price for the promise of the other party and it may either be in the form of ‘benefit’ or some ‘detriment’ to the parties.
(b) Consideration must move at the desire of the promisor.
(c) It may be executed or executory.
(d) Past consideration is valid provided it moved at the previous request of the promisor.
(e) It must not be something which the promisor is already legally bound to do.
(f) It may move from the promisee or any third party.
(g) Inadequacy of consideration is not relevant.
(h) Consideration must be legal.
(i) The general rule of law is “No Consideration, No Contract” but there are a few exceptional cases where a contract, even though without consideration is valid.
(j) “Stranger to a contract can’t sue but in some exceptional cases the contract may be enforced by a person who is not a party to the contract.

ESSENTIAL ELEMENTS OF A CONTRACT

The following persons are incompetent to contract: (a) minor, (b) persons of unsound mind, (c) other disqualified persons.

(a) Minor: Agreement with a minor is altogether void but his property is liable for necessaries supplied to him. He cannot be a partner but can be admitted to benefits of partnership with the consent of all partners. He can always plead minority and cannot be asked to compensate for any benefit received under a void agreement. Under certain circumstances, a guardian can enter into valid contract on behalf of minor. Minor cannot ratify a contract on attaining majority.

(b) Persons of unsound mind: Persons of unsound mind such as idiots, lunatics and drunkers cannot enter into a contract, but a lunatic can enter into a valid contract when he is in a sound state of mind. The liability for necessities of life supplied to persons of unsound mind is the same as in case of minors. (Section 68).

(c) Certain other persons are disqualified due to their status.

Free Consent

Two or more persons are said to consent when they agree upon the same thing in the same sense (Section 13). Consent is free when it is not caused by mistake, misrepresentation, undue influence, fraud or coercion. When consent is caused by any of above said elements, the contract is voidable at the option of the party whose consent was so caused (Sections 19 and 19A)

(a) Coercion: Coercion is the committing or threatening 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 with the intention of causing any person to enter into an agreement (Section 15). A contract induced by coercion is voidable at the option of the aggrieved party.

(b) Undue influence: When one party to a contract is able to dominate the will of the other and uses the position to obtain an unfair advantage, the contract is said to be induced by undue influence. (Section 16). Such contract is voidable, not void.

(c) Fraud: Fraud exists when a false representation has been made knowingly with an intention to deceive the other party, or to induce him to enter a contract (Section 17). Contract in the case is voidable.

(d) Misrepresentation: Means a misstatement of a material fact made believing it to be true, without an intent to deceive the other party (Section 18). Contract will be voidable in this case.

(e) Mistake: When both the parties are at a mistake to a matter of fact to the agreement, the agreement is altogether void.

Lawful Object and Consideration

An agreement where the object or the consideration is unlawful, is void. Object or consideration is unlawful if it is forbidden by law, it defeats the provisions of law; or is fraudulent, or involves injury to the person or property of another; or is immoral; or is opposed to public policy.
Besides the above said agreements, certain agreements have been expressly declared to be void by the Contract Act such as – wagering agreements, agreement with uncertain meaning, agreements where consideration is unlawful in part etc.

PERFORMANCE OF CONTRACT

1. The promisor or his representative must perform unless the nature of contract shows that it may be performed by a third person, but the promisee may accept performance by a third party. (Sections 37, 40 and 41)
2. In case of joint promisors, all must perform, and after the death of any of them, the survivors and the representatives of the deceased must perform. But their liability is joint and several. If the promisee requires any one of them perform the whole promise, he can claim contribution from others. (Sections 42, 43 and 44)
3. Joint promisees have only a joint right to claim performance. (Section 45)
4. The promisor must offer to perform and such offer must be unconditional, and be made at the proper time and place, allowing the promisee a reasonable opportunity of inspection of the things to be delivered. (Sections 38, 46, 47, 48, 49 and 50)
5. If the performance consists of payment of money and there are several debts to be paid, the payment shall be appropriated as per provisions of Sections 59, 60 and 61.
6. If an offer of performance is not accepted, the promisor is not responsible for non-performance and does not lose his rights under the contract; so also if the promisee fails to accord reasonable facilities. He may sue for specific performance or he may avoid the contract and claim compensation (Sections 38, 39, 53 and 67).
7. Rescission is communicated and revoked in the same way as a promise. The effect is to dispense with further performance and to render the party rescinding liable to restore any benefit he may have received. (Sections 64 and 66)
8. Parties may agree to cancel the contract or to alter it or to substitute a new contract for it. (Section 62)

BREACH OF CONTRACT AND ITS REMEDIES

1. In case of breach of contract by one party, the other party need not perform his part of the contract and is entitled to compensation for the loss occurred to him.
2. Damages for breach of contract must be such loss or damage as naturally arise, in the usual course of things or which had been reasonably supposed to have been in contemplation of the parties when they made the contract, as the probable result of the breach.
3. Any other damages are said to be remote or indirect damages, hence, cannot be claimed.

CONTINGENT AND QUASI CONTRACTS

  • Contingent Contracts are the contracts, which are conditional on some future event happening or not happening and are enforceable when the future event or loss occurs. (Section 31)

RULES FOR ENFORCEMENT

(a) If it is contingent on the happening of a future event, it is enforceable when the event happens. The contract becomes void if the event becomes impossible, or the event does not happen till the expiry of time fixed for happening of the event.
(b) If it is contingent on a future event not happening. It can be enforced when happening of that
event becomes impossible or it does not happen at the expiry of time fixed for non-happening of the event.
(c) If the future event is the act of a living person, any conduct of that person which prevents the event happening within a definite time renders the event impossible.
(d) If the future event is impossible at the time of the contract is made, the contract is void ab initio.

  • Wagering Contracts are void.
  • Quasi Contracts arise where obligations are created without a contract. The obligations which they give rise to are expressly enacted:
    1. If necessaries are supplied to a person who is incapable of contracting, the supplier is entitled to claim their price from the property of such a person
    2. A person who is interested in the payment of money which another is bound to pay, and who therefore pays it, is entitled to be reimbursed by the other
    3. A person who enjoys the benefit of a non-gratuitous act is bound to make compensation.
    4. A person who finds lost property may retain it subject to the responsibility of a bailee.
    5. If money is paid or goods delivered by mistake or under coercion, the recipient must repay or make restoration.

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