Indian Contract Act Unit 1

WHAT IS LAW?
Law consists of rules that regulate the conduct of individuals, businesses, and
other organizations within society.
OBJECT OF LAW
Object of law is the creation and protection of legal rights to maintain order in
the society.
 Keeping the peace.
 Shaping moral standards.
 Promoting social justice.
 Maintaining the status quo (current political or social conditions).
 Facilitating orderly change.
 Maximizing individual freedom.

IGNORTIA JURIS NOT EXCUSANT

 Ignorance of law is - NO EXCUSE.
 Every member of the society is expected that his actions confirm to a set
pattern or standard as reflected in legal rules.
 For this purpose he is presumed to know the legal rules. He cannot take
the plea that he did not know them.

THE INDIAN CONTRACT ACT, 1872

 The Law of Contract lays down the legal rules relating to contracts, their
formation, performance and enforceability.
 This Act is one of the oldest mercantile law of India.
 This Act is based mainly on English Common Law consisting of judicial
precedents. This is not exhaustive Act as it does not deal with all the
branches of the law of contract.
 There are separate Acts for:
1. Sales of Goods Act
2. Partnership Act
3. Negotiable Instrument Act
4. Insurance Act
Mercantile law
 Mercantile law is also termed as commercial Law and business law.
 Business law is generally used to denote that portion of law which deals
with rights and obligations arising out of transactions between
mercantile persons.
 The term appears to be a convenient way of grouping together the laws
that should be regarded important for men in business.
 It includes following laws:
1. Law of Contracts
2. Sales of Goods Act
3. Partnership Act
4. Company Law
5. Negotiable Instrument Act
6. Insurance Act
1.1 Nature of the Law of Contract
 It does not lay down the duties and responsibilities which the law
will enforce BUT, It consists a number of limiting principles,
subject to which; the parties may create rights & duties for
themselves which the law will upload.
 Law of contract creates:
 jus in personam (Right against specific person)
 not jus in rem (Right against a thing at large)
Section 2 – Interpretation Clause
(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;
(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;
(c) The person making the proposal is called the "promisor", and the
person accepting the proposal is called "promisee",
(d) 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;
Definition of AGREEMENT
 Sec. 2(e), “Every promise and every set of promises, forming
consideration for each other”
 An agreement takes place when an offer is made by one person is
accepted by the other.
 Agreement = Offer + Acceptance + Consideration
 Consensus ad idem (meeting of minds) is essential while making an
agreement.
 2(f) Promises which form the consideration or part of the
consideration for each other, are called reciprocal promises

DEFINITION OF CONTRACT
 Sec.2(h) “An agreement enforceable by law.”
 Contract =Agreement + enforceability by law.
 Agreement must create a legal obligation or duty.
 All agreements are not contracts but all contracts are agreements.
AGREEMENT CONTRACT
An Agreement refers to an informal A contract, on the other hand, is a
arrangement between two or more formal arrangement between two
parties. parties.

An Agreement is not enforceable by a contract is enforceable by the court

the court of law. of law
An Agreement can be Oral or Written. A Contract is normally made in a
Written form for it to be enforceable
in the court of law.
An Agreement simply needs to be A Contract, however, must have the
agreed upon by two or more parties following elements for it to be legally
once they have a mutual binding in the court of law
understanding between them. The •Agreement •Intention to Create
only requirement is the “meeting of Legal Relations •Lawful Consideration
minds”. •Competent Parties •Free Consent
•Lawful Object •Not Expressly
Declared Void
Example- Meera and Rahul mutually Example- Preeti takes a loan of Rs. 1
decided to go for dinner on Friday Lakh from a Lender. Her brother
Night. However, when the day came, Pradeep promises in writing to the
Rahul had to work overtime and could lender that he would pay off his
not meet Meera. As a result, Meera sister’s loan if she were to default on
lost valuable time. Here Meera cannot the monthly instalments. Preeti repaid
sue Rahul for damages as the decision the initial few instalments of the loan
to go for Dinner is not a contract but after which she went bankrupt. The
merely a domestic agreement. lender reaches out to her brother
Pradeep and asks him to pay on his
sister’s behalf. Pradeep refuses to pay.
Now, the lender has every right to sue
Pradeep for damages as well as
recover the balance part of the loan
since the agreement to stand in as
surety was in writing and registered
and is enforceable in the court of law.
1.2 ESSENTIAL ELEMENTS OF VALID CONTRACT
 Agreement u/s 2(e) – promise + Consideration
 Lawful Consideration u/s 2(d) - cash, kind, act of abstinence
 Contractual Capacity of parties u/s11 and 12 – Competency
i.e major, sound mind and not disqualified by law.
 Free consent u/s 14 – without pressure (physical or mental)
Lawful object – the contract should not be Immoral or Illegal
Possibility of performance – No impossible events
 Agreement not expressly declared void – agreements must
not be declared void by law in force in the country
 Legal formalities – In writing, properly stamped
Kinds of Contracts
A. Validity or Enforceability
 Valid Contracts
 Voidable Contracts
 Void Agreement
 Void Contracts
 Unenforceable Contracts
 Illegal Contract
B. Formation
 Express Contracts
 Implied Contracts
 Quasi Contracts
C. Performance
 Executed Contracts
 Executory Contracts
 Bilateral Contracts
 Unilateral Contracts
A. According to validity
 Valid contract – Agreement satisfying all the essentials.
 Voidable contract – Consent of one party is not free. (Aggrieved
party, avoid in reasonable time). & Void at option of that party
only.
Example – If X is forced to sign a contract, the contract is voidable at
the option of X. X may either rescind (avoid or repudiate) the
contract or elect to be bound by it.
Section 2(i): “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 a voidable contract”.
 Void agreements - Void ab - initio …. From the very beginning
( lack of one of the essentials)
Section (2)(g) of Indian Contract Act: “An agreement not enforceable
by law is said to be void” A void agreement does not give rise to any
legal consequences. It is void ab initio, i.e., from the very beginning.
For example: An agreement with a minor or an agreement without
consideration.
 Void contract – A valid contract when it was made but
subsequently it becomes void as a contract cannot be void ab
initio.
Example – A contract between X and Y where X wants to sell his car.
It is valid contract but later on it was found that car didn’t belong to
X and was stolen. Now it is a void contract simply because the terms
of the contract are illegal.
Section 2 (j) of Indian Contract Act: “A contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”.
 Difference between void and voidable contract

VOID CONTRACT VOIDABLE CONTRACT

1. A void contract is one 1. A voidable contract is one

which is valid when it is made which is enforceable by law
but becomes void at later at the option of one of the
stage. parties.

2. A void contract cannot be 2. A voidable contract can be

enforced. enforced if the aggrieved
party elects to carry out the
contract.
3. A contract becomes void 3. A contracts become
due to certain reasons like voidable, if consent is caused
impossibility of by coercion, undue
performance , subsequent influence, fraud and
illegality etc. misrepresentation or failure
to perform at the time fixed
if time is essence of the
contract.
4. Compensation is not 4. In a voidable contract the
payable except only when aggrieved party can claim
party knows beforehand damages.
about the impossibility of the
performance.
Illegal contract – An agreement which is forbidden by law or
against the policy of law is known as unlawful or illegal
agreement. (smuggling, murder )
According to Section 23: An agreement is illegal and void if its
object or consideration
1. Is forbidden by law
2. Is of such nature that, it would defeat the provisions of any
law or
3. Is fraudulent
4. Involves or implies injury to the person or property of
another
5. The Courts regards it as immoral or opposed to public
policy
Unenforceable contract – one which cannot be enforced in a
Court of law due to some technical defects.
An unenforceable contract is one which suffers from some
technical defect such as lack of attestation, registration or
affixing of certain amount of stamps, etc.
Example : 1. Non registration 2. Want of Proper Stamp 3.
Lack of Signature.

B. According to formation
 Express contract – orally or in writing
 Section 9 of the Act says that when the proposal or
acceptance is made in words (written or spoken), the
promise is said to be express.

 Implied contract – by conduct or acts .

An implied contract is created by the conduct of the
parties or is inferred from circumstances.
Example – A steps into a bus to go to a certain
location. A is bound to pay the fare, although he has
not in words promised to do so.
 Quasi contract – No intention of the parties to create
legal relationship. It is created by law.
Example – liability of a person to whom money is paid
under mistake to repay it back.
C. According to time of performance:

EXECUTED CONTRACT EXECUTORY

CONTRACT

An executed contract is one An executory contract is one

that has been performed by all where either both the parties
parties. have still to perform their
respective , contractual
obligations in toto or part is
remaining from both the sides.
For example: A buys a TV set For example: A contracts to sell
from B for Rs. 29,000. A pays and deliver a TV to B for Rs.
the price and B delivers the TV. 29,000 to be paid in 3 weeks.
It is an executed contract. This is executory contract as
both the parties are yet to fulfil
their part of the contract.

 Unilateral Contract- In the case of a Unilateral

Contract, only one party has to perform its obligation
and the other party has already performed its obligation
at the time of formation of contract or before.
 Bilateral Contract- A Bilateral Contract is one in which
both the parties are yet to perform their respective
obligations at the time of formation of contract.
1.3 Offer and acceptance
1.3.1 The proposal or offer
 An offer is a proposal by one party to another to enter in to a
legally binding agreement with him.
 Offer [Proposal] A person is said to have made a proposal,
when he,
“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”. [Sec.2(a)].
 Offer cannot be a casual enquiry or a mere statement. Proposal
has to be made with the object of obtaining the assent.

1.3.2 Essentials of Valid offer

1. An offer may be ‘express’ or ‘implied’.
2. An offer must contemplate to give rise to legal consequences and
be capable of creating legal relations.
3. The terms of offer must be certain and not loose or vague.
4. An invitation to offer is not an offer.
5. An offer may be ‘specific’ or ‘general’.
6. An offer must be communicated to the offeree.
6(a) Communication of special terms
1. An offer should not contain a term, the non-compliance of
which would be amount to acceptance
2. An offer can be made subject to any terms and conditions.
3. Two identical cross-offers do not make a contract.

Revocation of the offer

1.Offer lapses after stipulated or reasonable time.
2.An offer lapses by not being accepted in the mode prescribed, or if
no mode is prescribed, in some usual and reasonable manner.
3.An offer lapses by rejection.
4.An offer lapses by the death or insanity of the offeror or the
offeree.
5.An offer lapses by revocation.
6.Revocation by non-fulfillment of the condition precedent to
acceptance.
7.An offer lapses by subsequent illegality or destruction of subject
matter.

1.3.1 The Acceptance

Section 2(b) states that “ A proposal when accepted becomes a
promise”.
When the person to whom proposal is made signifies his assent
thereto, the proposal is said to be accepted.

1.3.2 Essentials of acceptance

1. Acceptance must be given by the person to whom the offer is
made.
2. Acceptance must be absolute and unqualified. [Sec 7(1)].
3. Acceptance must be expressed in some usual and reasonable
manner, unless the proposal prescribed the manner in which it is to
be accepted. [7(2)].
4. Acceptance must be communicated by the acceptor.
5. Accepted must be given within a reasonable time and before the
offer lapses and/or is revoked.
6. Acceptance must succeed the offer.
7. Rejected offer can be accepted only, if renewed.

1.3.3 Communication and revocation of offer and

acceptance
1. Communication of the offer:
2. Communication of the acceptance:
3. Communication of a revocation:
a. Time during which an offer or acceptance can be revoked.
b. Effect of delay or loss of letter of acceptance in postal transit.
c. Contracts over the telephone.

Consideration
As per section 2(d) of the Act Consideration consist of four
components:
1. The act or abstinence or promise which forms the consideration
for the promise, must be done at the desire of the promisor;
2. It must be done by the promiseeor any other person;
3. I may have been already executed or is in the process of being
done or may be still executory;
4. It must be something to which the law attaches a value.

Essentials of Valid Consideration

1. Consideration must move at the desire of the promiser.
2. Consideration may move from the promiseeor any other person.
3. Consideration may be past, present or future.
4. Consideration must be something of value.
1. Consideration must move at the desire of the promiser.
 Durga Prasad vs. Baldeo (1881)
 National Bank of Upper India vs. Bansidhar. (1930)
2. Consideration may move from the promiseeor any
other person.
  Chinayya vs. Ramayya (1881) Doctrine of Constructive
Consideration.
 A Stranger to the contract cannot be sued.
Exceptions:
i. Where an express or implied trust is created. (M.K. Rapal vs John)
(Amir Ullah vs. Central Govt.)
ii. Family settlement. (Veeramma vs. Appayya)
iii. When a defendant constitutes himself as the agent of the third
party. ( Surjan vs. Nanat)
iv. In case of agency.
v. In case of assignment of rights under a contract

3. Consideration must be something of value.

 Consideration must be real and cannot be:
i. Physically impossible.
ii. Legally impossible.
iii. Uncertain consideration.
iv. Illusory consideration.

Exception to the rule, ‘NO CONSIDERATION, NO

CONTRACT’
1. Agreement made on account of natural love and affection.
( section 25(1))
2. Agreement to compensate for past voluntary service. (section
25(2))
3. Agreement to pay a time-barred debt. (section 25(3)).
4. Completed gift.
5. Contract of agency.
6. Remission by the promise, of performance of the promise. (section
63)
7. Contribution to charity.