MODULE 1- INDIAN CONTRACT ACT 1872

 In India, the law relating to contracts is contained in the INDIAN CONTRACT ACT, 1872.
 The Act came into force on the 1st day of September 1872 and it applies to the whole of India except
the State of Jammu and Kashmir.

Definition

 Section 2 (h) of the Indian Contract Act defines a contract as “an agreement enforceable by law”.
 A contract essentially consists of two elements. They are agreement and enforceability.

ESSENTIAL ELEMENTS OF A VALID CONTRACT (Sec 10 of the Indian Contract Act)

1. Agreement: it is formed when one party makes the proposal and the other party accepts it.
Agreement = offer + acceptance
2. Consensus ad idem: For a valid contract, there must be a complete identity of minds between the
contracting parties.
3. Free Consent: The contracting parties must give their consent freely. It must not be given due to coercion,
undue influence, fraud, misrepresentation or mistake.
4. Capacity of the parties: The parties making the contract must be legally competent in the sense that each
must be of the age of majority, of a sound mind, and not expressly disqualified from contracting.
5. Lawful Consideration: An agreement to be enforceable by law must be supported by consideration.
Moreover, the consideration must be lawful.
6. Lawful object: The object of the agreement must be lawful. It is considered unlawful if it is illegal, immoral,
defeat provisions of any law or opposed to public policy.
7. Not expressly declared void: The agreement must not have been declared void by any law in force in India.
8. Intention to create legal relations: There must be an intention among the parties that the agreement
should be attached by legal consequences and create legal obligations.
9. Certainty of meaning: The terms of the agreement must be certain and unambiguous.
10. Legal formalities: The agreement must comply with the necessary formalities as to writing, registration,
stamping etc.

Classification of contracts:

1. On the basis of enforceability:

a) Valid contract: A contract which satisfies all the legal requirements laid down in Section 10 of the Act, is a
valid contract.
b) Void agreement: Section 2(g) defines it as, “an agreement not enforceable by law is said to be void”.
Such agreements are void ab initio which means that they are unenforceable right from the time they are
made.
c) Void Contract: Section 2(j) provides that "a contract which ceases to be enforceable by law becomes void
when it ceases to be enforceable."
d) 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 other or others, is a voidable contract.
 e) Illegal agreement: An agreement which is either prohibited by law or otherwise against the policy of
law is an illegal agreement.
f) Unenforceable Contract: An unenforceable contract is that which is valid and enforceable, but for
certain technical defects it becomes unenforceable.

2. On the basis of mode of creation:

a) Express Contract: An express contract is that which is made in writing or by the words of mouth.
b) Implied contract: An implied contract is one which arises out of acts or conduct of the parties or out of
the dealings between them.
c) Quasi Contract: Under certain circumstances, law itself creates legal rights and obligations against the
parties. These obligations are known as quasi contracts.

3. On the basis of execution

a) Executed Contract: When a contract has been completely performed, it is termed as executed contract.
b) Executory Contract: Where one or both the parties to the contract have still to perform their obligations
in future, the contract is termed as executory contract.
c) Unilateral Contract: A unilateral contract is one sided contract in which only one party has to perform
his promise or obligation.
d) Bilateral Contract: A bilateral contract is one in which both the parties have to perform their respective
promises or obligations.

OFFER AND ACCEPTANCE

 An agreement arises only when an offer is made by one person and is accepted by the other person, to
whom it is made. Thus, an offer and its acceptance is the starting point in the making of an agreement.
 The person making the proposal or offer is called the ‘promisor or offeror’.
 The person to whom the proposal is made is called the ‘promisee or offeree’.

Essential features of a valid offer:

1. An offer must be made with an intention of creating legal obligations.

2. The terms of an offer must be clear, definite and certain.
3. The offer must be communicated to the other party.
4. The offer must be made with a view to obtaining the consent of the offeree.
5. Invitation to an offer is not an offer.
6. Special conditions attached to an offer must also be communicated.
7. The offer may be express or implied.
8. The offer may be specific or general: When an offer is addressed to a specific individual or a group of
individuals, called it as specific offer. When an offer is addressed to the public at large, it is said to be a
general offer.
9. The offer should not contain a term the non-compliance of which would amount to acceptance.
10. Offer may be conditional: a conditional offer lapses when the condition is not accepted.
Kinds of offers:

1. Express offer: An express offer is one which is made by words spoken or written.
2. Implied offer: An implied offer is one which is made otherwise than in words.
3. Specific offer: A specific offer can be accepted only by that definite person or that particular group of
persons to whom it has made.
4. General offer: A general offer is one which is made to the world at large or public in general.
5. Standing or Open or Continuing offer: An offer for a continuous supply of certain goods and services in any
quantity at a certain price as and when required it will be termed as a standing or open offer.
6. Counter offer: A Counter offer is rejecting the original offer and making a new offer. The new offer is the
counter offer.
7. Cross offer: Where identical offers are made by parties in ignorance of each other, the offers are said to be
cross offers.

Lapses of an offer (when does an offer come to an end):

1. By communication of notice of revocation by the proposer: The proposer can revoke or withdraw his offer
at any time before the acceptor posts his letters of acceptance.
2. By lapse of prescribed time: An offer lapses if acceptance is not communicated within the time prescribed
in the offer, or if no time is prescribed, within a reasonable time.
3. By non-fulfillment of a condition by acceptor: A proposal comes to an end when the acceptor fails to fulfil
a condition precedent to the acceptance of the proposal.
4. By the death or insanity of the offeror: A proposal comes to an end by the death or insanity of the offeror
if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance.
5. By counter offer: A proposal lapses if a counter offer is made.
6. By subsequent illegality or destruction of subject matter: An offer lapses if it becomes illegal after it is
made or which the subject matter is destroyed before acceptance.
7. By rejection: An offer lapses if it has been rejected by the offeree.

Acceptance:
 When the person to whom the proposal is made signifies his willingness thereto, the proposal is said to be
accepted.

Essentials of valid acceptance:

1. Acceptance must be unconditional.

2. Acceptance must be communicated to the proposer.
3. Acceptance may be express or implied.
4. The acceptance must be given in some usual and reasonable manner.
5. The acceptance must be given before the lapse of offer.
6. The acceptance cannot be implied from silence.
7. Acceptance must be made by the offeree.
 CONSIDERATION
 When a party to an agreement promises to do something, he must also get something in return from
another party. This something is called consideration.
 Accordingly, an agreement which is not supported by consideration is a nudum pactum (bare agreement).

Essentials of consideration:

1. Consideration must move at the desire of the promisor: promisee should perform his part of
promise only at the desire of the promisor.
2. Consideration may move from promisee or any other person: It is not necessary that the
consideration should proceed only from the promisee.
3. Consideration may be past, present or future:
 When the promisor received the consideration from the promisee before the date of the promise it is
called past consideration.
 When the promisor receives consideration from promise simultaneously with the promise, it is called
present or executed consideration.
 When the promisor has to receive consideration in future for his promise, it is called future
consideration or executory consideration.
4. Consideration need not be adequate: The consideration need not be adequate to the promise but it must
be of some value in the eye of the law.
5. Consideration must be real and not illusory: Consideration must be real and be of some value in the eyes
of law.
6. Consideration must be lawful: Section 23 of the Act which says that “every agreement of which the
consideration is unlawful, is void”.

Privity of consideration or stranger to consideration:

 The term ‘privity of consideration’ means stranger to the consideration, or consideration given by any other
person other than the promisee.
 A promise is enforceable so long as there is some consideration for it, and it is immaterial whether it is
furnished by the promisee or other person even a stranger.

Privity of contract or stranger to contract

 A stranger to contract is a person who is not a party to the contract.

 As per the doctrine of privity of contract, a person, who is not a party to the contract, cannot sue for
carrying out the promise made by the parties to the contract.

Exceptions to the rule that stranger to a contract cannot sue:

1. In case of Trusts: When a trust is created, the beneficiary can enforce his rights given to him under the
trust, even though he was not a party to the contract between the settler and the trustees.
2. In case of marriage settlement, partition or other family arrangements: Where a provision is made in a
partition or family arrangement for the benefit of any member of the family, such a member may sue to
enforce the agreement even though he is not a party to the agreement.
3. In case of agency contract: A contract entered into by an agent acting within the scope of his authority,
can be enforced by the principal.

Exceptions to the rule “no consideration, no contract”:

1. Agreements made on account of natural love and affection: it must be in writing, registered under the law,
made on account of natural love and affection and between parties standing in a near relation to each other.
2. Promise to compensate for past voluntary services: if a person has already done something for the promisor
and the promisor agrees to compensate, the agreement is valid even though it is without consideration.
3. Agreement to pay time-barred debt: when a debtor promises by way of writing to pay a time barred debt,
the agreement is valid even though it is not supported by consideration.
4. Completed gifts: The gifts actually made by a donor and accepted by the donee, are valid even without
consideration.
5. Contract of agency: no consideration is needed to create an agency.

CAPACITY TO CONTRACT
 The ‘capacity to contract’ means the competence (i.e., capability) of the parties to enter into a valid contract.
 As per the statement of Section 11 of the Indian Contract Act, the following persons are not competent to
contract, i.e., they are minors, persons of unsound mind and persons disqualified for contracting by any
other law.

Minors:

 According to Section 3 of the Indian Majority Act, 1875, a person who has not completed his age of 18 years
(majority), is considered to be a minor.

Rules Regarding Minor's Agreements

1. An agreement with or by a minor is void ab initio.

2. Minor can be a promisee or a beneficiary.
3. Minor cannot ratify contracts entered into by him during his minority, even after attaining the majority.
4. Minor is not bound to return the benefits received under a void agreement.
5. No restitution: Sometimes, the minor receives some property or money by falsely representing his age. In
such cases, the minor can be asked to restore such property.
6. Minor’s property liable for necessaries: Sometimes, a person supplies necessaries to a minor. In such cases,
the supplier of necessaries can claim reimbursement from the property of minor.
7. Minor as an agent: Minor can act as an agent and bind his principal by his acts without incurring any
personal liability.
8. Minor as an insolvent: A minor cannot be declared insolvent because he is not competent to contract.
9. Principle of estoppel is not applicable to minors: a minor is not bound by his misrepresentations.
Persons of unsound mind:

 A person of unsound mind is one who is suffering from permanent or temporary mental derangement.
 The following persons are also considered to be the persons of unsound mind:
1. Idiots: a person who has completely lost his mental powers and who is incapable of forming a rational
judgement. All agreements, other than those for necessities of life, with idiots are absolutely void.
2. Lunatics: A lunatic is a person who is mentally deranged (disordered) due to some mental strain or
other personal experience but who has some lucid intervals of sound mind. They can enter into a
contract during the lucid intervals.
3. Drunken persons: a person who is in a state of intoxication is incapable of entering into a contract.
Any contract made during drunkenness is void. In lucid intervals he can enter into contracts.

Persons disqualified by any law:

1. Alien enemies: alien refers to a person who is a citizen of a foreign country. An alien whose country is at
war with India is called an alien enemy. During the continuance of war, an alien enemy can neither enter
into a contract with an Indian citizen nor can be sued in Indian court.
2. Foreign sovereigns: Such persons can enter into valid contracts and can enforce them in Indian courts.
However, a suit cannot be filed against them in the Indian courts.
3. Companies: the powers of the corporation to contract are limited by its memorandum of association. Any
contract beyond such power is not valid.
4. Insolvents: When a person is declared as an insolvent, his property vests in the Official Receiver or
Assignee. The insolvent cannot enter into contracts relating to his property.
5. Felons or Convicts: A convict cannot enter into a contract while he is undergoing imprisonment.

FREE CONSENT

The word “free consent” is defined in Section 14 of the Contract Act as “Consent is said to be free when it is
not caused by

1. Coercion, as defined in Section 15; or

2. Undue influence as defined in Section 16; or
3. Fraud, as defined in Section 17; or
4. Misrepresentation, as defined in Section 18; or
5. Mistake, subject to the provisions of Sections 20, 21 and 22.

Coercion:

 Coercion means compelling or forcing a person to enter into a contract under a threat.
 According to Section 19 states that, ‘when the consent of a party to an agreement is obtained by coercion,
the contract becomes voidable at the option of the party, i.e., such party can put an end to the contract if
he so chooses’.
Undue influence:

 When a party enters into a contract under any kind of mental pressure, unfair influence or persuasion by
the superior party, the undue influence is said to be employed.
 If consent to an agreement is caused by undue influence the contract is voidable at the option of the other
party.

Fraud:

 It is the wilful representation made by a party to a contract with the intention to deceive the other party or
to induce such party to enter into a contract.
 A party whose consent to an agreement was caused by fraud has three remedies.
a. He can cancel the contract.
b. Right to insist upon performance.
c. He can file a suit for damages.

Misrepresentation:

 It is an untrue statement made by one party to the other which will induce the other party to enter into a
contract.
 A false representation made by a person may be either:
1. Innocent or unintentional, i.e., without any intention of deceiving the party.
2. Intentional or wilful or deliberate, i.e., with the intention of deceiving the party.
 The effect of misrepresentation is that it makes the contract voidable at the option of the aggrieved party
and such party may put an end to the contract if he so chooses.

Mistake:

 A mistake is said to have occurred where the parties intending to do one thing by error do something else.

Types of mistakes:

1. Mistake of law: it may be of two types.

a. Mistake of Indian law: according to section 21, a contract is not void because it was caused by a
mistake as to any law which is in force in India. This is based on the rule of law namely, ignorantia juris
non excusat (i.e., ignorance of law is no excuse).
b. Mistake of foreign law: a mistake of foreign law violates a contract as no one is expected to be familiar
with foreign laws.

2. Mistake of fact: it may be of two types.

a. Bilateral mistake: Where both the parties to an agreement are under a mistake as to matter of
fact essential to the agreement, the agreement is void.
b. Unilateral mistake: The term unilateral mistake means where only one party to the agreement is
under a mistake. A contract is not voidable merely because it was caused by one of the party alone.
 LEGALITY OF CONSIDERATION AND OBJECT

 For a valid contract it is essential that the object or consideration of the agreement must be lawful.
 According to Sec. 23 of the Indian Contract Act, the objects and the consideration of an agreement shall
be unlawful in the following cases:

1. It is forbidden by law: if the object or consideration of an agreement is forbidden by law the agreement
is void.
2. It defeats the provision of any law: if the enforcement of a particular agreement is of such a nature that
it would defeat the provisions of any statutory law which is in force, the agreement is void.
3. It is fraudulent: if the object of an agreement is fraudulent then the agreement is void.
4. It is injurious either to the person or his property: if the object of an agreement involves injury to
person or property of another, the agreement is void.
5. Immoral agreements: agreements which are contrary to good morals are void.
6. It is opposed to public policy: The agreements that are injurious to the public or which are against the
public welfare are void.

Agreements opposed to public policy:

An agreement is said to be opposed to public policy when it is injurious to the welfare of the society.

1. Trading with an alien enemy: All agreements made with an alien enemy are illegal on the ground of public
policy.
2. Agreement for sale of public offices and titles: The agreements for the sale of public offices or to obtain
public title like Padma Shree etc., are illegal on the ground of being opposed to public policy.
3. Agreement for stifling prosecution: agreements for supressing prosecution are not enforceable in a court
of law since they are opposed to public policy.
4. Agreements in restraint of legal proceedings: if the object of an agreement is to restrain an individual
from going to a court of law for redress and relief, such agreement is void.
5. Agreements in restraint of marriage: if the object of an agreement is to restrain a person from marriage,
such agreement is void.
6. Agreement in restraint of trade: if the object of an agreement is to interfere with the freedom of a person
to carry on any lawful trade, such agreement is called agreement in restraint of trade.

VOID AGREEMENTS
 According to Section 2 (g) of the Indian Contract Act, 1872, a void agreement is an agreement which is not
enforceable by law. The following agreements have been expressly declared as void by the Indian Contract
Act:
1. Agreements by incompetent persons.
2. Agreements, the object or consideration of which is unlawful.
3. Agreements made under a mutual mistake.
 4. Agreements made without consideration.
5. Agreements in restraint of marriage.
6. Agreements in restraint of trade.
7. Agreements in restraint of legal proceedings.

Agreements the meaning of which is uncertain (section 29)

 An uncertain agreement is one, the terms of which are uncertain or not capable of being made certain
without further agreement between the parties are void.

Wagering agreements

 The term ‘wagering agreement’ or ‘wager’ may be defined as an agreement in which one person agrees to
pay certain amount of money to the other person on the happening or non-happening of a specified
uncertain event.

Essential features of wagering

1. There must be a promise to pay money or money's worth by one party to the other.
2. The promise must be conditional on the happening or not happening of an event.
3. Mutual chances of gain or loss.
4. No control over the event.
5. Uncertainty of the event.

CONTINGENT CONTRACT:

 A contingent contract is one in which the performance becomes due only upon the happening of
some future event.
 Contracts of insurance, indemnity and guarantee etc. are some of the important examples of contingent
contracts.

QUASI CONTRACTS

 Quasi contracts are exceptional kinds of contracts by which one party is bound to pay money in
consideration of something done or suffered by the other party.
 It is imposed by law and does not arise from any agreement.

Kinds of quasi contracts:

1. Supply of necessaries to persons incompetent to contract: The person who has supplied the necessaries
to a person who is incompetent to contract is entitled to claim their price from the property of such
incapable person.
2. Payment by an interested person: A person who is interested in the payment of money which another is
bound by law to pay, and who, therefore, pays it, is entitled to be reimbursed by the other.
3. Liability to pay non-gratuitous acts: if a person lawfully does anything for another person, or delivers
anything to him not intending to do so gratuitously and such other person enjoys the benefits thereof, the
latter is bound to make compensation to the former.
4. Payment by mistake or under coercion: A person to whom money has been paid or anything
delivered by mistake or under coercion must repay or return it.
 DISCHARGE OF CONTRACT
 A contract is said to be discharged when the rights and obligations of the contracting parties are extinguished
and their relationship comes to an end.

Various modes of discharge: a contract may be discharged in the following ways.

1. By performance of contract: when the parties to the contract fulfil their obligations under a contract, the
contract is said to have been performed and the contract comes to an end.
2. Discharge by agreement: A contract can be discharged by mutual agreement in any of the following ways.
a. By novation (Substitution of a new contract): Novation means substituting a new contract for the
existing one. The new contract discharges the original contract.
b. By alteration: Alteration means change in one or more of the terms of a contract with the consent of
all the parties. If any material alterations are made in the contract, the original contract will come to an
end.
c. By remission: remission means acceptance of lesser performance than what was actually due under
the contract.
d. By rescission: Rescission means cancellation of the contract. Both the contracting parties may agree, by
mutual agreement to rescind the contract by cancelling all the terms of the contract.
e. By waiver: When both the parties, by mutual consent, agree of abandon their respective rights, the
contract need not be performed and the same is discharged. It is called waiver.
f. By merger: sometimes both parties, who have already entered into a contract with inferior rights may
subsequently enter into a new contract and the new contract creates superior rights. Now the previous
contract with lesser rights is said to be merged with subsequent contract with superior rights.
3. Discharge by lapse of time: a contract must be performed within the period of limitation. If the contract is
not performed and the promisee fails to take any action within the period of limitation, then the contract
is terminated.
4. Discharge by operation of law: A contract may be discharged by operation of law in the following cases:
a. By death: A contract involving the personal skill or ability of the promisor is discharged automatically
on the death of the promisor.
b. By insolvency: When a person is declared insolvent, he is discharged from his liability up to the date of
his insolvency.
5. Discharge by impossibility of performance: A contract will be discharged when the performance of
contract becomes impossible. The effects of impossibility of performance may be of the two types.
a. Initial impossibility: It is the impossibility which exists at the time of formation of contract. It makes the
contract void ab initio, i.e., void from the very beginning.
b. Subsequent or supervening impossibility: Supervening impossibility means impossibility which does
not exist at the time of making the contract but which arises subsequently after the formation of the
contract and which makes the performance of the contract impossible or illegal.
Supervening impossibility is an excuse for the non-performance of the contract in the following cases:
a) Destruction of subject matter
b) Death or personal incapacity
c) Change of law
 d) Non-existence of particular state of thing
e) Outbreak of war
6. Discharge by breach of contract: A contract is said to be discharged by breach of contract if any party to the
contract refuses or fails to perform his part of the contract. Breach of contract is of two kinds.
a. Actual breach of contract: it may take place either at the time when the performance is due or during
the performance of contract.
b. Anticipatory breach of contract: when a party to a contract refuses to perform his part of the contract,
before the due date of performance, it is known as anticipatory or constructive breach of contract.

REMEDIES FOR BREACH OF CONTRACT: The various remedies available to an aggrieved party are as follows:

1. Rescission of the contract: When there is a breach of contract by one party, the aggrieved party may rescind
the contract and need not perform his part of the contract.
2. Suit for specific performance: specific performance means the actual performance of the contract as per
agreement. It will be granted in those cases where compensation is not an adequate remedy or actual
damages are not measurable.
3. Restitution: when the contract becomes void, any person who received any advantage under such
agreement is bound to return the same or to make compensation for it to the person from whom he
received it.
4. Suit for injunction: it is an order of the court preventing a person from doing a particular act.
5. Suit upon quantum meruit: The word ‘quantum meruit’ literally means “as much as is earned”. When a
person has done some work under a contract and the other party cancels the contract or some event
happens which makes further performance of the contract impossible, then the party who has performed
the work can claim remuneration for the work he has already done.
6. Suit for damages: it means monetary compensation payable by the defaulting party to the injured party in
the event of breach of contract.

Types of damages:

1. General or ordinary damages: when a contract has been broken the injured party may sustain some
damages or loss, such damages are called ordinary or general damages.
2. Special damages: These are the damages which arise from the breach of contract under special
circumstances.
3. Exemplary or vindictive damages: these damages are awarded with a view to punish the defaulting party
who injured the feelings of the others. The court may award these damages in case of breach of contract to
marry and wrongful dishonour of cheque by a banker.
4. Nominal damages: These are the damages which are very small in amount. Such damages are awarded
simply to establish the right of the party to claim damages for the breach of contract even though the party
has suffered no loss.
5. Penalty and liquidated damages: a penalty is a sum fixed in the contract at the time of its formation
which is disproportionate to the damages likely to accrue in the event of breach. Liquidated damages
represent a sum fixed or ascertained by the parties in the contract. It is a fair and genuine pre-estimate of
the probable loss.