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The Indian Contract Act, 1872

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Nature of Contract

• The fabric of modern industrial society is woven around economic relationships.

• The relational integration and determination of mutual rights and obligations are dependent, to a great extent, on ex contractum terms.

• Contracts arising out of economic and social relationships.

• Such relations are either contractual or akin to a contract.

• The market functions on the very premise of effective functioning of contractual relationship.

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What is a contract

• A written or spoken agreement intended to be enforceable by law.

• An agreement enforceable by law is a contract. [Section 2(h) ]

• A contract is an agreement made between two or more parties, which the law will enforce.

• Contract is a method through which individuals make law for themselves by creating rights and obligation ex contractas.

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• Every agreement and promise enforceable at law is a

contract. Pollock.

• A legally binding agreement between two or more

persons by which rights are acquired by one or more

to acts or forbearances on the part of the others. Sir

William Anson.

• An agreement creating and defining obligations

between the parties. Salmond

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Proposal, Acceptance, Promise & Agreement

• When a 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(a)]

• A proposal is said to be accepted when the person to whom

the proposal is made signifies his assent thereto. A

proposal when accepted becomes promise. [Sec 2(b)]

• Every promise and every set of promises forming

consideration for each other is a an agreement. [(Sec 2(e)]

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Section 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 a lawful object, and

• are not expressly declared to be void.

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Classification of Contracts

On basis of Formation

• Express Contract

• Implied contract -

• Quasi Contract

On basis of Performance

• Executed Contract

• Executory Contract

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On basis of Validity

• Voidable Contracts

• Void agreement

• Void Contract

• Valid Contract

• Illegal Agreements

• Unenforceable contract (technical defects)

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Essential Elements of Contract• Offer• Acceptance• Consensus ad idem• Legal enforceability • Lawful consideration• Capacity of parties• Free consent• Lawful object• Agreement not declared void• Certainty and possibility of performance• Legal formalities

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Elements of Offer• It must be made by one person to another person. • It must be an expression of readiness or willingness

to do or to abstain form doing something.• It must be made with a view to obtain the consent of

that other person.• Terms of offer must be definite, unambiguous and

certain.• Offer must be communicated.• Offer not to contain a term the non-compliance of

which may amount to acceptance.• A statement of price is not an offer.

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Types of Offer

• Express Offer – by words written or spoken.

• Implied Offer – By conduct or circumstances.

• Specific Offer- Made to a specified or definite

person.

• General Offer- Made to public at large

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An offer must be distinguished from

• A declaration of intention and an announcement.

• An invitation to make an offer or do business.

• A statement of price. [Harvey v. Facey, (1893)]

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Tenders

A Definite Offer

• When tenders are invited for the supply of specified goods or services,

• each tender submitted is an offer.

• The party inviting tender may accept any tender he chooses

• thereby bringing about a contractual relationship with the person (tender) so chosen.

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Tenders

A Standing Offer

• Where goods or services are required continuously over a certain period,

• a trader may invite tenders as a standing offer which is a continuing offer.

• The effect is that as and when goods or services are required, an order is placed with the person whose tender has been accepted.

• However, at each such time a distinct contract is made.

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Special terms in the contract

• A term limiting or excluding the liability of offeror.

• The special terms should be presented in such a manner that a reasonable man can become aware of it before a contract is entered into.

• The fact that he did not or could not read does not alter the legal position.

• If the conditions are contained in a voucher or receipt for payment of money, they do not bind the person receiving the voucher or receipt.

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Legal Rules as to Acceptance

1. Must be absolute and unqualified.

2. Must be communicated to the offeror.

3. Must be according to the mode prescribed or usual and reasonable mode.

4. Must be given within a reasonable time.

5. Cannot precede an offer.

6. Must be given by the party to whom the offer is made.

7. Must be given before the offer lapse or is withdrawn.

8. It cannot be implied from silence.

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Revocation or lapse of Offer (Sec. 6)

• By communication of notice of revocation.

• By lapse of time.

• By non-fulfillment by the offeree of a condition precedent to acceptance.

• By death or insanity of the offeror.

• If a counter offer is made.

• If an offer is not accepted according to the prescribed or usual mode.

• If the law is changed.

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Consideration

• Consideration is some kind of an exchange between the parties to an agreement.

• Consideration is the price for which the promise of the other is bought and the promise thus given for value is enforceable. Pollock

• A valuable consideration in the sense of the law may consist either –

• in some right, interest, profit or benefit accruing to one party, or

• some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

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Definition

• 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.” [Section 2(d)]

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Legal Rules as to Consideration

• It must move at the desire of the promisor.

• It may move from promisee or any other person.

• It may be an act, abstinence or forbearance.

• It may be past, present or future.

• It need not be adequate.

• It must be real and not illusory.

• It must be something which the promisor is not already bound to do.

• It must not be illegal, immoral or opposed to public policy.

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Capacity to contract

• Every person is competent to contract who-

• Is of the age of majority according to the law to

which he is subject.

• Is of sound mind.

• Is not disqualified from contracting by any law

to which he is subject. (Sec 11)

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The position of Minor’s Agreements • An agreement with or by minor is void ab initio • No Estoppel• Limited application of Restitution• Contracts for the benefit of Minor• No ratification of agreement on attaining majority• No specific performance• Cannot be adjudged insolvent• He can be an agent• Liability of Minor’s parents and guardians• Minor’s liability in Tort• Minor as a Partner• Minor as a Shareholder• Liability of minor for necessities supplied to him

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Other Persons Disqualified by Law

• Alien Enemy

• Foreign Sovereigns and Ambassadors

• A Company and a Corporations

• Convicts

• Insolvents

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Free Consent

• Consent means an act of approval or assenting to an offer.

• Two or more persons are said to consent when they agree upon the same thing in the same sense.

• Consent involves ad idem i.e. identity of mind about the subject matter of contract.

• A mere consent is not enough, it should be free and voluntary.

• Not to be caused by any vitiating factors given u/s 14.

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Section 14

• Consent is said to be free when it is not caused by –

• a) Coercion.

• b) Undue influence.

• c) Fraud.

• d) Misrepresentation.

• e) Mistake.

• The contract is said to be voidable at the option of

the party whose consent was not free. [Sec. 19]

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Presumption of Domination

• Master and Servant,

• Parent and Child,

• ITO and the Assessee,

• Trustee and Beneficiary,

• Spiritual Guru and Disciple,

• Solicitor and Client,

• Guardian and Ward,

• Medical Attendant and Patient.

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Agreements Opposed to Public Policy• While a contract serves private interest it should not

conflict with any other private or public interests.

• Public interest policies invalidate any private agreement.

• Section 23 provides that the consideration or object of an agreement is lawful unless –

• it is forbidden by law,

• is of such a nature that if permitted, it would defeat the provision of any law, or

• is fraudulent, or

• involves injury to the person or property of another, or

• the courts regard it as immoral or opposed to public policy.

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• Trading with enemy.

• Agreements interfering with the administration of justice –

• a) Interference with justice – using improper influence over judges or officers.

• b) Stifling Prosecution – by way of an understanding not to prosecute an offender.

• c) Maintenance and Champerty – financial or other assistance to bring or defend a lawsuit when the person has no legal interest.

• Trafficking in public offices or titles.

• Agreement creating interest opposed to duty.

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• Agreements restricting personal liberty.

• Agreements in restraint of marriage.

• Agreement to commit a crime.

• Agreements in restraint of trade.

• Agreements in restraint of legal proceedings

• a) Agreement restricting enforcement of rights

• b) Agreement Limiting the Period of Limitation.

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Exceptions – Restraint of trade

Sale of Goodwill

• i) the restriction must relate to the same business;

• ii) the restriction must be within a specified local

limit;

• iii) the restriction must be for the time so long as

the buyer or any person, carries on a like business in

the specified local limits;

• iv) the specified local limit must be reasonable

having regard to the nature of the business.

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Trade Combination

• Trade combination formed to regulate the business

or to fix prices are not void,

• but trade combinations to create monopoly or cartel,

and

• which are against the public interest are void.

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Employment Contracts

• A clause to serve the employer for a stipulated period is a valid clause if reasonable.

• A clause preventing employee from accepting similar engagement during the employment is also valid.

• A clause preventing the employee from accepting a similar engagement after the termination –

• a) if the restraint is to protect an employer against making use of trade secret it is valid.

• b) if the restraint is intended to serve any other purpose, like to avoid competition, it is not valid.

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Performance of Contract

• Performance of a contract is a mode of discharge of the contract.

• Performance of contract takes place when the parties to the contract fulfill their respective obligations under the contract.

• The parties to a contract must either perform or offer to perform their respective promises,

• unless such performance is dispensed with or excused under the provisions of this Act, or of any other law.[Sec 37]

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Requisite of a valid tender

• It must be unconditional.

• It must be of the whole obligation.

• It must be made at a proper time and place.

• It must be made to the proper person.

• It may be made to one of the several joint promisees.

• In case of tender of goods it must give a reasonable

opportunity to the promisee for inspection of the good.

• In case of tender of money the debtor must make a valid

tender in the legal tender money.

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Performance and Demand of Performance

• By promisor himself. (S. 40)

• Promisor’s Agent. (S. 40)

• Legal representatives.

• Third person. (S 41)

• Joint promisors.

• Promisee

• Legal Representative

• Third Party

• Joint promisee

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Discharge of Contract

• A contract is said to be discharged when it ceases to

operate.

• The rights and obligations created by it comes to an end.

• A contract may be discharged -

• By Performance

• Actual performance – doing what the parties intended to

do when they entered in to the contract.

• Attempted performance or tender – It is the legitimate

attempt on the part of the promisor to perform his

obligations

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By Mutual Agreement or Consent

• Novation

• Rescission

• Alteration

• Remission

• Waiver

• Merger

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By operation of Law

• By death.

• By merger.

• By insolvency.

• By unauthorized alteration of terms of a written

contract.

• By rights and liabilities becoming vested in the same

person.

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By Impossibility of Performance

• Impossibility existing at the time of agreement –

• Known to the parties – the agreement is void ab

initio.

• Unknown to the parties – the agreement is void on

the ground of mutual mistake.

• Impossibility arising subsequent to the formation

of the contract.

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By Supervening Impossibility

• Destruction of subject matter of contract

• Non-existence or non-occurrence of a particular state

or things

• Death or incapacity for personal services

• Change of law or stepping in of a person with

statutory authority

• Out break of war

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By breach of contract

• Actual Breach

• a) On the due date of performance.

• b) During the course of performance of contract.

• i) Express Repudiation.

• ii) Implied Repudiation.

• Anticipatory Breach

• a) By express renunciation.

• b) Making the performance of promise become impossible by doing some act.

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Remedies for Breach of Contract

• When the contract is broken, the injured party has

one or more of the following remedies:

• Rescission of the contract.

• Suit for damages.

• Suit upon quantum meruit.

• Suit for specific performance.

• Suit for injunction.

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Rescission of the contract

• Rescission means a right not to perform an

obligation.

• In case of breach of contract the promisee need not

perform his obligation,

• he is not only discharged from his liabilities but also

he is entitled to claim compensation for damages

• which he might have sustained due to non

performance of the contract. [Section 39]

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Suit for damages

• Damages are monetary compensation allowed to the

injured party for the loss suffered.

• The object of awarding damages is not to punish the

party at fault

• but to make good the financial loss suffered by the

injured party due to breach of contract.

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Quantum Meruit• When an agreement is discovered to be void. [Sec 65]

• When something is done without any intention to do gratuitously. [Sec 70]

• When there is an express or implied contract to render service but no agreement as to remuneration.

• When the completion of the contract has been prevented by the act of the other party to the contract.

• When a contract is divisible.

• When an indivisible contract is completely performed but badly.

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Specific Performance• The remedy of Specific Performance is in the nature of

equitable remedies based on the principles of equities.

• Among the remedies are specific performance, injunction, rectification and cancellation of instruments and rescission of contract.

• In the discretion of the court, specific performance may be enforced:

• where there is no standard for ascertaining the actual damage caused by the non-performance; or

• where compensation in money for the non-performance would not afford adequate relief.

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Suit for Injunction

• It is a judicial process whereby a party to the contract is ordered to refrain from doing a particular act or thing, or

• to do a particular act or thing. • It a discretionary remedy and it acts only in

personam. • Injunction means a prohibitory order of the court to a

person to • not to do a particular act he has promised not to do

under a contract, or • to do an act which he has promised, under a contract,

to do.

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Quasi Contracts• Sometime a person may receive a benefit which

the law regards another person as better entitled, or for which the law considers he should pay to the other person, even though there is no contract between the parties. Such relationships are called quasi contracts.

• Because although there is no contract or agreement between the parties,

• they are put on the same pedestal as though there was a contract between them.

• This is based on the principles of equity.

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Kinds of quasi contracts

• Right to recover the price of necessities supplied.

[Sec 68]

• Payment by an interested person. [Sec 69]

• Right to recover for non-gratuitous Act. [Sec 70]

• Responsibility of the finder of Goods. [Sec 71]

• When money is paid or things are delivered by

mistake or under coercion. [Sec 72]

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Contracts of Indemnity

• In a contract of indemnity one party promises to

compensate the other party against loss suffered by

the latter.

• Section 125 confines itself to losses occasioned due to

an act of promisor or due to act of any other persons.

• A contract by which one party promises to save the

other from loss caused to him by the conduct of the

promisor himself or by the conduct of any other

person is called a contract of indemnity. [Sec 124]

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• If a person who is interested in the payment of money which another is bound to pay and pays it, he is entitled to be indemnified. [Sec 69]

• The surety has a rights to claim indemnity from the principal debtor for sums he has rightfully paid towards the guarantee. [Sec 145]

• The principal is liable to indemnify the agent for all amount paid by him during the exercise of his

authority. [Sec 222]

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Rights of indemnity holder [Sec 125]

• All damages that he may be compelled to pay in a

suit in respect of any matter to which the promise to

indemnify applies.

• All cost that he may be compelled to pay in bringing

or defending such suit.

• All sums which he may have paid under the terms of

any compromise of any such suit.

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Contract of Guarantee

• A contract of guarantee is essentially a contract

• to perform the promise or

• discharge the liability of a third person

• in case of his default.

• The basic function of a contract of guarantee is

• to enable a person to get a loan, or goods, or an

employment. [Sec 126]

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Essential features of guarantee

• Surety.

• Principal Debtor.

• Creditor.

• Not be vitiated by incapacity, flaw in consent, and unlawful character of the agreement.

• May be oral and it may either be expressed or implied.

• Concurrence of parties.

• Existence of Principal debt.

• Essential of a valid contract like Consideration and Free consent.

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Extent of surety's liability

• The liability of surety is coextensive with that of the principal debtor. [Sec 128]

• The Surety may limit his liability by an express agreement.

• The liability of the surety arises immediately when a default is made by the principal debtor.

• The creditor can sue the surety without suing the principal debtor.

• If the guarantee is conditional upon another person joining it as co-surety, the guarantee is not valid if that person does not join. [Sec 144]

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Kinds of Guarantees• Specific guarantee – extends to a specific transaction or

a single debt.

• The liability of surety comes to an end when the guaranteed debt is duly discharged.

• Continuing guarantee –extends to a series of transaction.

• This kind of guarantee is intended to cover a number of transactions over a period of time.

• Whether the guarantee is continuing guarantee or not is a question of intention, subject matter & circumstance.

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Revocation of Continuing Guarantee

• By Notice • By Death of Surety • By Novation. (Sec 62)• By variance in the terms of contract. (Sec 133)• By release or discharge of principal debtor.• By compounding with the principal debtor.

(Sec 135)• By creditor's act or omission imparting surety's

eventual remedy. (Sec 139)• By loss of security. (Sec 142)

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Discharge of Surety

• By Revocation of Guarantee

• Discharge by conduct of creditor

• Variance in the terms of the contract

• Release or discharge of principal debtor

• Compounding by creditor with principal debtor

• Creditor compounding with principal debtor

• Creditor promising to give time to the principal debtor

• Creditor agreeing not to sue the debtor.

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• By impairing surety's remedy

• Loss of security by the creditor

• Discharge of surety by invalidation of contract

• Guarantee obtained by misrepresentatio

• Guarantee obtained by concealment

• Guarantee on contract that creditor shall not act on it untill a co-surety joins

• Failure of consideration

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Finder of Goods

• A person who finds goods belonging to another and

takes them into his custody,

• is subject to the same responsibilities as a bailee.

[Sec 71]

• He must take reasonable care.

• He must not use the goods for his own purpose.

• He must not mix goods with his own.

• He must try to find out the owner of the goods.

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Rights of Finder of Goods

• Right of lien.

• Right to sue for rewards.

• Right of sale.

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Contract of Agency

• An agent is a person employed to do any act for another, or

• to represent another, in dealings with third persons.

• The person for whom such act is done or who is so represented, is called the principal."

• Whatever the principal can do himself, he may get the same done through an agent,; and

• What the principal does by another, he does it himself.

• The acts of the agents are the acts of the principal.

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Creation of Agency• By Agreement –• - Express Agreement.• - Implied Agreement. • Implied agency includes the following – • Agency by Estoppel. • Agency by holding out.• Agency by necessity – • Agent acceding his authority in an emergency.• A person entrusted with another's property.• Husband and Wife.• Agency by ratification.

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Essentials of a valid ratification• The agent must act for an identifiable principal.• The principal must be in existence.• The principal must have contractual capacity.• Ratification must be with full knowledge of facts. • Ratification must be done within a reasonable time.• The act to be ratified must not be void, illegal or ultra

vires.• The whole transaction must be ratified. • Ratification can be of the acts the principal had power

to do.• Ratification should not put a third party to damages.• Ratification relates back to the date of the act.

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Duties of Agents• To carry out the work according to the directions of

principal.

• To carry out the work with reasonable care, skill and diligence.

• To render proper accounts.

• To communicate with the principal in case of difficulty.

• Not to deal on his own account.

• To pay sums received for the principal.

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• To protect the interest of the principal in case of his death or insolvency.

• Not to use information obtained in the course of agency against the principal.

• Not to make secret profit.

• Not to set up an adverse title.

• Not to put himself in a position where his interest and duty conflict.

• Not to delegate authority.

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Rights of Agents

• Right of retainer.

• Right to receive remuneration.

• Right of lien.

• Right of indemnification.

• Right of compensation.

• Right of stoppage in transit.

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Delegation of Authority • Delegatus non potest delegar• A Sub-agent is a person employed by and • acting under the control of the original agent and the

business of the agency. [Section 191]• A agent may appoint a sub-agent if -• There is a custom of trade. • The nature of work is such that sub-agent is necessary.• Where the principal is aware of the intention of the agent

to appoint a sub-agent.• Where unforeseen emergencies arise rendering.• Where the act to be done is purely ministerial.• Where the principal permits appointment of sub-agent.

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Effect of appointment of sub-agent [Section 192 and 193]

• Where a sub-agent is properly appointed, the following

effect follows :

• the principal is bound by the acts of the sub-agent;

• the agent is responsible to the principal for the acts of

the sub-agent;

• the sub-agent is responsible for his acts to the agent,

but not to the principal, except in case of fraud or

willful wrong.

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• Where the sub-agent is not properly appointed, the effect will be :

• the principal is not bound by the acts of sub-agent;

• the original agent is responsible for the acts of the sub-agent both to the principal and to he third party;

• the sub-agent is responsible for his acts to the original agent but not to the principal even in case

of fraud or willful wrong.

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Position of Principal and Agent in relation to third parties

Named principal –

• Acts of the agent are the acts of the principal.

• When the agent exceed his authority

• Notice given to agent as notice to principal.

• Principal inducing belief that agent's unauthorised acts were authorised.

• Misrepresentation or fraud of agent.

Unnamed principal

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Undisclosed principal –

• The position of Principal – contracting party may sue either the principal or the agent or both.

• The principal may also require the performance of contract.

• The position of agent – as between the principal and agent, the agent has all the rights of an agent as against the principal;

• but as regards the third party, he is personally liable on the contract.

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• The position of third parties –

• the third party may elect to sue either the principal or the agent or both.

• If the principal discloses himself before the contract is completed, the other party may refuse to fulfill the contract on the ground of mistake of identity of party.

• The third party can also claim a right of set-off against the agent.

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Personal Liability of an Agent - Exceptions [Sec 230]

• When the contract expressly provides.• When the agent acts for a foreign principal.• When he acts for an undisclosed principal.• When he acts for a principal who cannot be sued.• Where he signs a contract in his own name.• Where he acts for a principal not in existence.• Where he is liable for breach of warranty of authority.• Where he receives or pays money by mistake or fraud.• Where his authority is coupled with interest.• Where trade usage or customs makes him personally

liable.

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Termination of agency [Sec 201]Termination of agency by act of parties• a) Agreement. • b) Revocation by the principal. • c) Revocation by agent. Termination of agency by operation of law• a) Performance of contract.• b) Expiry of time. • c) Death or Insanity. • d) Insolvency. • e) Destruction of subject matter. • f) Principal becoming an alien enemy. • g) Dissolution of a company.