Indian Contract Act, 1872

Essential Elements

Valid Contract: Essential Elements

• Proposal (Offer) & Acceptance• Consideration• Capacity of Parties• Free Consent• Lawful Object (Should not be a Void agreement)

• In Writing & Registered• Intention to Create Legal Relationship• Certainty• Possibility of Performance

Agreement (Sec. 2e)

• “Every promise and every set of promises, forming the consideration for each other is an agreement.”an agreement.”

• Proposal when accepted = Promise

• That is,

Proposal or Offer + Acceptance = Agreement

What are the kinds of Agreements?• Valid Agreement: An agreement

enforceable by law.• Void Agreement: Not enforceable by law.• Enforceable Agreement: A contract

enforceable by law.enforceable by law.• Voidable Agreement: It is valid so long as

it is not avoided by the party entitled to do so.

• Illegal Agreement: It is void ab-initio.

Contract (Sec. 2h)

• “An Agreement Enforceable by Law is a Contract.”

• Hence, Contract is a combination of • Hence, Contract is a combination of agreement and enforceability.

• To be enforceable by law, an agreement must possess the essential elements of a valid contract as contained in sections 10, 29 and 56.

What are the kinds of Contract?• Voidable Contract: It is when one of the parties

has not exercised his free consent.• Void Contract: That which ceases to be

enforceable by law becomes void.• Unenforceable Contract: Valid but incapable

of proof, hence not enforceable.• Executed Contract: When parties have

performed their obligations.• Executory Contract: When any party has not

performed his share of obligation or promise.• Express Contract: When terms of contract are

reduced in writing.

• Implied Contract: Terms of contract inferred from conduct between parties.

• Quasi Contract: Obligations which are not contracts but fall under the purview of law.

• Contingent Contract: Where a promise contained in the contract is conditional.

• Contracts of Record: Contracts made on the records of a court. Creates a binding effect.records of a court. Creates a binding effect.

• Specialty Contract: In writing, sealed and delivered by parties. “Contract under Seal”

• Simple Contract: Not under seal. Made in writing or spoken words.

• Statutory Contract: All or some terms & conditions are statutory.

Proposal (Sec. 2a)

• “When one person signifies to another his willingness to do so or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence he is said make a Proposal”.or abstinence he is said make a Proposal”.

• In other words, a person should offer to do something. This offer must be sufficiently communicated to the person for whom he intends to do something with a view to obtaining his assent to it.

• Maker of the offer = Proposer = Offerer = Promisor

Valid Proposal: Essentials• Proposer cannot dictate terms.

• Intended to create a legal relation.

• Mere statement of intention is not a binding promise.promise.

• Offer must be made to definite person.

• Offer terms must be unambiguous.

• Offer can be expressed or implied.

• Offer must be communicated even if conditional.

• Proposer should intend to be bound by it.

Some Questions• What is a Counter-Offer?

It is a rejection of the original offer and making a new offer. New offer is a counter offer.

• What is Auction Sales?• It is an invitation to an offer. Only when a buyer

makes a bid for the item that there is an offer.• What is a Standing (or Open) Offer?• What is a Standing (or Open) Offer?

The continuous supply of a certain article at a certain rate over a definite period is called a standing offer. Unless there is an order there is no contract.

• What is ‘Invitation to an Offer?It is not an offer. It is only an aim to circulate information of readiness to negotiate business with anybody who comes to the person sending it.

Acceptance (Sec. 2b)

• “When the person to whom a proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise.”when accepted becomes a promise.”

• To make the contract binding, there must be absolute and unconditional acceptance of the terms of a proposal.

• Performance of conditions of a proposal is an acceptance of the proposal.

Valid Acceptance: Essentials

• Must be absolute and unconditional.

• Must be expressed in usual & reasonable manner.

• Mental acceptance is not sufficient.

• Must be communicated to Proposer.• Must be communicated to Proposer.

• Must be by a certain person.

• Doing it by ignorance of proposal is no acceptance.

• Must be given within a reasonable time.

• Must accept the proposal.

CAPACITY TO CONTRACT

• An agreement becomes a contract if it isentered into between the parties who arecompetent to contract (Sec. 10).

• Everyone is competent• Everyone is competent

(i) who is of the age of majority;

(ii) who is of sound mind; and

(iii) who is not disqualified from contractingby any law.

Contracts by a Minor

• A ‘minor’ is a person who has not completedthe age of 21 years. Under the Indian law aminor in not competent to contract.

• A minor’s contract is absolutely void abinitio: In other words, a minor is neither liableinitio: In other words, a minor is neither liableto perform what he has promised under anagreement, nor liable to repay money receivedunder it.

• Principle behind this ruling is that a minor isincapable of judging what is good for him.

• Specific performance of a minor’scontract is absolutely void: Guardian hasno power to bind a minor by a contract forbuying of immovable property.

• Ratification of a minor’s contract: Itmeans consenting to a past contract, made bymeans consenting to a past contract, made bya minor, of a future date on attainingmajority. No question of ratification.

• False representation by a minor –Estoppel: Estoppel means rule of evidence. Aminor cannot be charged even if he representsfalsely to enter into a contract.

• Agreement by Guardian on behalf ofminor is valid: In this case it is validprovided it benefits the Guardian or for legalnecessity.

• Insolvency: Minor cannot be insolvent.• Relinquishment: Not applicable to a

minor.minor.• Service Contracts: Contract for personal

service is void.So, when can a minor contract? (Exceptions)• As a Promisee. For example, promissory in

minor’s favor can be enforced by him.

• As an Agent. Can bind his principal by hisacts, but is not liable to the same.

• As a partner in a partnership firm. Notliable to any obligations of the firm.

• Necessaries: Minor is bound to support the• Necessaries: Minor is bound to support thesupplier of necessaries. Supplier can bereimbursed from property of minor.

Contracts by Persons of Unsound Mind

• Contracts by Lunatics.

• Example: A patient in a lunatic asylumwho is at intervals of sound mind, maywho is at intervals of sound mind, maycontract during those times.

• Contracts by Drunkards. Contract by sucha person is absolutely void and cannot beratified.

Contracts with Parda-NishinWomen

• Such women, who by custom of the countryor by usage of the particular community towhich she belongs is obliged to observewhich she belongs is obliged to observecomplete ‘seclusion’.

• In order to make a valid contract with sucha woman, it should be established that thedeed was not only executed by her but wasexplained to and understood by her.

Contracts by Married or Single Women

• Can enter into contract if she is a major anddoes not suffer from any disability.

• A married woman can enter into a valid• A married woman can enter into a validcontract w/o her husband’s consent.

• A married woman can even bind herhusband’s property and pledge his credit forpressing necessities.

Other Contracts By Corporations• It is competent to contract.• It cannot enter into contracts of a strictly

personal nature.By InsolventsBy Insolvents• Such persons cannot enter into contracts as his

property vests in the hands of the OfficialAssignee, who can enter into contract onbehalf of the insolvent.

ConvictAlien Enemy

FREE CONSENT

• Sec. 13: “Two or more are said to consentwhen they agree upon the same thing inthe same sense.”

• Agreeing upon the same thing in the same• Agreeing upon the same thing in the samesense means ad-idem.

• Sec. 14: “Consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake.”

Coercion

• It is committing, or threatening to commit,any act forbidden by the IPC,

• or the unlawful detaining, or threatening• or the unlawful detaining, or threateningto detain any property,

• to the prejudice of any person whatever,

• with the intention of causing any personto enter into an agreement.

• Ashok threatens to shoot Brijesh if he does notlet out the house to him. Brijesh agrees to doso. This agreement has been brought aboutby coercion.

• Ajay and Bittu are negotiating on a Contract,but Ajay are unwilling. A third partybut Ajay are unwilling. A third partythreatens to assault Ajay if he does not enterinto contract with Bittu, who is unaware ofthese threatening. Ajay, thereupon out offear, enters into a contract with Bittu. Doesthe contract become binding on Ajay?

• It is observed here that the consent of Ajayhas not been freely obtained as he wasthreatened with assault.

• Coercion may proceed from anybody,even a person who is not a party to thecontract.contract.

• Ajay’s consent as such is caused by coercionand therefore, the consent is not bindingon Ajay.

Undue Influence

• Sec.16(1): “A contract is said to be inducedby ‘undue influence’ where the relationssubsisting between the parties are suchsubsisting between the parties are suchthat one of the parties is in a position todominate the will of the other and usesthat position to obtain an unfairadvantage over the other.”

When is a person deemed to be in a position to dominate will of another?

• Real or apparent authority, or• In a fiduciary relation, or• Mental capacity temporarily or permanently

affected by reason of age, illness, oraffected by reason of age, illness, ormental/bodily distress.

• Relationships of father & son, guardian &ward, husband & wife, doctor & patient,trustee & beneficiary, solicitor & client,pardanishin women, etc would fall within theambit of undue influence.

Fraud

Sec.17: Fraud means and includes any of thefollowing acts committed by a party to a contract; orwith his connivance; or by his agent, with intent todeceive another party thereto or his agent, or toinduce 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 to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made w/o any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.

Essentials of Fraud

There must be an intention to deceive.

Act done by a party to a contract, or with his connivance or by his agent.by his agent.

There must be false representation of facts, eg, suggestiofalsi.

There must be an active concealment of a fact of which he has the knowledge and duty to disclose, eg, suppressio veri.

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There must be a false promise.

Any other act or omission which the law considers it to be fraudulent.to be fraudulent.

Or fitted to deceive which is done with the obvious intention to commit fraud.

The party so induced must have acted upon it and suffered loss.

When is a contract not Voidable? (Exceptions)

Deceit which does not deceive is no fraud.

Negligence is no fraud.

Ignorance is not fraud.Ignorance is not fraud.

If there is a Waiver (pardon) of the fraud.

Silence w/o any duty to speak does not amount to fraud.

Silence likely to affect willingness of contracting by a person is not fraud.

When is silence fraudulent?

Where the circumstances of the case are such that it is the duty of the person keeping silence to speak; or

Where silence is in itself equivalent to speech.

X says to Y: “If you do not deny it, I shall assume that the horse is sound.” Y says nothing. Here Y’s silence is equivalent to speech.

Misrepresentation

Consent given under misrepresentation of facts is no consent at all.

It is an untrue statement of a material fact which induces the It is an untrue statement of a material fact which induces the other party into a contract.

X says to Y that Z’s horse is of a very good breed & can run 40kms at a stretch. X believes it to be true and Y buys the horse from Z. It turns out that the horse can run only 4kms. This is misrepresentation.

An assertion or manifestation by words or conduct that is not in accord with the facts.

Misrepresentation is a tort, or a civil wrong. This means that it can create civil liability if it results in a pecuniary loss.

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For example, if a real estate speculator owns swampland but advertises it as valuable commercial land. This is a misrepresentation.

If someone buys the land relying on the speculator's statement that it is commercially valuable, the buyer may sue the speculator for monetary losses resulting from the purchase.

How can Liability be created for the Maker of the Statement?

To create liability for the maker of the statement,

a misrepresentation must be relied on by the listener or reader.

Also, the speaker must know that the listener is relying on the factual correctness of the statement.

Finally, the listener's reliance on the statement must have been reasonable and justified, and the misrepresentation must have resulted in a pecuniary loss to the listener.

When a person asserts a fact which is actually not true because his information does not warrant, justify, or merit it.

For e.g., the sales clerk as a car dealer tells the customer the price of cars will come down in a month, which turns out to be of cars will come down in a month, which turns out to be incorrect. The clerk had actually only heard it from his friend who claimed he had heard it from a top agent.

Thus, the clerk’s information which does not come from the a confirmed source is not warranted.

Mistake

An erroneous belief about something is called “mistake”.

When an agreement is entered into under a mistake, consent is not free.

Mistake is of two kinds –

(i) mistake of fact; and

(ii) mistake of law.

Mistake of Fact

Where both the parties to an agreement are under amistake as to a matter of fact essential to theagreement, the agreement is void (Sec.20).

X agrees to buy from Y a certain breed of dog. ItX agrees to buy from Y a certain breed of dog. Itturns out that the dog was dead at the time of thebargain though neither party was aware of the fact.

The agreement is void.

Mistake of Law

A misconception that occurs when a person with complete knowledge of the facts reaches an erroneous conclusion as to their legal effect; erroneous conclusion as to their legal effect;

an incorrect opinion or inference, arising from a flawed evaluation of the facts.

Mistake of Law of the Land

In this regard, the rule is “Ignorantia juris non excusat,” i.e.,ignorance of law is no excuse. Following this principle, Section 21declares that “a contract is not voidable because it was caused by amistake as to any law in force India.”

Generally, a mistaken belief about a law is no defense to a violationGenerally, a mistaken belief about a law is no defense to a violationof that law.

All persons are presumed to know and understand the law, exceptminors, persons who lack mental capacity to contract with others,and, in criminal cases, persons who are insane.

Mistake of Foreign Law

The above maxim that ignorance of law is noexcuse applies only to the law of the country andnot to foreign law.

The mistake of foreign law is to be treated as aThe mistake of foreign law is to be treated as amistake of fact.

Section 21 reads, “A mistake as to a law not inforce in India has the same effect as a mistake offact.”

PERFORMANCE OF CONTRACTS

Who must perform?

Sec.37: “The parties to a Sec.37: “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.”

Representative’s Liability: Promises

bind the legal representative of the deceased promisor.

Ashok promises to deliver goods to Babu on a certain day on payment of Rs.1000. Ashok dies

before that day. Ashok’s representative is bound to deliver the goods to Babu who in turn is bound to

pay the amount to Ashok’s representative.

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pay the amount to Ashok’s representative.

Mr.A promises to paint a picture for Mr.B by a certain day, at a certain price. Mr.A dies before

the day. The contract cannot be enforced either by Mr.A’s representative or by Mr.B.

What is Tender of Performance?

It is also called “offer of performance.” It is when the parties to a contract offer to perform their respective promises.

Essentials of a valid tender of performance:

It must be unconditional: X offers to give his house to Y, if Z permits. Offer is conditional, hence not a valid tender.

Offer must be made by promisor or representative.

Must be made at reasonable time & place.

Offer cannot be of the part of performance. For example, a stakeholder not bound to accept less than what is actually payable.

Promisor is bound by his promise to deliver the same thing and

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Promisor is bound by his promise to deliver the same thing and promisee has opportunity to examine the same.

In case of joint promises, the tender is valid.

It must be made to promisee or his duly authorized agent.

Assignment of Contracts

Under certain circumstances, parties may drop out and bring others in their places.

To ‘assign’ means ‘to transfer.’

An obligation of the party to contract may be personal or impersonal.

The contract to marry being personal in nature cannot be assigned, whereas debts of an individual is impersonal in nature, hence assignable.

Types of Assignment

Assignment by act of parties: X owes Y Rs.1000. X cannot

transfer his liability to a third person.

Assignment by operation of law: (i) Upon death of a party,

rights & liabilities devolve upon his a third person.

However, if Y agrees to accept Z as his

debtor in place of X, the liability can then be transferred from X

to Z.

devolve upon his heirs & legal

representatives. (ii) Upon insolvency,

rights and obligations pass on to Assignee or

Official Receiver.

DISCHARGE OF CONTRACT

It means “termination” of a contract.

By discharge the rights and obligations of the parties come to an end.

How is the contract discharged?

By performance;

By death;

By refusal to accept “offer of performance”;

By breach of contract – actual or anticipatory breach of contract;

By impossibility of performance;

Discharge by lapse of time;

By promisee failing to offer facilities for performance;

By operation of law;

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By operation of law;

By insolvency or bankruptcy;

By merger;

By unauthorized material alteration of a contract;

By agreement or by consent – by Novation, by Accord & Satisfaction, by Waiver, by Rescission.

Novation: It is a substitution of a new for an old debt. The old debt is extinguished by the new one contracted in its stead.

It also generally means, assigning or replacing one or a series of contracts with new contracts, often with a third party replacing one of the originals.

Accord & Satisfaction: The settlement of a debt by paying less than the

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Accord & Satisfaction: The settlement of a debt by paying less than the amount demanded in exchange for extinguishing the debt.

Waiver: Intentional relinquishment of a right, claim, or privilege.

Rescission: The act of rescinding. Rescinding means to make void; repeal or annul.

BREACH OF CONTRACTRemedies to aggrieved party

Suit for specific performance (according to terms of contract)

Suit for injunction (an order of court directing to do or refrain from doing some act)refrain from doing some act)

Suit for damages, for the loss sustained

Quantum Meruit (as much as earned or deserved as far as ‘damages’ are concerned)

Types of Damages

Compensatory Damages (calculated to actually compensate):Compensatory damages provide a plaintiff with the monetary amountnecessary to replace what was lost, and nothing more. In order to beawarded compensatory damages, the plaintiff must prove that he or shehas suffered a legally recognizable harm that is compensable by acertain amount of money that can be objectively determined by a judgeor jury.or jury.

Nominal Damages (naturally occurring): Minimal money damagesawarded to an individual in an action where the person has not sufferedany substantial injury or loss for which he must be compensated.

Exemplary/Punitive/Vindictive Damages (based on feelings, sufferings, agony, etc): May be awarded by a jury or a judge in addition to actual damages, which compensate a plaintiff for the losses suffered due to the harm caused by the defendant.

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Special Damages (arise due to unusual circumstances): Damages that are awarded to compensate for a very specific part of the loss associated with the incident. For instance, if you cause damage to another person's vehicle in an accident, but you also cause physical harm to the individual, the medical bills could be special damages.

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