INDIAN CONTRACT ACT, 1872
This law extends to whole of India except the state of Jammu and
Kashmir.
Definition: According to Section 2 (h) it is an 'Agreement
enforceable by law'. This definition contains two important parts:
1. Agreement: Section 2 (e) defined an agreement as "Every promise and
every set of promises, forming consideration for each other".
Agreement = Offer + Acceptance
2 Enforceable by Law: For an agreement to become a contract, it must be
legally enforceable.
Essentials of a Contract:
1. Offer and Acceptance.
2. Intention to Create Legal Relationship.
3. Lawful Consideration.
4. Parties should be capable of entering into contracts.
5. Free Consent.
6. Lawful Object.
7. Writing and Registration. Though contracts can be oral or in
writing. In certain cases, the contracts should be in writing and
registered.
8. Certainty. The terms of the agreement should be certain.
9. Possibility of performance.
10. The agreement should not be declared by law as illegal or void.
Classification of Contracts:
1. On the basis of enforceability:
a. valid contracts.
b. void contracts (the contracts were valid in the beginning but become
unenforceable at law later on).
c. void agreements (agreements which are not enforceable at law from the
very beginning).
d. voidable contracts.
e. Agreements Discovered to be Void: Parties to this contract come to know
about its invalidity of the agreement later on.
f. Illegal contract: It is forbidden by law.
g. Unenforceable contract: Cannot be enforced at law because of some
technical flaws.
2. On the basis of formation:
a. Express contract: Made by express words, may be oral or in writing.
b. Implied contract: This comes into existence because of conduct of
parties.
c. Quasi-Contract: It is not actually a contract but a legal responsibility
placed by law on a person.
3. On the Basis of Performance.
a. Executed Contract. Every party to the contract completed its promise.
b. Executory Contract: One or both the parties still have to perform their
part of promise.
OFFER AND ACCEPTANCE
Definition of Offer: According to Sec 2(a) 'when one person signifies
to another his willingness to do or to abstain from doing anything, with a
view to obtaining the assent of the other to such an act or abstinence, he
is said to make a proposal'.
The person who makes the offer or proposal is called offer or
promisor and the person to whom offer or proposal is made is called the
offeree or promise.
Types of offers:
1. General Offer: This Is an offer to the public at large and anyone can
accept it.
2. Special Offer: This offer is made to a specific person and only that
person can accept it.
3. Cross Offer: When two parties make similar offer to each other without
knowing about the other person's offer.
4. Counter Offer: When the offeree makes an offer in response to the
original offer, the offer made by the offeree is called counter offer.
5. Standing Offer: This is an offer which is kept open for acceptance for
some time. It remains open till is withdrawn.
Essentials of a Valid Offer:
a. Offer must be capable of creating legal relationship.
b. Offer must be certain, definite and not vague.
c. Offer could be express or implied.
d. There is a difference between an Offer and Invitation to Offer.
e. Offer may be made to a Specific Person or to public in General.
f. Offer must be communicated.
g. An offer becomes effective only when it is communicated to the offeree.
h. Offerer may attach certain conditions for acceptance of offer.
Lapse of an Offer: An offer may offer in the following cases:
1. By revocation.
2. By Lapse of Time.
3. By death or insanity of the offeror or offeree.
4. By failing to accept the offer with conditions.
5. If the offerree makes counter offer.
6. If the offer is not accepted as prescribed or by the usual mode.
7. If the offeree rejects the offer.
8. If the subject matter of the offer is destroyed or becomes illegal
later on.
Definition of Acceptance: Section 2 (b) 'A proposal is said to be
accepted when the person to whom the proposal is made signifies his asset
thereto. Proposal when accepted becomes a promise'.
Essentials of a Valid Acceptance:
1. The acceptance should be absolute and without any qualification.
2. With in specified time, if any or within reasonable time.
3. Acceptance should have been communicated to the offerer/proposer.
4. Acceptance should be accepted in the prescribed or usual mode.
5. Acceptance must be given by the person to whom the proposal is made.
6. Acceptance must be in response to an offer. Acceptance cannot be
before offer is made.
7. If offer is rejected once, it cannot be accepted later on.
Communication and Revocation of Offer and Acceptance.
a. When is communication complete, Section 4.
Offer: The communication of offer is complete, when it comes to the
knowledge of the offeree.
Acceptance: (i) Communication of acceptance is complete against the
proposer when it is put in course of transmission to him so as to be out
of the power of the acceptor to withdraw the same. (ii) As against the
acceptor, when it comes to the knowledge of the proposer.
Revocation: (i) As against the person who makes, when it is put into
a course of transmission to the person to whom it is made, so as to be out
of the power of the person who makes it. (ii) As against the person to whom
it is made, when it comes to the knowledge.
When can offer and acceptance be revoked?
1. A proposal can be revoked at any time before the communication of its
acceptance is complete as against the proposer.
2. Ac acceptance may be revoked at any time before its communication is
complete as against the acceptor.
CONSIDERATION
Section 2(d) "When at the desire of promisor, the promise or any
other person has done or abstained from doing or does or abstain from
doing, or promises to do or to abstain from doing something. Such an act
or abstinence or promise is called a consideration for the promise.
Essential of a Valid Consideration.
1. Consideration must move at the desire of the promisor.
2. Consideration may move from the promisee or any other person.
3. It may be past, present or future.
4. It may not be adequate.
5. it must not be something which the promisor is already bound to do.
6. It may be an act or abstinence
7. It must be real and not illusory.
8. The consideration may not be illegal, immoral or opposed to the public
policy.
Exceptions to the rule 'No Consideration No Contract'.
1. Promise must be out of natural love and affection. A father may gift
some property without a consideration to his son.
2. Compensation for past voluntary services. Once you promise to pay for
past services, you cannot withdraw it.
3. A time barred debt though cannot be recovered but if a Promise to pay a
time-barred debt is made, this becomes a valid contract.
4. Completed gifts. Once a gift is accepted, the giver cannot take it
back.
5. Once a promise is made to forgo some of the benefits of a previous
contract, the new contract in itself is a valid contract. This is called
Remission of promise.
6. Contract of agency: According to Sec. 185 of the Contract Act, no
consideration is required to create a contract of agency.
7. Promise of donation. If the promisee has incurred some expenses on the
basis of such a promise, then the promisor has to pay that amount.
CAPACITY OF PARTIES
Every person is competent to contract who:
1. Is not a minor (18 years or more).
2. Is of sound mind.
3. Is not disqualified for contracting by any other law.
Agreements by a Minor.
1. Agreements entered into by a minor are void ab-initio.
2. Minor can be a beneficiary.
3. A minor cannot ratify a contract on attaining majority which he/she
entered into at the time of minority.
4. Minor's estate is liable for making payment against necessaries supplied
to him or to anybody whom minor is supposed to support.
6. A minor can be admitted to 'benefits of partnership'. He will not bear
losses.
7. A minor can be an agent but cannot be sued for breach of duty or
negligence.
8. Minor cannot be declared insolvent.
9. A minor can jointly enter into a contract along with a major.
10. Minor's parents are not responsible for agreements made by the minor.
11. A minor cannot be a shareholder in a company.
Persons of Unsound Mind.
Section 12: 'A person is said to be of sound mind for the purpose of
making contract, if at the time when he makes it, he is capable of
understanding it and of forming a rational judgement as to its effects upon
his interests'.
A person may be considered of unsound mind in the following cases:
1. Idiocy. 2. Lunacy. 3. Drunkardness. 4. Mental Decay. 5. Hypnotism
A person of unsound mind stands at the same footing as a minor. This
means contracts made by him are void but he can receive benefits under a
contract.
Persons Disqualified by Law.
1. Alien Enemies, during war time an Indian national cannot make contract
with alien enemies.
2. Foreign Sovereigns and Ambassadors, they have got immunity under the
Vienna Agreement.
3. Convict: during the period of his conviction, he cannot make new
contracts nor can sue on old contracts.
4. Insolvent: He cannot sell the property which vests in the official
receiver.
5. Pardanashin women. She is supposed to be ignorant of many issues, hence
contracts made by her cannot be called valid.
FREE CONSENT
Meaning of Consent : (Section 13) Two or more persons are said to have
consented when they agree upon the same thing in the same sense'. For a
valid contract, there ought to be free consent. If the parties to the
contract have given their consent under some wrong understanding of the
object or the person with whom they are dealing, they consent cannot be
called a proper consent.
A contract without consent becomes void ab initio (void from the very
beginning).
Free Consent (Sec. 14): "Consent is said to be 'free' when it is not
caused by:
(a) Coercion (Sec. 15)
(b) Undue influence (Sec. 16)
(c) Fraud (Sec.17)
(d) Misrepresentation (Sec. 18)
(e) Mistake
A contract which is not formed with free consent is a voidable
contract at the option of the party whose consent was not free.
Coercion (Sec.15): Coercion is the committing, or threatening to
commit any act forbidden by the Indian Penal Code, or the unlawful
detaining, or threatening to detain any property, to the prejudice of any
person whatever, with the intention of causing any force in the place where
the coercion is employed.
(a) If consent in any contract has been caused with coercion, then the
aggrieved party can avoid the contract but has to restore the benefits
received under that contract.
(b) If some money or goods have been handed over to some person under
coercion, then that party has to return money or goods.
Undue Influence Sec. 16(1) : A contract is said to be induced by
'Undue Influence' where,
(1) The relation subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other, and (2) He uses
the position to obtain an unfair advantage over the other.
Sec. 16(2): A person is deemed to be in a position to dominate the
will of another:
1. Where he hold a real or apparent authority over the other, for example
relationship between employer and employee.
2. Where he stands in a fiduciary relation (a relation of trust and
confidence) to the other. For example relationship between a spiritual guru
and his disciples.
3. Where he makes a contract with a person whose mental capacity is
temporarily or permanently affected by reason of age, illness, or mental or
bodily distress, for example in the ad. Of Dr. Fixit, the man gets some
papers signed from the old man in hospital.
A contract in which the consent has been obtained with undue
influence, can be rescinded by the aggrieved party. The courts may in such
cases cancel the contract on such terms and conditions as it may deem fit.
The party avoiding the contract will have to restore the benefit received
in such cases.
FRAUD
Sec. 17: 'Fraud' defined.—'Fraud' means and includes any of the following
acts committed by a party to a contract, or with his connivance, or by his
agent1, with intent to deceive another party thereto or his agent, or to
induce him to enter into the contract:— —'Fraud' means and includes any of
the following acts committed by a party to a contract, or with his
connivance, or by his agent1, with intent to deceive another party thereto
or his agent, or to induce him to enter into the contract\:—"
(1) the suggestion, as 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 without 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. Explanation.—Mere silence as to facts likely to affect the
willingness of a person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to them, it is
the duty of the person keeping silence to speak2, or unless his silence,
is, in itself, equivalent to speech. Illustrations
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says
nothing to B about the horse's unsoundness. This is not fraud in A. (a) A
sells, by auction, to B, a horse which A knows to be unsound. A says
nothing to B about the horse's unsoundness. This is not fraud in A."
(b) B is A's daughter and has just come of age. Here the relation between
the parties would make it A's duty to tell B if the horse is unsound. (b) B
is A's daughter and has just come of age. Here the relation between the
parties would make it A's duty to tell B if the horse is unsound."
(c) B says to A—''If you do not deny it, I shall assume that the horse is
sound". A says nothing. Here, A's silence is equivalent to speech. (c) B
says to A—''If you do not deny it, I shall assume that the horse is sound".
A says nothing. Here, A's silence is equivalent to speech."
(d) A and B, being traders, enter upon a contract. A has private
information of a change in prices which would affect B's willingness to
proceed with the contract. A is not bound to inform B. (d) A and B, being
traders, enter upon a contract. A has private information of a change in
prices which would affect B's willingness to proceed with the contract. A
is not bound to inform B.
Effects of Fraud?
A party who has been induced to enter into a contract by fraud, has the
following remedies open to him:
1. He can rescind the contract i.e. he can avoid the performance of the
contract, contract being voidable at his option or
2. He can ask for restitution and insist that the contract shall be
performed, and that he shall be put in the position in which he would have
beeb, if the representation made had been true (Sec. 19).
Illustration A, fraudulently informs B that A's estate is free from en-
cumbrance. B thereupon buys the estate. The estate is subject to a
mortgage. B may either avoid the contract, or' may insist on its being
carried out and the, mortgage debt of deemed..
The aggrieved party can also sue for demand if any. Fraud is a 'civil
wrong' hence compensation is payable. For instance, if the party suffers
injury because of unsound horse, which was not disclosed despite enquiry,
compensation can be demanded. Similarly, where a man was fraudulently
induced to buy a house, he was allowed to recover the expense involved in
moving into the house as damages (in addition to rescission. of the
contract)
Special points- For giving rise to an action for deceit, the following
points deserve special attention:
(i) Fraud by a stranger to the contract does not affect contract. It may,
be recalled that 'coercion' as 'undue influence' by a stranger to a
contract affect the contract.
(ii) Fraudulent representation must have been instrumental in inducing the
other party to enter into the contract i.e., but for this, the aggrieved
party would not have entered into the contract.
(iii) The plaintiff must have been actually deceived by fraudulent
statement. A deceipt which does not deceive gives no ground for action.
(iv) The plaintiff must be thereby idemnified. Unless the plaintiff has
sustained a damage or injury, no action will lie. It is a common saying
that "there is no fraud without damages."
In cases. of fraudulent silence, the contract is not voidable, if the party
whose consent was so caused had the means of discovering the truth with
ordinary diligence ( Exception to Sec. 19 given in the Act). Note that in
other cases of fraud, this is no defence i.e., the contract is voidable
even if the fraud could be discovered with ordinary diligence.
MISREPRESENTATION
Sec.18: "Misrepresentation" defined.—"Misrepresentation" means and
includes— —"Misrepresentation" means and includes—"
(1) the positive assertion, in a manner not warranted by the information of
the person making it, of that which is not true, though he believes it to
be true;
(2) any breach of duty which, without an intent to deceive, gains an
advantage of the person committing it, or any one claiming under him, by
misleading another to his prejudice, or to the prejudice of any one
claiming under him;
(3) causing, however innocently, a party to an agreement, to make a mistake
as to the substance of the thing which is the subject of the agreement.
Essentials of misrepresentation?
Essentials of misrepresentation. From the foregoing discussion, It follows
that for alleging misrepresentation, the following four things are
necessary
(i) There should be a representation; made innocently, with an honest
belief as to its truth and without any desire to deceive the other party,
either expressly or impliedly
(ii) The representation must relate to facts material to the contract and
not to mere opinion or hearsay
(iii) The representation must be, or must have become untrue
(iv) The representation must have been instrumental in inducing the other
party to enter into a contract (As per the Explanation to Section 19).
Effects of Misrepresentation
In case of misrepresentation, the aggrieved party has two alternative
courses open to him
(i) He can rescind the contract, treating the contract as voidable; or
(ii) He may affirm the contract and insist that he shall be put in the
position in which he would have been; if the represen-tation made had been
true (Sec. 19). Misrepresentation does not entitle the aggrieved party to
claim damages by way of interest or otherwise for expenses occurred.
llustration A, innocently in good faith tells B that his T.V. set is made
in Japan. B. thereupon buys the T.V. set. However, it comes out to be an
Indian make. A. is guilty of misrepresentation. B. may either avoid the
contract or may insist on its being carried out. In the latter case, B may
either ask for replacing the set by a Japanese make set or may keep the
Indian make set and claim the difference in price between that set and a
Japanese make set.
Exception. The above remedy is lost, if the party whose consent was caused
by misrepresentation, had the means of discovering the truth with ordinary
diligence
Illustration A. by a misrepresentation, leads B erroneously to believe that
500 maunds of indigo are made annually at A's factory. B examines the
accounts of the factory, which show that only 400 maunds of indigo have
been made. After this B buys the factory. The contract is not voidable on
account of A 's misrepresentation (Illustration ( b) to Section 19].
MISTAKE
Sec.20: Agreement void where both parties are under mistake as to matter of
fact.—Where both the parties to an agreement are under a mistake as to a
matter of fact essential to the agreement the agreement is void.
Explanation.—An erroneous opinion as to the value of the thing which forms
the subject-matter of the agreement, is not to be deemed a mistake as to a
matter of fact. Illustra
(a) A agrees to sell to B a specific cargo of goods supposed to be on its
way from England to Bombay. It turns out that, before the day of the
bargain the ship conveying the cargo had been cast away and the goods lost.
Neither party was aware of these facts. The agreement is void. (a) A agrees
to sell to B a specific cargo of goods supposed to be on its way from
England to Bombay. It turns out that, before the day of the bargain the
ship conveying the cargo had been cast away and the goods lost. Neither
party was aware of these facts. The agreement is void."
(b) A agrees to buy from B a certain horse. It turns out that the horse was
dead at the time of the bargain, though neither party was aware of the
fact. The agreement is void. (b) A agrees to buy from B a certain horse. It
turns out that the horse was dead at the time of the bargain, though
neither party was aware of the fact. The agreement is void."
(c) A, being entitled to an estate for the life of B, agrees to sell it to
C, B was dead at the time of agreement, but both parties were ignorant of
the fact. The agreement is void. (c) A, being entitled to an estate for the
life of B, agrees to sell it to C, B was dead at the time of agreement, but
both parties were ignorant of the fact. The agreement is void.
Mistake of fact may be of two types:
i. Bilateral mistake; or
ii. Unilateral mistake.
1. Bilaterial mistake. Where the parties to an agreement misunderstood each
other and are at cross purposes, there is a bilateral mistake. Here there
is no real correspondence 'of offer acceptance, each party obviously
understanding the contract in a different way. In fact in such cases, there
is no agreement at all, there being entire absence of consent. This has
been termed by Salmond as 'error in consensus as distinguished from 'error
in causa' (i.e. where consent is not free and is caused by coercion, undue
influence, misrepresentation or fraud). In case .of bilateral mistake of
essen-tial fact, the agreement is void ab-initio. Section 20 provides that
"where both the parties. to an agreement are under a mistake as to a matter
of fact essential to the agreement, the agreement is void Thus for
declaring an agreement void ab-inito under this Section, the following
three conditions must be fulfilled
(i) Both the parties must be under a mistake i.e., the mistake must be
mutual. Both the parties should misunderstand each other so as to nullify
consent.
Illustration M, having two houses A and B, offers to sell house A, and N
not knowing that M has two houses, thinks of house B and agrees to buy it.
Here there is no real consent and the agreement is void.
(ii) A stake must relate to some fact and not to judgement or opinion etc.
An erroneous opinion as to the value of the thing which forms the subject-
matter of the agreement is not to be deemed a mistake as to a matter of
fact (Explanation to Section 20)
Illustration
(i) If A buys a motorcar, thinking that it is worth Rs 80,000, and pays Rs.
80,000 for it, when it is only worth Rs 40,000, the contract remains good.
A has to blame himself for his ignorance of the true value of the motorcar
and he cannot avoid the contract on the ground of mistake.
2. Unilateral mistake. Where only cine of the contracting parties is
mistaken as to a matter of fact, the mistake is a unilateral mistake.
Regard-ing the effect of unilateral mistake .on the validity of a contract,
Section 22 provides that "a contract is not voidable merely because it was
caused by one of the parties to it being under a mistake as to a matter of
fact." Accord-ingly, in case unilateral mistake a contract remains valid
unless the mistake is caused by misrepresentation or fraud, in which case
the contract is voidable at t e option of aggrieved art. n t e basis of
judicial deci-sions, however, in certain exceptional cases even an
unilateral mistake, whether caused by fraud, misrepresentation, etc., or
otherwise, may make an agreement void ab-intio.
Sec.21: Effect of mistakes as to law.—A contract is not voidable because it
was caused by a mistake as to any law in force in [India]; but a mistake
as to a law not in force in [India] has the same effect as a mistake of
fact. —A contract is not voidable because it was caused by a mistake as to
any law in force in [India]; but a mistake as to a law not in force in
[India] has the same effect as a mistake of fact."
Illustration A and B make a contract grounded on the erroneous belief that
a particular debt is barred by the Indian Law of Limitation; the contract
is not voidable. A and B make a contract grounded on the erroneous belief
that a particular debt is barred by the Indian Law of Limitation; the
contract is not voidable."
