Sunday, August 24, 2008

MODULE- 2 Indian Contract Act, 1872

The Indian Contract Act extends to the whole of India (except the State of Jammu and Kashmir) and it came into force on the first day of September 1872

Section 2(h)-An agreement enforceable by law is a contract.
Thus for the formation of a contract there must be
•an agreement
•the agreement should be enforceable by law

The definition of Contract u/s2(h) emphasis
an agreement enforceable by law
Consensus-ad-idem Exceptions
Rights & duties social & domestic agreements

1.Offer and its acceptance
2.Free consent of both parties
3.Mutual and lawful consideration for agreement
4.It should be enforceable by law- intention should be to create legal relationship.
5.Parties should be competent to contract
6.Object should be lawful
7.Certainty and possibility of performance
8. Contract should not have been declared as void under Contract Act or any other law


1.Offer or Proposal and Acceptance

•Offer and acceptance analysis is a traditional approach in contract law used to determine whether an agreement exists between two parties. An offer is an indication by one person ("offeror") to another ("offeree") of the offeror's willingness to contract on certain terms without further negotiations. A contract is then formed if there is express or implied agreement. A contract is said to come into existence when acceptance of an offer has been communicated to the offeror by the offeree.

• For the formation of a contract the process of proposal or offer by one party and the acceptance thereof by the other is necessary. This generally involves the process of negotiation where the parties apply their minds make offer and acceptance and create a contract.

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

Rules of Offer

•Offer must create legal relationship.
•Offer must be definite & certain.
•Offer must be communicated.
•Offer must be made with a view to obtaining the assent.
•Offer should not contain a term the non-compliance of which may be assumed to amount to acceptance.
•A statement of price is not an offer.


When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.

Rules of acceptance

Communication of acceptance

•The acceptance must be communicated. Carlill v. Carbolic Smoke Ball Co
•An offer can only be accepted by the offeree, that is, the person to whom the offer is made.
•An offeree is not bound if another person accepts the offer on his behalf without his authorization.
•It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance.
•If the offer specifies a method of acceptance (such as by post or fax), you must accept it using a method that is no less effective than the method specified.
•Silence cannot be construed as acceptance. Felthouse v. Bindley

Revocation or Lapse of offer

•By communication of notice
•By lapse of time
•By non-fulfillment of a condition
•By death or insanity of the offeror
•If offer is not accepted in usual manner
•Counter offer is made
•If law is changed

Unilateral contract
•The contract in Carlill v. Carbolic Smoke Ball Co was of a kind known as a unilateral contract, one in which the offeree accepts the offer by performing his or her side of the bargain. It can be contrasted with a bilateral contract, where there is an exchange of promises between two parties
Invitations to treat
•An invitation to treat is not an offer, but an indication of a person's willingness to negotiate a contract. In Harvey v. Facey, an indication by the owner of property that he or she might be interested in selling at a certain price, for example, has been regarded as an invitation to treat
Revocation of offer
•An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror. If the offer was made to the entire world, such as in Carlill's case, the revocation must take a form that is similar to the offer.If the offer is one that leads to a unilateral contract, then unless there was an ancillary contract entered into that guaranteed that the main contract would not be withdrawn, the contract may be revoked at any time:


A person who
is of the age of majority according to the law to which he is subject
is of sound mind ? A person is said to be of sound mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding it and of forming a rational judgement as to its effect upon his interests.
is not disqualified from contracting by any law to which he is subject
is competent to contract.
Therefore a minor is not competent to contract and an agreement by a minor is void ab initio. He can not ratify an agreement on attaining the age of majority and validate the same. (Void ab initio means it has at no time had any legal validity).

The following persons are therefore incompetent to contract
•Persons of unsound mind
•Persons disqualified by law to which they are subject

Minors and Contractual Capacity

•An agreement with or by a minor is void
•Can be a promissee or a beneficiary
•NO ratification of agreement on the age of majority
•There can be no claim for compensation from a minor
•Minor can always plead minority
•Liability - for necessities, the item contracted for must be necessary for minor’s existence, the value must be up to that of the current standard of living or financial/social status (not excessive in value),
-for tort or a civil wrong.
•Can act as a agent
•Cannot be a partner in a firm or adjudged insolvent

Others and Contractual Capacity

•Insanity, mental illness, or mental/medical condition
•Drunkenness/drug abuse
•Enemy aliens and/or terrorists
•Foreign sovereigns & accredited representatives of a foreign state
•Business entities

–The extent of an artificial person's capacity depends on the law of the place of incorporation and the enabling provisions included in the constitutive documents of incorporation. The general rule is that anything not included in the corporation's capacity is unenforceable by the corporation, but the rights and interests of innocent third parties dealing with the corporations are usually protected.

–When a business entity becomes insolvent, an administrator, receiver, or other similar legal functionary may be appointed to determine whether the entity shall continue to trade or be sold so that the creditors may receive all or a proportion of the money owing to them. During this time, the capacity of the entity is limited so that its liabilities are not increased unreasonably and to the detriment of the existing creditors.


Consideration is a central concept in the Indian contract act:
It is value paid for a promise or the inducement, price or motive that causes a party to enter into an agreement or contract. Consideration is needed for a valid contract.
An example; If you sign a contract with a man, agreeing to buy his car for an amount of money, his consideration is the car, which he promises to give to you. Your consideration is the CAR that you BUY and his consideration is the AMOUNT PAID to him. However, a contract saying that he would give you his car for nothing would not be valid per se, because you aren't giving him any consideration.

Legal Rules for Consideration

1.Moved at the desire of the promisor
2.It may be moved from promisee or any other person
3.It may be an act ,abstinence or forbearance or a return promise
4.It may be past , present or future
5.It need not be adequate
6.It must be real and not illusory
7.It must be something which the promisor is not already bound to do
8.It must not be illegal ,immoral or opposed to public policy


Only parties to contracts should be able to sue to enforce their rights or claim damages as such. However the doctrine has proven problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties.
Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty.

Common law exceptions
These are:

1.Collateral Contracts (between the third party and one of the contracting parties)
2.Trusts (the beneficiary of a trust may sue the trustee to carry out the contract)
3.Land Law (restrictive covenants on land are imposed upon subsequent purchasers if the covenant benefits neighboring land)
4.Agency and the assignment of contractual rights are permitted.
5.Marriage settlement ,partition ,family arrangements.

1.Love and affection
2.Compensation for voluntary services
3.Payment for time barred debt
4.Completed gift
5.Charitable subscription


•“Consent” defined.
U/S13. Two or more persons are said to consent when they agree upon the same thing in the same sense.
•“Free consent” defined.
U/S14. 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.

Consent is said to be free if it is not caused by-

•Coercion ? Consent is said to be caused by coercion when it is obtained by pressure exerted by either committing or threatening to commit an act forbidden by the Indian Penal Code or unlawfully detaining or threatening to detain any property.

•Undue influence ? A contract is said to be induced by "undue influence" where 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 uses that position to obtain an unfair advantage over the other.

•Fraud ? Means and includes the following acts done with the intention to deceive or to induce a person to enter into a contract.
(a) the suggestion that a fact is true when it is not true and the person making the suggestion does not believe it to be true
(b) active concealment of a fact by a person who has knowledge or belief of the fact,
(c) promise made without the intention of performing it.

•Misrepresentation ? When a person positively asserts that a fact is true when his information does not warrant it to be so, though he believes it to be true, it is misrepresentation. A breach of duty which brings an advantage to the person committing it by misleading the other to his prejudice is also a misrepresentation.

•Mistake ? Where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. An erroneous opinion as the value of the thing, which forms the subject matter of the agreement, is not deemed as mistake as to a matter of fact. Unilateral mistake, i.e. the mistake in the mind of only one party does not affect the validity of the contract

Object or consideration is unlawful if
(1) It is forbidden by law,
(2) Is of such a nature if permitted it would defeat the provisions of any law,
(3) It is fraudulent,
(4) The court regards it immoral,
(5) The court regards it opposed to public policy.
Every agreement of which the consideration or object is unlawful is void

Void agreements
Void agreements - An agreement not enforceable by law is said to be void. [section 2(g)]. - - Note that it is not ‘void contract’, as an agreement which is not enforceable by law does not become ‘contract’ at all.

Following are void agreements
• Both parties under mistake of fact (section 20)
• Unlawful object or consideration (section 24)
• Agreement without consideration (section 25)
• Agreement in restraint of marriage (section 26)
• Agreement in restraint of trade (section 27)
• Agreement in restraint of legal proceedings (section 28)
• Uncertain agreement (section 29)
• Wagering agreement (section 29)
• Agreement to do an impossible Act (section 56).

Performance of contract

Obligation of parties to contracts. U/S 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.
•Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract.

Tender of performance.
Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract.

Effect of refusal of party to perform promise wholly.
When a party to a contract has refused to perform, or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.

Person by whom promises is to be performed
If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contain in it should be performed by the promisor himself, such promise must be performed by the promisor.In other cases, the promisor or his representative may employ a competent person to perform it.

Effect of accepting performance from this person
When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor.

Devolution of joint liabilities
When two or more person have made a joint promise, then, unless a contrary intention appears by the contract, all such persons, during their joint lives, and, after the death of any of them, his representative jointly with the survivor or survivors, and, after the death of the last survivor the representatives of all jointly, must fulfill the promise.

Discharge of 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 the Act, or any other law.Promises bind the representatives of the promisor in the case of death of such promisor before performance, unless a contrary intention appears from a contract.

•In a contract the agreement being enforceable by law, each party to the contract is legally bound to perform his part of the obligation. Non-performance of the duty undertaken by a party in a contract amounts to breach of contract, for which he can be made liable.


When a party to the contract makes a breach of contract, there are five possible alternatives available to the other party.
•Rescind the contract
•Sue for damages
•Specific performance
•Quantum meruit

•Compensation for loss or damage caused by breach of contract.
• Compensation for breach of contact where penalty stipulated for.
• Party rightfully rescinding contract entitled to compensation.

Specific performance means actual execution of the contract as agreed between the parties.
•When there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done; or
•When the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief.

Quantum meruit’ means ‘as much as earned’.
A contract may come to end by
* breach of contract
* contract becoming void or
* Voidable contract avoided by party.
In such case, if a party has executed part of contract, he is entitled to get a proportionate amount i.e. ‘as much as earned by him’. This is not by way of ‘damages’ or ‘compensation for loss’. - - The principle is that even when contract comes to a premature end, the party should get amount proportional to the work done/services provided/goods supplied by one party. One party should not get enriched at the cost of others


Narender said...

Dear Ma'am,

I am pursuing LLB from CCU. Your bolg is very much helpful for the students who are studying Contract.

I am very much thankful to you.

Do you suggest more study material for the students of LLB (3yrs) a link to study material will be very helpful.

thanks & regards,

Narender Basista

sreenivas said...

Hi shravani,
i am an additional commissioner of incometax, in mumbai. I recently came across ur blog and i found it very useful in understanding the basics af eack law u have wriiten. I really like the way u write about each law in short so that one can get the gist of it.
This mail is to record my appreciation and admiration for ur efforts. keep up trhe good work.

Govind4ever said...


Your article is very useful. I am an Assistant HR Manager and needs to draft various agreement day to day, also I am pursuing LLB from University of Mumbai.
The Contract is well explained and I am planning to make it's mp3 file so other can use it

Vijaya said...

I am student of ICWA, and i studing contract act with much more dificulties but your Contract act and explanation is very usefull to memory the act much more. thanks lot of your valueable one.
Thanks & Regards
S. Vijayakumar