Indian Contract Act (1872)

1.1 Nature of contract

The Contract came into force on 1 September 1872.

1. The Indian Contract Act was passed and implemented to control various kinds of
commercial and business contracts.
2. This act is not complete code of contracts.It deals with general principles of The Law
of Contract and special Contract.
3. The act is applicable to the whole India except for the state of Jammu and Kashmir.
4. The Contract Act only provides rules and regulations for the purpose of contract. It does
not list any rights and liabilities between parties to the contract.
5. Rights and liabilities and their manner of performance are decided by the parties
themselves under the contract but it is within the purview of the act.
1.2 Some Fundamental definitions
1.2.1 Contract

Section 2(h) of the Indian Contract Act,1872 states that ‘ an agreement enforceable by law is
contract’.

1.2.2 Agreement

Section 2(e) of the act defines it as: Every promise and every set of promises forming the
consideration for each other is an agreement.

1.2.3 Promise

As per Section 2(b) of the Contract Act,a proposal when accepted becomes a promise.

1.2.4 Proposal

Section 2(a) states that when one person signifies another person his willingness to do or
abstain from doing anything with a view to obtaining the assent of that other to such an act or
abstinence,he is said to make a proposal’.A proposal is also known as an offer.
1.2.5 Defendent

A peson against whom a suit has been filed in court and who has to defend himself against the
charges of breach of contract is called the defendant.

1.2.6 Palintiff

A prson who files a suit in a court of law against another for breach of contract is called the
plaintiff.

1.2.7 Promiser and Promisee

According to Section 2© of the Act,the person making the proposal is called the ‘promisor’
and the person accepting the proposal is called the ‘promisee’.

1.2.8 Acceptance and Promise

According to Section 2(b) of the Indian Contract Act: When the person to whom the proposal
is made signifies his assent thereto,the proposal is said to be accepted.Aproposal,when
accepted,becomes a promise.

1.2.9 Void Agreement

Section 2(g) of the Act defines a void agreement as “an agreement not enforceable by law’.

1.2.10 Voidable Contract

An agreement which is enforceable by law at the option of one or more of the parties thereto,but
not at the option of others,is a voidable contract-Section 2(i).

1.3 Classification of Contract/Types of contract

1. On the basis of the mode of formation
 Express contract
 Implied contract
 Quasi-contract
 2. On the basis of performance
 Executed contract
 Executory contract
 Partly executed and partly executory
 Unilateral contract
 Bilateral contract
3. On the basis of Validity or Enforceability
 Valid contract
 Void contract
 Voidable contract
 Illegal agreement
 Unenforceable contract

1. On the basis of the Mode of Formation

 Express Contracts : A contract would be an express contract if the terms are expressed
by words or in writing. Section 9 of the Act provides that if a proposal or acceptance of
any promise is made in words the promise is said to be express.
 Implied Contract: An implied contract is a contract which is made otherwise than by
the words spoken or written. It came into existence on account of an act or conduct of
the parties.
 Quasi contract:Even in the absence of a contract, certain social relationships give rise
to certain specific obligations to be performed by certain persons. These are known as
quasi contracts as they create same obligations as in the case of regular contract. Quasi
contracts are based on principles of equity, justice and good conscience.
2. On the basis of performance

 Executed contract:The consideration in a given contract could be an act or forbearance.

When the act is done or executed or the forbearance is brought on record, then the
contract is an executed contract.
 Executory contract: In an executory contract the consideration is reciprocal promise or
obligation. Such consideration is to be performed in future only and therefore these
contracts are described as executory contracts.
  Partly executed and partly executory: In a partly executed and partly executory
contract,one party has already performed his promise and the other party has yet to
execute his promise.
 Unilateral contract: Unilateral contract is a one sided contract in which only one party
has to perform his duty or obligation.
 Bilateral contract: A Bilateral contract is one where the obligation or promise is
outstanding on the part of both the parties.
3. On the basis of Validity or Enforceability

 Valid contract: If the contract entreed into by the parties and satisfies all the elements
of a valid contract as per the act, it is said to be a valid contract.
 Void contract: A contract which ceases to be enforceably by law is known as a void
contract.A void contract is not enforceable by the court.Generally,a valid contract
ceases to be enforceable on the change in circumstances or on the change of provisions
of an act.
 Voidable contract: When the contract is entered into without the free consent of party,it
is considered as a voidable contract.The definition of the act states that a voidable
contract is enforceably by law at the option at the option of one or more parties but not
at option of the other parties.
 Illegal Agreement: An illegal agreement is one which is forbidden by law.It cannot be
enforced by any court.Not only that any associated or collateral transaction to an illegal
agreement is also void.No action is allowed on an illegal agreement.No action can be
taken for the recovery of the money paid under illegal agreement or for the breach of
the illegal agreement.
 Unenforceable contract: A contract which satisfies all the requirements of the contract
but has technical defects is called an unenforceable contract.A contract is said to have
a technical defect when it does not fulfil the legal formalities required by some other
act.When such legal formalities are compiled with later on,the act becomes enforceable.
1.4 Offer and Acceptance
i. Proposal or Offer
According to Section 2(e) of the Indian Contract Act,”When one person signifies to another
his willingness to do job,or to 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.”

1.4.1 Elements/Main features of a Proposal

1. Existence of two parties
For a valid offer,there must be two parties.A person cannot make an offer to himself.

2. Communication

The offer must be communicated to the offence.If it is never communicated to the offence,it
cannot be accepted and no valid contract comes into existence.

3. Willingness
The offer must show willingness of the offeror. Mere telling or sharing a plan is not an offer.

4. Intention of Obtaining Assent

The offer must be made with a view to obtain the assent of the offeree. The offer made out of
a prank or as a joke is not valid offer,and therefore if accepted,it can never make the valid
contract.

5. May be positive or Negative

The offer may involve doing something or not doing something-Section 2(o).The offer to do
something is a positive offer or not to do something is a negative offer.

1.4.2 Legal Rules as to Offer

1. Offer Must be definite,Unambiguous and certain

They must be vague or indefinite. If the terms are vague, it is not capable of being accepted as
the vagueness would not create any contractual relationship.

2. Offer should not bind the other party to reply

The offer should not bind the other party to reply.In the same way,if the offer should not contain
terms,non- compliance of which may be assumed as acceptance.

3. Offer must be made to create legal relationship

While making the offer,the aim of the offerer should be to primarily create a legal obligation.An
offer that creates only social or moral obligations does not constitute a valid agreement or
contract.

4. The offer may be general or specific

An offer is called specific when it is made to an individual or a group of individuals.In case of

a specific offer,only the person or group of persons to whom the offer is made can accept or
reject the offer.
5. The offer may be express or implied.

An offer does not necessarily need to be express.it can also be implied.According to Section
9,a specific offer can be made in words-written or oral.

6. The offer should be a request and not an order.

The person making the offer has the right to set conditions to the acceptance of the offer,but he
does not have any right to set conditions to the non-acceptance of the offer.

7. The offer must be for a possible act

Man can do only what is possible,and the laws accepts that.An offer or a proposal to do
impossible is devoid of practicality or meaning.To make an offer which is humanly impossible
is not recognized by law and as such there can be no compliance.

8. The offer must be communicated

An offer,to be complete,must be communicated to the person to whom it is made so that he can

accept or not accept the offer.Unless the offer is communicated by the offerer (or by his agent)
to the offeree,there can be no acceptance of the offer and as such,no agreement can be reached.
1. Express Offer

The offer made by using words spoken or written is known as an express offer.

2. Implied Offer

The offer which could be understood by a conduct of parties or circumstances of case is called
the implied offer.

3. Specific Offer

The offer made to a specific person or a particular person or two or more than two specific
persons.The specific offer is made to an ascertained person.

4. General Offer
It is not necessary that the offer should be made to a specific person.The offer can bemade to
the world at large.If the offer is made to the world at large,it is known as the general or public
offer.

5. Cross Offer

When two parties exchange identical offers in ignorance at the time of each other’s offer, the
offers are called cross offers. There is not binding contract in such a case, as one’s offer cannot
be construed as acceptance by the other.

6. Continuous Offer

It is the offer which is open for a continuous period of time,it is also known as the open offer
or the standing offer.

7. Counter Offer

When the offeree offers to qualified acceptance of the offer subject to modifications and
variations in the terms of original offer, he is said to have made a counter offer. Counter-offer
amounts to rejection of the original offer.

ii. Acceptance
A proposal or offer is said to have been accepted when the person to whom the proposal is
made signifies his assent to the proposal to do or not to do something [Section 2 (b)].

Rules governing acceptance

1. Acceptance must be absolute and unqualified: As per section 7 of the Act, acceptance is
valid only when it is absolute and unqualified and is also expressed in some usual and
reasonable manner unless the proposal prescribes the manner in which it must be accepted. If
the proposal prescribes the manner in which it must be accepted, then it must be accepted
accordingly.

2. The acceptance must be communicated

An acceptance must be communicated to the person who made the offer. An offer made by the
intended offeree without the knowledge that an offer has been made to him cannot be deemed
as an acceptance thereto.

3. Acceptance must be in the prescribed mode

Where the proposal prescribes the mode of acceptance, it must be accepted in that manner.
Where the proposal does not prescribe the manner, then it must be accepted in a reasonable
manner.

4. Mere silence is not acceptance

The acceptance of an offer cannot be implied from the silence of the offeree or his failure to
answer, unless the offeree has in any previous conduct indicated that his silence is the evidence
of acceptance.

5. The proposer cannot prescribe the method of refusal

The proposer needs to be informed if the offer made by him is accepted,but he cannot insist on
him being informed of its non-acceptance.It is the right of the offeree to accept the proposal or
not to accept it.

6. An offer once rejected cannot be accepted until it is renewed.

A rejected offer is dead offer and needs to be revived before it can be considered for acceptance.

7. Acceptance may be express or implied

Express acceptance may be written or by word of mouth whereas implied acceptance Could be
reflectes by the action or behavior of the person accepting the offer.The later is also called tacit
acceptance. According to Section 8 of the Act,tacit acceptance can be acceptance by
performing conditions or acceptance by receiving consideration.

8. An action without the knowledge of the proposal is no acceptance

Without the knowledge of the proposal,even if the action conforms to the conditions of the
proposal,it does not constitute an acceptance.Acceptance can be given only by the person to
whom the proposal is made.

9. Acceptance can only be given by the person to whom the offer is made

This is true of a specific proposal which can only be accepted by the person to whom it is
made.

10. Acceptance must be made before the lapse or withdrawal of an offer.

If the person making the offer has set a time limit for its acceptance,the offer must be accepted
within that time.
Difference between Fraud and Misrepresentation
Difference between Coercion and Undue influence

Consideration
Section 2 (d) of the Indian Contract Act, 1872 defines consideration as ‘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 abstain from doing something, such an act or
abstinence or promise is called consideration for the promise’.

From the above definition it can be inferred that,

1. Consideration must be at the desire of the promisor.

(2) Consideration may move from one person to any other person

(3) Consideration may be past, present or future and

(4) Consideration should be real though not adequate.

Type of Consideration
1. Past Consideration

It is alos known as executed consideration.One party to contract has received the benefit before
formation of contract.

2. Present Consideration

It is received at the time of formation of the contract.It is in process of execution.

3. Future Consideration

It will be received by a party after the formation of the contract.It is also called as executory
consideration.

Legal Requirements Regarding Consideration

1. Considration means doing or not doing something

The consideration is some act or abstinence.Some act means doing something while abstinence
means not to do something.Thus, a consideration can be positive or negative.To do something
is known as positive consideration while not to do something is known as negative
considetation.

2. Consideration must move at the desire or Promisor

The consideration must move at the desire of the promisor.However,it is not necessary that it
must for the benefit of the promisor. It can be for the benefit of a third person also.
3. Consideration can flow either from the promisee or any other person:

The consideration for a contract can move either from the promisee or from any other person.
This point is made clear even by the definition of the word “consideration”, according to which
at the desire of the promisor, the promisee or any other person, doing something is
consideration.

4. Consideration may be inadequate

Consideration need not necessarily be of the same value as of the promise for which it is
exchanged. But it must be something which can be inadequate as well. Inadequate
consideration would not invalidate an agreement but such inadequate consideration could be
taken into account by the court in deciding whether the consent of the promisor was freely
given.

5. Consideration may be Past,Present or Future

The consideration may be past,present or future.A past consideration is valid in India while it
is not regarded as valid in many other countires.

Past consideration:
When a consideration by a party for a present promise was given in the past i.e. before the date
of the promise,it is said to be a past consideration.

Present Consideration:
A consideration to do or abstain from doing something given simultaneously with the promise
is a present present consideration.

Future Consideration:
When the consideration from one party to the other is to pass subsequent to the act of doing or
abstaining from doing something ,it is called a future consideration.

6. Act Promisor bound to do is not consideration

If the promisor is legally bound or required to perform something as a part of his duty,and he
agrees to do so,it is not a valid consideration.The consideration must be something different
from promisor’s existing obligation.

7. Consideation must be lawful

The consideration must be lawful.Lawful means as per the provisions of an act.An unlawful
act or benefit received in an unlawful manner is not regarded as the consideration.

8. Consideration should be possible to perform

The consideration must be real and not illusory.It means the consideration should not be
impossible to perform.An act does not recognize impossible performance.It may be physically
impossible or can be legal impossible.

Validity of an Agreement without Consideration/Agreement without consideration-

Exceptions
An agreement without consideration is void. Not only that, even inadequate consideration
would render the enforceability of the contract quite difficult as the free consent of the parties
would become suspect. The Act however contains certain exceptions to this important rule.
These are:

i. On account of natural love and affection:

According to Section 25, “An agreement made without consideration is void unless it is
expressed in writing,and registered under the law for the time being in force fot the registeration
of documents,and is made on account of natural love and affection between parties standing in
a near relation to each other.”

It follows,therefore,that the following four elements are essential for scuh agreement:

a)The agreement must be written.

b)The agreement must be registered under the prevailing law.

c)The parties to the agreement must be intimately related

d)There must belove and affection between the parties.

ii. Compensation paid for past voluntary services:

A promise to compensate wholly or in part for past voluntary services rendered by someone
to promisor does not require consideration for being enforced. However the past services must
have been rendered voluntarily to the promisor. Further the promisor must have been in
existence at that time and he must have intended to compensate.

iii. Promise to pay debts barred by limitation:

Where there is a promise in writing to pay a debt, which was barred by limitation, is valid
without consideration.

iv. Creation of Agency:

In term of section 185 of the Act, no consideration is necessary to create an agency

v. In case of completed gifts, no consideration is necessary.

This is clear from the Explanation (1) to section 25 of the Act which provides that “nothing in
this Section shall affect the validity as between donor and donee of any gift actually made.

Legality of object
According to section 10 of The Indian Contract Act, all agreements are contracts if they are
made by the free consent of parties competent to contract,for a lawful consideration and with
a lawful object and are not hereby expressly declared to void.It should be for lawful
consideration and with a lawful object.

What consideration and objects are lawful and what not (Section 23)

The consideration or object of an agreement is lawful,unless:

1. It is forbidden by law

When something is forbidden by law, an agreement to do that is unlawful. Anagreement to do

what has been prohibited by the Indian Penal Code or by someother law cannot be enforced.

2. Defeat the provisions of law

If the object or consideration of an agreement is of such a nature that, if it ispermitted, it would

defeat the provisions of any law, such an agreement is void.Certain acts may not be expressly
forbidden by law, but if they result incircumventing any law, they cannot be encouraged

3. Is fraudulent

If the consideration or object of an agreement is to commit a fraud, the agreement is void. An

agreement to avoid competition with one another cannot be considered to be either fraudulent
or opposed to public policy.

4. Agreemen injurious to the person or property of another

If the consideration or the object of an agreement is to cause an injury to theperson or property

of another, the agreement is unlawful, and therefore void.Injury here means harm which is
unlawful, for example, an agreement to commitfraud or a tort

5. Immoral or opposed to public policy

If the consideration or object of an agreement is regarded by a court to be immoral or opposed

to public policy, the agreement is unlawful and void. Public policy means the policy of the law
at a stated time. An act which is injurious to the interest of the society is against public policy.
If an agreement is prejudicial to social or economic interest of the community, it will be against
public policy to enforce such an agreement. On the one hand a persons right of contractual
freedom should be maintained, on the other hand if the contract is against public policy the law
must not allow that to be enforced.
Agreement declared void
As per Section 2(g) of The Indian Contract Act , 1872 “An agreement not enforceable by law
is said to be void”, and as per Section 2(j) of The Act “A Contract which ceases to be
enforceable by law becomes void when it ceases to be enforceable”.

Types of agreements expressly declared void:

1. Agreements by or with persons incompetent to contract.

A contract can also be void due to the impossibility of its performance. E g: If a contract is
formed between two parties A & B but during the performance of the contract the object of the
contract becomes impossible to achieve (due to action by someone or something other than the
contracting parties), then the contract cannot be enforced in the court of law and is thus void.

2. Agreement entered into through a mutual mistake of fact between the parties.

Any agreement with a bilateral mistake is void.(Section 20) :- Where both the parties to an
agreement are under a mistake as to matter of fact essential to agreement , the agreement is
void.

Agreement , the object or consideration of which is unlawful(Section 23)

A consideration is unlawful if-

 It is forbidden by law
 It would defeat the provisions of any law.
 It is fraudulent
 It causes injury to the person or property of another
 The court regards it as immoral
 The court regards it as opposed to Public Policy.
 Agreement made without consideration
4. Agreement in restraint of marriage

Every agreement in restraint of marriage of any person other than a minor, is void(Section 26)

5. Agreement in restraint of trade.

Every agreement by which anyone is restrained from exercised a Lawful profession, trade or
business of any kind is void(Section 27)

6. Agreement in restraint of legal proceedings.(Section 28)

Every Agreement:

1. by which any party is restricted absolutely from enforcing his legal rights under any
contract is void.
2. which limits the time within which an action may be brought is void.
7. Wagering agreements(Section 30)

An agreement between two persons under which money or money’s worth is payable by one
person to another on the happen or non happening of a future uncertain event is called a
wagering agreement.(Section 30)

8. Impossible agreements(Section 36)

Such an agreement can not be enforced since it is void whether the impossibility of the event
was known to the parties or not is immaterial.