THE INDIAN CONTRACT ACT, 1872.

The Indian Contract Act, 1872

The Indian Contract Act, 1872, lays down the general principles relating to the formation, performance and enforceability of contracts, and the rules relating to certain special types of contracts such as indemnity guarantee, bailment, pledge and agency. However, some of the special contracts such as those relating to partnership, sale of goods, negotiable instruments, insurance, etc. are dealt with by separate legislations.

Important Definitions:-

1. Agreement:

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

When one person conveys to another his proposal, and that other person assents thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise. In other words, an agreement consists of an offer and its acceptance. The essence of an agreement is the meeting of the minds of the parties; both the parties must agree to the same thing in the same sense. This is also called as ‘consensus ad idem’.

E.g.: if ‘A’ who owns two cars, one Ambassador and the other Fiat, offers to sell ‘B’ one car, ‘A’ intending it to be the Ambassador, ‘B’ accepts the offer thinking that it is the Fiat, there is no consensus and hence no contract.

2. Contract:

According to Section 2(h), an agreement enforceable by law is a contract. In other words, a contract is an agreement made with an intention to create a legal obligation, that is, a duty enforceable by law.

3. Offer or Proposal:

As per Section 2(a), when one signifies to another his willingness to do or to abstain from doing anything, with a view to obtain the assent of that other to such an act or abstinence, he is said to make a proposal or offer. An offer may be implied from the conduct of the parties of the circumstance of the case.

E.g.: when ‘A’ says to ‘B’, “will you like to purchase my Fiat car of 1985 model for Rs. 45,000?” he is said to have made an express offer.

Invitation to the offer is not an offer:  An offer is different from an invitation to offers. A person sending out an ‘invitation to offer’ does not make an offer but only invites the other parties to make an offer.

Knowledge of the Offer:

An offer must be in the knowledge of the offeree since the offeree cannot accept the offer without having any knowledge of it.

Revocation of the Offer:

An offeror can revoke or withdraw his offer at any time until an acceptance has been made. For a revocation to be effective it is essential that it reaches the offeree before he sends off his acceptance. Revocation of a ‘general offer’ must be communicated through the same mode by which the original offer was communicated. Also an offer stands revoked if the offeree fails to fulfil a condition precedent to acceptance. [Sec. 6(3)]   

4. Acceptance:

As per Section 2(b) when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. An acceptance is the act of manifestation by the offeree of his assent to the terms of the offer. It signifies the offeree’s willingness to be bound by the terms of the proposal communicated to him. An acceptance must correspond exactly with the terms of the offer, it must be unconditional and absolute and it must be communicated to the offeror. According to Sec. 4, the communication of the acceptance is complete as against the acceptor when it comes to the knowledge of the proposer.

Revocation of the Acceptance:

As per Sec. 5 of the Indian Contract Act, 1872, an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards.

5. Consideration:

According to Section 2(d), 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 act or abstinence or promise is called a consideration for the promise. The general rule is that an agreement without consideration is void. There are, however, following exceptions to this rule, when consideration is not necessary.

a. Agreement made on account of Love and Affection: An agreement expressed in writing and registered under the law for the registration of documents, and made on account of natural love and affection between parties standing in a near relation to each other, is enforceable even if it is without consideration. [Sec 25(1)].

b.Gifts: Any gift actually made shall not be invalid for want of consideration. (Sec. 25, explanation 1)

c. Compensation for past voluntary service: A promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do, is enforceable even though it is without consideration. [Sec. 25(2)]

 d. Promise to pay a time barred debt: An agreement made by a debtor to pay, wholly or in part, a time barred debt, is enforceable. The agreement should be made in writing and signed by the debtor or his agent generally or specially authorised in this behalf. The debt must be such as would have been enforceable but for the law of limitation.

 e. Agency: No consideration is necessary to create a contract of agency. (Sec. 185)  

Essential Elements of a Contract:-

All contracts are agreements but all agreements are not necessarily contracts; the agreements not enforceable by law are not contracts. To be legally enforceable, the agreements must satisfy two things, viz.- the intention to be bound and the consideration. However, according to Section 10, an agreement is a contract if it is made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and is not expressly declared to be void.

The essential elements of a contract may be enumerated as follows:  

1. Minimum two parties:

A person cannot enter into a contract with himself. To form a contract, one party has to make an offer and the other must accept it.

2. The offer and the acceptance:

Both the offer and the acceptance should be lawful for a contract to be void.

3. The Intention to create a legal obligation:

In commercial agreements, an intention to create legal relations is presumed, unless the parties have expressly agreed to otherwise.

4. The Lawful consideration:

The consideration may be past, present or future, but it must be lawful, that is, it must not be illegal or fraudulent or immoral or opposed to public policy, or must not imply injury to the person or the property of the another. E.g.: ‘A’ promises to obtain for ‘B’ an employment in the public service and ‘B’ promises to pay Rs. 1000 to ‘A’. The agreement is void as the consideration for it is unlawful

5. The competent parties:

The parties to a contract must be competent, that is, of the age of majority, over 18 years of age; of sound mind and not disqualified from contracting by any law to which they are subject (Sec. 11 & 12). Thus, a minor, lunatic, idiot, drunkard, etc. cannot, except for some special cases, enter into a valid contract.

6. Free consent:

The consent means that the parties must agree about the subject matter of the agreement in the same sense and at the same time. The consent is said to be free unless it is induced by coercion, undue influence, fraud, misrepresentation or mistake. (Sec. 13 & 14)

7. The lawful object:

The object of an agreement must not be fraudulent or illegal or immoral or opposed to the public policy, or must not imply injury to the person or the property of another.

8. Not expressly declared void:

An agreement, which is, expressly declared to be void under Sec. 24 to 30 of the Act or under any other law, is not enforceable and is, thus not a contract. For example: an agreement in restraint of the trade or wagering agreements are not enforceable.

9. Certainty and possibility of the performance:

If an agreement is vague and its meaning cannot be ascertained, it cannot be enforced. The terms of a contract must be such as are capable of the performance. An agreement to do an impossible act is void and not enforceable at law. (Sec. 56)

10. The legal formalities:

Generally, a contract may be oral or in writing. However, certain contracts are required to be in writing and may even require registration. For instance, an agreement to pay a time barred debt must be in writing; an agreement to make a gift must be in writing and registered. In such cases, these additional formalities must be complied with.

All these elements mentioned above must be present in order to make a valid contract. If any of the elements is absent the agreement does not transform into the contract.  

The Performance of the Contracts:-

The parties must perform their respective obligations under the contract. If a promisor dies before the performance of a contract his legal representatives is bound to perform the contract unless a contrary intention appears from the words in the contract or the contract requires personal performance by the promisor.

Effect of failure to perform a promise at a fixed time:  When a party promises to do a certain thing at or before a specific time and fails to do so, the contract becomes voidable at the option of the promisee, if the parties had intended that time shall be of essence to the contract. (Sec. 55)

Discharge of the Contract:

A contract is said to be discharged when the liabilities of the parties thereto, come to an end or are determined. A contract may be discharged by any of the following modes:

a. By impossibility of Performance: The impossibility may be initial or subsequent. An agreement to do an impossible act is void ab initio.

b. By mutual agreement: A contract is discharged by the novation, rescission or alteration. Where the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract stands discharged. (Sec. 62)

c. By remission: Where a party to a contract dispenses with, either wholly or in part, the performance of a contract by the other party, or extends the time for performance, or accepts any other satisfaction instead of performance, the contract stands discharged to the extent remitted. (Sec. 63)

d.By operation of Law: A contract is discharged by operation of Law under the following circumstances:

i.   Material alteration or loss of a written document;

ii.  Merger of an inferior contract into a superior contract;

iii. Discharge of an insolvent; and

iv. When the rights and liabilities under the same contracts become vested in the same person.

e. By breach of contract: When a party to a contract has refused to perform or is disabled from performing his promise, the promisee may put an end to the contract on account of breach by the first party.

Anticipatory Breach: When, prior to the promised date of performance, the promisor signifies his intention not to fulfil the contract and that he will no longer be bound by it.

Present Breach: When a promisor signifies his refusal or disability to perform a contract, at the time agreed for its performance.

Remedies for Breach of Contract:-

1. Damages or Compensation: The party who is injured by the breach of a contract may bring an action for the damages, that is monetary compensation for the loss suffered by him.

2. Specific Performance: Where the loss suffered by the breach of contract cannot be compensated by damages or where there are no standards to ascertain the quantum of damages, the aggrieved party may approach the court for the grant of a decree for specific performance of the contact under the Specific Relief Act, 1963.

3. Suit for injunction: When a party guilty of breach acts to the detriment of the injured party, the injured party may bring a suit for injunction and restrain the guilty party from doing such act.

4. Suit for Quantum Merit: When a contract becomes void, any person who has received any advantages under such contract is bound to restore it, to the person from whom he received it. (Sec. 63)