Indian Contract Act 1872

Unit I
Indian Contract Act 1872
Indian Contract Act
1.1. Definition of Contract, Proposal, Agreement,
Consideration, etc.
1.2. Essentials of Valid contract
1.3. Competent Parties
1.4. Types of Contracts – valid, void and voidable.
1.5. Performance of Contract
1.6. Discharge of Contract
1.7. Remedies for Breach of Contract
1.8. Indemnity and Guarantee
Unit I
 Objective of the Act
The objective of the Contract Act is to ensure
• the rights and obligations arising out of a
that
contract are honoured
and that legal remedies are made available to
an aggrieved
party against the party failing to honour his
part of agreement.
The Indian Contract Act
makes it obligatory that this is done and
compels the defaulters to honour their
commitments.
 Extent and Commencement
• It extends to the whole of India except the
State of Jammu and Kashmir
• It came into force on the first day of
September, 1872.

• The sale of Goods was repealed from this

Indian Contract Act in 1930. Contracts relating
to partnership were repealed in 1932.
 Present Contract Act
• Basic Principles of Contract (Sections 1 to 75)
• Indemnity and Guarantee (Sections 124 to
147)
•  Bailment (Sections 148 to 181)
•  Agency (Sections 182 to 238)
 Proposal
• 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 act or abstinence, he said
to make a proposal.
 Promise
• When the person to whom the proposal is
made signifies his assent thereto, the proposal
is said to be accepted. A proposal when
accepted, becomes a promise.
• The person making the proposal is called the
“Promisor” and the person accepting the
proposal is called the “Promisee”.
 Consideration
• When at the desire of the promisor, the
promise or any other person has done or
abstained from doing, or does or abstains
from doing, or promises to do or to abstain
from doing something, such act or abstinence
or promise is called a consideration for the
promise.
 Agreement
• Every promise and every set of promises,
forming the consideration for each other is an
agreement.

• An agreement not enforceable by law is said

to be void.
 Contract
• An agreement enforceable by law is a
contract.
 Steps involved in the Contract
• Proposal and its communication
• Acceptance of proposal and its
communication
• Agreement by mutual promises
• Contract
•  Performance of Contract
 Essential requirements of a valid
contract
•  Offer and its acceptance
•  Free consent of both parties
•  Mutual and lawful consideration for agreement
• It should be enforceable by law. Hence, intention
should be to create legal relationship. Agreements of
social or domestic nature are not contracts
•  Parties should be competent to contract
•  Object should be lawful
•  Certainty and possibility of performance
• Contract should not have been declared as void under
Contract Act or any other law
 Offer
• May be express or implied
•  May be positive or negative
• Must intend to create legal relationship
• Terms of offer must be certain
• May be made to a specific person or class of
persons or to any one in the world at large
•  Must be communicated to the offeree
• Must be made with a view to obtain the
assent
•  May be conditional
 Termination of Offer
• By notice of revocation
•  By lapse of time
• By failure of the acceptor to fulfil a condition
precedent to acceptance
• By failure to accept according to the mode
prescribed
•  By death or insanity of the offeror
•  By rejection
 Essentials of a valid acceptance
• Acceptance must be absolute and
unconditional
• Acceptance by usual mode as desired by the
offeror
• Acceptance cannot precede the offer
•  Acceptance may be express or implied
• Acceptance must be given within a reasonable
time
• Acceptance must be by an ascertained person
(offeree)
 Essentials of a valid acceptance
• Offer cannot be accepted after it was rejected
unless it is renewed
• Silence does not imply acceptance
• Acceptance must be made before the lapse or
revocation of the offer
• Acceptance of offer means acceptance of all
terms attached to the offer
Legal rules regarding Consideration
• Consideration is required both for formation
and discharge of an agreement or contract
•  Consideration may be past, present and future
• Consideration may be either positive or
negative
• Consideration must be done at the desire of
the promisor
• Consideration may be furnished by the
promisee or any other person
Legal rules regarding Consideration
•  Consideration must be lawful
• Consideration must be real and not illusory
•  Consideration need not be adequate
• Consideration must not be the performance
of existing duties
• Consideration must be of some value in the
eyes of law
 Contractual Capacity
• Every person is competent to contract who is
of the age of the majority according to the law
to which he is subject and who is of a sound
mind, and is not disqualified from contracting
by any law to which he is subject.
 Contractual Capacity
• Mental Deficiency
– Sound Mind (he is capable of understanding it and
of forming a rational judgment as to its effects
upon his interests)
•  Mental Incompetents
•  Idiots
•  Lunatics and insane persons
– Minor (< 18 years)
– Drunkenness
•  Legal Disability (Alien Enemy, Insolvent,

Imprisonment)
 Free Consent
•  Agree upon the same thing in the same sense.
 Object and Public Policy
•  Not be forbidden by law
•  Should not defeat provisions of any law
•  Not be fraudulent
• Should not injure a person / property
•  Should not be immoral
•  Should not be opposed to public policy
 Void and 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 the other or
others, is a voidable contract

• A contract which ceases to be enforceable by

law becomes a void contract.
 Types of Contract – On the basis of
Validity
Valid contract: An agreement which has all the essential elements of a
contract
• is called a valid contract. A valid contract can be enforced by
law.
•  Void contract[Section 2(g)]: A void contract is a contract which ceases
to be enforceable by law. A contract when originally entered into may
be valid and binding on the parties. It may subsequently become void.
-- There are many judgments which have stated that where any crime
has been converted into a "Source of Profit" or if any act to be done
under any contract is opposed to "Public Policy" under any contract—
than that contract itself cannot be enforced under the law-
•  Voidable contract[Section 2(i)]: An agreement which is enforceable by
law at the option of one or more of the parties thereto, but not at the
option of other or others, is a voidable contract. If the essential element
of free consent is missing in a contract, the law confers right on the
aggrieved party either to reject the contract or to accept it. However,
the contract continues to be good and enforceable unless it is
repudiated by the aggrieved party.
 Types of Contract – On the basis of
Validity
Illegal contract: A contract is illegal if it is forbidden by law;
•or is of such nature that, if permitted, would defeat the
provisions of any law or is fraudulent; or involves or implies
injury to a person or property of another, or court regards
it as immoral or opposed to public policy. These
agreements are punishable by law. These are void-ab-initio.
•  “All illegal agreements are void agreements but all void
agreements are not illegal.”
•  Unenforceable contract: Where a contract is good in

substance but because of some technical defect cannot be

enforced by law is called unenforceable contract. These
contracts are neither void nor voidable.
 Types of Contract – On the basis of
Formation
Express contract: Where the terms of the contract are expressly
• agreed upon in words (written or spoken) at the time of
formation, the contract is said to be express contract.
•  Implied contract: An implied contract is one which is inferred
from the acts or conduct of the parties or from the
circumstances of the cases. Where a proposal or acceptance is
made otherwise than in words, promise is said to be implied.•  
Quasi contract: A quasi contract is created by law. Thus, quasi
contracts are strictly not contracts as there is no intention of
parties to enter into a contract. It is legal obligation which is
imposed on a party who is required to perform it.
A quasi contract is based on the principle that a person shall
not be allowed to enrich himself at the expense of another.
 Types of Contract – On the basis of
Performance
•  Executed contract: An executed contract is
one in which both the parties have performed
their respective obligation.
•  Executory contract: An executory contract is
one where one or both the parties to the
contract have still to perform their obligations
in future. Thus, a contract which is partially
performed or wholly unperformed is termed
as executory contract.
 Types of Contract – On the basis of
Performance
Unilateral contract: A unilateral contract is one in
•
which only one party has to perform his
obligation at the time of the formation of the
contract, the other party having fulfilled his
obligation at the time of the contract or before
the contract comes into existence.
•  
Bilateral contract: A bilateral contract is one in
which the obligation on both the parties to the
contract is outstanding at the time of the
formation of the contract. Bilateral contracts are
also known as contracts with executory
consideration.
 Performance
• Section 37, Para 1, of the Contract Act lays down
that, “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.”
•  The offer to perform the contract is called Tender.
Offer to perform or Tender may be called attempted
performance. A tender, to be legally valid, must fulfill
the following conditions.
 A tender, to be legally valid, must
fulfill the following conditions
• It must be unconditional
• A tender money, must be in legal tender money, not
by any foreign money, or by promissory note or
cheque.
• The tender must be made at a proper time and place
• The person to whom a tender is made must be given
a reasonable opportunity of ascertaining that the
person by whom it is made is able and willing there
and then, to do the whole of what he is bound by his
promise to do.
 A tender, to be legally valid, must
fulfill the following conditions
• If the offer is an offer to deliver anything to
the promisee, the promisee must have a
reasonable opportunity of seeing that the
thing offered is the thing which the promisor
is bound by his promise to deliver.
• When there are several promisees, an offer,
to any one of them is a valid tender
•  Must be in proper form
• Must be willing and ready to fulfill the
obligations
 Performance made by whom?
• Personal Performance : In cases involving personal
skill, taste, or credit, the promisor must himself
perform the contract.
• Performance by Representative : In all other cases
the Promisor or his representatives may employ a
competent person to perform it.
• Performance by a third person : When a promise
accepts performance of the promisee from a third
person, he cannot afterwards enforce it against the
promisor
 Performance made by whom?
•  Death of Promisor
– Contracts involving personal skill or volition, come
to an end when the Promisor dies. His heirs or
legal representatives are not bound to perform
such contract
– In cases not involving personal skill or volition, the
legal representatives of a deceased promisor are
bound to perform the contract. Liability of the
legal representatives is limited to the assets
obtained from the deceased.
 Persons entitled to demand
performance
•  Promisee
• Legal Representative
• Third Party (Eg. Trust : A & B enter into a
contract in favor of C; C can demand
performance)
•  Joint promisees
 Time for Performance
• When no time is specified : Reasonable time
•  When time is specified (it has to be followed)
•  On application for performance by promisee

Place for Performance

This applies to
•  Delivery of Goods
•  Payment of Money
 Performance of Reciprocal
Promises
• Mutual and Dependent
• Mutual and Independent
• Mutual and Concurrent

• Order of Performance (who has to do when) :

Fixed by contract
 Contracts that need not be
performed
•  When a new contract is substituted
• A person rescinds it (who has the option of
‘voidable’)
• Promisee neglects or refuses to afford the
promisor circumstance for performance
• Impossibility or Illegality
•  If one person has right to rescind a contract
 Discharge of Contract by a New
Agreement
•  Substitution
– Of old contract by new contract
– Of a party to the contract by a new one
•  Alteration (change in terms of contract
• Rescission (by mutual consent/non-
performance/voidable)
• Waiver (abandonment of a right which a
person is entitled to)
 Discharge of Contract by a New
Agreement
• Remission (promisee may give up a part of his
claim at his own will)
– Whole / in part
– Extend the time of performance
– Accept any other satisfaction than performance
•  Merger (superior right and inferior right

coincide and meet in one and the same

person) eg. Person buys the land which he has
taken for lease before.
 Discharge by Operation of law
•  Insolvency
•  Merger
•  Death
•  Lapse of Time

• Material alteration / Unauthorized alteration

 Discharge of contract by
impossibility
• Destruction of object necessary for
performance
•  Change of law
• Personal incapacity
• Non-existence or non-occurrence of an event
necessary for performance
•  Outbreak of war
 Breach
• If a party breaks his obligations which the
contract imposes; contract is no longer
binding on the other person
• Actual Breach of Contract
– At the time when the performance is due
•  One party fails or refuses to perform his obligation
– During the performance of the contract
•  Express Repudiation (by word or act refuses to
continue to perform his obligation)
•  Implied Repudiation (makes by his own act the
complete performance of the contract impossible)
 Breach
• Anticipatory Breach of Contract (done before
the time for performance arrives)
– By Renunciation (Express Repudiation)
– By creating some Impossibility (Implied
Repudiation)
 Remedies in case of Breach
• Suit for damages (dealt by Indian Contract
Act)
• Dealt by Specific Relief Act, 1963
– Bring an action for specific performance
– Suit for Injunction
– Claim for quantum meruit
– Restitution
– Suit for cancellation or rescission
 Remedies for Breach of Contract
• Suit for Damages (loss or damage suffered by
breach of contract)
•  Kinds
– Ordinary or General Damages (damages which
arise on a breach; parties know it at the time of
entering into contract; eg. Difference in contract
price and market price)
– Special Damages (breach of contract under some
special circumstances)
 Remedies for Breach of Contract
•  Kinds
– Exemplary Damages (shows the Court’s strong
disapproval of the conduct of the defendant in
committing the wrong; eg. Refusal to honor a
cheque in spite of having funds)
– Nominal Damages (breach involved is of technical
nature, so some nominal damages (1 rupee) may
be awarded)
– Remote Damages (not to be given for any remote
and indirect loss or damage sustained by reason
of the breach)
 Remedies for Breach of Contract
• Rules regarding determination of amount of
damages
– Restoration of parties to a position where they
would have been if the contract had been
performed and not where they would have been if
they never made the contract
• Damages are recoverable in 2 cases
– When they arise naturally in the usual course of
things from such breach.
– Loss or damage which the parties knew, when
they made the contract is likely to result from the
breach of it.
 Suit for Injunction
•  Preventive relief
• This is an order of the court restraining the
wrong doer from doing or continuing the
wrongful act complained of.
• Usually granted to enforce negative
stipulations in cases where damages are not
adequate relief.
 Suit for Quantum Meruit
•  Quantum Meruit means as much as is earned.
• Right to Quantum Meruit : Right to claim the
compensation for the work already done.