Introduction to Indian Contract Act-1872

Introduction to Indian contract act-1872.

1. UNIT – I Law of contract-1872 RAMAKRISHNAIAH. A MBA, M.Com, MISTE, (PGDFM), (PhD) Lecturer in Management Studies, Westin school of Business Vijayawada.

2. LAW MEANING: The term law refers to rules of conduct enforced by the state to maintain peace and order in the society. Broadly speaking, law may be defined as the rules of conduct recognized and enforced by the state to control and regulate the conduct of people, to protect their property and contractual rights with a view to securing justice, peaceful living and social security.

3. definitions 1. According to Salmond , “Law is the body of principles recognized and applied by the state in administration of justice”. 2. Austin says, “A law is a rule of conduct imposed and enforced by the sovereign”. 3. In the words of Holland , “law is a rule of external human actions enforced by sovereign political authority”.

4. THE INDIAN CONTRACT ACT, 1872 The law relating to contracts in India is contained in the Indian Contract Act, 1872. The Act came into force with effect from September 1, 1872. It is applicable to the whole of India except the State of Jammu & Kashmir. The Act deals with a) The general principals of the law of contract (Secs. 1 to 75) which apply to all types of contracts irrespective of their nature and b) Some special contracts only (Secs. 124 to 238)

5. A contract is an agreement made between two or more parties which the law will enforce. A contract is an agreement to do or not to do an act. It is a legally binding agreement, which is enforceable at law. Definition sec. 2 (h) of the Indian contract act, 1872 defines contract as an agreement enforceable by law.

6. Essential Elements of a Valid Contract Offer and Acceptance : in order to create a valid contract, there must be two or more parties because an individual cannot enter into an agreement with himself. It implies that one party makes a lawful proposal (offer) and the other party makes a lawful acceptance of the offer. The term lawful means offer and its acceptance must confirm to the rules laid down in the Indian contact act regarding valid offer and acceptance and its communication. Intention to create legal relationship : when two parties enter into an agreement, their intention must be to create legal relationship between them. If there is no such intention on the part of the parties, there is no contract between them. Agreements of a social or domestic nature do not anticipate legal relationship, as such they are not contracts.

7. 3. Lawful consideration: an agreement to be enforceable by law must be supported by consideration. ′Consideration′ means an advantage or benefit moving from one party to the other. For a valid contract, the consideration need not necessarily be in terms of a price the consideration can even be in the past, present or future – but the consideration needs to real and lawful. 4. Capacity of parties: the parties to the agreement must be legally competent to enter into a valid contract. According to section11 if the act, every person is competent to contract if he: (a) is of the age of majority, (b) is of sound mind and (c) is not disqualified from contracting by any law to which he is subject. If a party suffers from any flaw in capacity, the agreement is not enforceable except in some special cases.

8. 5. Free consent: it is essential to the creation of every contract that there must be free and genuine consent of the parties to the agreement. According to section 13, the consent of the parties is said to be free when they are of the same mind on the material terms of the contract. The parties are said to be of the same mind when they agree about the subject matter of the contract in the same sense and at the same time. 6. Lawful object: the object of an agreement must be lawful. Object has nothing to do with consideration. It means the purpose or design of the contract. Thus, when one hires a house for use as a gambling house, the object of the contract is to run a gambling house. The object is said to be unlawful if — a) it is prohibited by law; b) it is of such nature that if permitted it would defeat the provisions of any law; c) it is fraudulent; d) it involves an injury to the person or property of any other and e) the court regards it as immoral or opposed to public policy.

9. 7. Certainty of meaning: according to section 29, agreements the meaning of which is not certain or capable of being made certain are void. The terms of the contract must be precise and certain and not vague or indefinite. A contract may be void on the ground of uncertainty. 8. Possibility of performance: if the act is impossible in itself, physically or legally, it cannot be enforced at law.

10. 9. Agreement not declared void or illegal : the agreement though satisfying all the conditions for a valid contract must not have expressly declared void by any law in force in the country. Agreements mentioned in sections 24 to 30 of the contract act have been expressly declared void for example agreements in restriction of trade, marriage, legal proceedings, etc. 10. Legal formalities: an oral contract is a perfectly valid contract, except in those cases except where writing, registration, etc. Is required by some law. In India, writing is required in cases of sale, mortgage, lease and gift of immovable property, negotiable instruments, memorandum and articles of association of a company,

11. KINDS OF CONTRACT ON VALIDITY

12. Valid contract A valid contract is a legally binding agreement that satisfies all the essential elements of a contract. These essential elements include an offer, acceptance, consideration, free consent, capacity, and a lawful object. A contract that satisfies these elements is enforceable by law, and both parties must fulfill their obligations under the contract. Examples of valid contracts include employment contracts, sales contracts, lease agreements, and service contracts. For instance, when you rent a house, you enter into a valid contract with the landlord. The contract outlines the terms and conditions of the rental agreement, such as the rent amount, duration of the lease, and maintenance responsibilities. If either party violates the terms of the contract, the other party can seek legal remedies.

13. Void Agreements A void agreement is a contract that has no legal effect from the beginning. It is null and void ab initio, which means it is not enforceable by law, and the parties cannot be forced to fulfil their obligations under the contract. Such contracts are deemed void because they lack one or more essential elements required for a contract to be valid. Examples of void agreements include contracts with minors, contracts made under coercion, contracts that are against public policy or morality, and contracts with unlawful objects. For instance, a contract that requires a person to commit a crime or fraud is void because it is against the law.

14. Voidable Contracts A voidable agreement is a contract that is enforceable by law until one of the parties decides to void the contract due to some defect or lack of free consent. Such contracts are valid unless and until one of the parties decides to avoid them. Examples of voidable contracts include contracts made by a person who is not of sound mind, contracts made by a person under duress or undue influence, and contracts made by misrepresentation or fraud. For instance, a contract entered into by a person who was coerced into signing it is voidable at the option of the coerced party. The provisions related to voidable agreements are outlined in sections 2( i ) and 19 to 30 of the Indian contract act, 1872. These sections define the rules for free consent, coercion, undue influence, and misrepresentation in contracts.

15. OFFER

16. OFFER An offer is a proposal by one party to another to enter into a legally binding agreement with him. According to section 2 (c), “the person making the proposal is called the ‘promisor’ or offeror or proposer; the person to whom it is made is called the offeree or propose and the person accepting the proposal is called the ‘ promisee ’ or acceptor.”

17. essential elements in an offer Section 2 (a) reveals three essential elements in an offer: I) Expression of willingness to do or not to do something, ii) Made to another person i.e., A person cannot make an offer to himself, iii) With the object of gaining the consent of the other person to such act.

18. Types of Offer Offers or proposals may be classified on the basis of — 1) How an offer is made? 2) To whom an offer is made?

19. 1. How an offer is made: an offer may be either express or implied from the conduct of the parties. A) express offer: an express offer is one which may be made by words spoken or written such as letter, telegram, telex, fax message, e-mail or through internet. For example, when A offers to sell his dissection box to B for rs . 400, it is an express offer. B) implied offer: an implied offer is one which may be gathered from the conduct of the party or the circumstances of the case. Stepping into a local bus, consuming eatables at a restaurant, shinning shoes by a shoe shiner, without being asked to do so etc. Create implied promises to pay for the benefits enjoyed.

20. 2. To whom an offer is made: an offer may be made to — a) a particular person or a particular group or body of persons, b) the public at large. A) specific offer : an offer made to a definite person or a body of persons is called a specific offer. A specific offer can usually be accepted only by the person or persons to whom it is made. B) general offer: when an offer is addressed to the whole world, it is called a general offer. A general offer is accepted by any one.

21. 3. Positive and negative offers: A person may express his willingness to do something or to abstain from doing something e.g., It may be an offer to construct a wall to provide privacy or not to construct a wall so that free passage of light and air may not be blocked. 4. Cross offers: when two parties make identical offers to each other, in ignorance of each other’s offer, such offers are known as cross offers. They shall not constitute acceptance of one’s offer by the other.

22. ACCEPTANCE According to section 2 (b) of the Indian contract act, “when the person to whom the offer is made signifies his assent thereto, the offer is said to be accepted. An accepted proposal is called a promise or an agreement”

23. Essentials of a Valid Acceptance 1. Acceptance must be absolute and unconditional: it must confirm with the offer. If it does, the offer or proposal becomes a promise. The acceptance, in order to be binding, must be absolute and unqualified [sec. 7 (1)] in respect of all terms of the offer, whether material or immaterial, major or minor. A qualified acceptance is not a contractual acceptance. If the terms of acceptance are different from the terms of offer, it is termed as a counter offer and is not recognized by law as an acceptance until the original offeror accepts the qualified terms.

24. 2. Acceptance must be communicated to the offeror: to conclude a contract between the parties, the acceptance must be communicated to the offeror. If the acceptance is not communicated, the acceptance is not valid in terms of law. A mere resolve or mental determination on the part of the offeree to accept an offer, when there is no external expression of the intention to do so. 3. Acceptance must be made within a reasonable time: acceptance to be valid must be made within the time allowed by the offeror and if no time is specified, it must be made4 within a reasonable time. What is a reasonable time is a question of fact depending on the particular circumstances. Acceptance may be made at any time till the offer is alive. Acceptance made after the offer has been withdrawn is invalid.

25. 4. Acceptance must be made according to the mode prescribed or usual or reasonable mode: acceptance has to be made in the manner prescribed or indicated by the offeror. Section 7 (2) states that if the acceptance is not made in the manner prescribed, the proposer may within a reasonable time after the acceptance is communicated to him, insist that the acceptance must be made in the manner prescribed. Failure on the part of the offeror to do so will imply that he has accepted although it is not in the desired manner. 5. The acceptor must be aware of the proposal at the time of the offer: acceptance follows offer. If the acceptor is not aware of the existence of the offer and conveys his acceptance, no contract comes into being. There must be a knowledge of the offer before anyone could consent to it. An act done in ignorance of the offer of a reward cannot be called an acceptance.

26. 6. Acceptance must be given before the offer lapses or before the offer is revoked (canceled): it means that acceptance must be made while the offer is in force i.e., Before the offer has been revoked or offer has lapsed. A prospective resignation to quit a post is an offer and it can be withdrawn before the resignation is accepted by a competent authority. 7. Acceptance cannot be implied from silence: no contract is formed if the offeree remains silent and does nothing to show that he has accepted the offer. The acceptance of an offer cannot be implied from the silence of the offeree or his failure to answer, unless the offeree has by his previous conduct indicated that his silence means that he accepts. Rakesh told Shyam, “I offer you my car for Rs. 2,00,000. If you don’t reply me in 15 days’ time, I shall assume that you accept the offer.” Shyam kept silent. Held, there was no contract.

27. CONSIDERATION Meaning: consideration is one of the essential elements to support a contract. The law enforces only those promises which are made for consideration. Where one party promises to do something, it must get something in return. This something in return is called consideration.

28. Definition Section 2 (d) of the Indian contract act 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 act or abstinence or promise is called a consideration for the promise”

29. Essential Elements of Valid Consideration 1. It must move at the desire of the promisor: any act or self-denial constituting consideration must have been done at the desire or request of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it will not be a good consideration. The desire of the promisor may be express or implied. 2. It must move from the promisee or any other person: under the English law, consideration must move from the promisee . Under the Indian law, consideration may, move from the promise or any other person, i.e.0, Even a stranger. This means that as long as there is consideration for a promise it is immaterial who has furnished it. But the stranger to consideration will be able to sue only if he is a party to the contract.

30. 3. Consideration may be past, present or future: the words used in section 2 (d) — has done or abstained from doing (past); or does or abstains from doing (present); or promises to do or to abstain from doing (future) — indicates that consideration may be past, present or future. The indian contract act recognizes past, present and future considerations whereas the english law does not recognize a past consideration. 4. Consideration need not be adequate: consideration means ‘something in return’. This ‘something in return’ need not necessarily be equal in value to ‘something given. The law simply provides that a contract should be supported by consideration. So long as consideration exists, the courts are not concerned as to its adequacy, provided it is of some value. Adequacy is for the parties to decide at the time of making the agreement. Inadequacy is no ground for refusing the performance of the promise, unless it is evidence of fraud.

31. 5. Consideration must be real and not illusory: though consideration need not be adequate, yet it must be real and not illusory. Thus, a promise to do that which a person is by law bound to do, does not amount to consideration. Consideration has also to be competent. If it is physically impossible, unclear or legally impossible, uncertain or illusory, the contract cannot be enforced. Thus, a promise by a man to make two parallel lines meet is no good consideration. 6. Consideration must be something which the promisor is not already bound to do: A promise to do what one is already bound to do, either by general law or under an existing contract, is not a good consideration for a new promise. There will be no detriment to the promise or benefit to the promisor over and above their existing rights or obligations

32. 7. Consideration must be lawful: the consideration for an agreement must be lawful. An agreement is void, if it is based on unlawful consideration. The consideration of an agreement is lawful unless it is forbidden (prohibited) by law, or ii) is of such a nature that if permitted it would defeat the provisions of any law, or iii) is fraudulent, or iv) involves or implies injury to the person or property of another, or v) the court regards it as immoral or opposed to public policy.

33. Capacity of Parties According to section 11 of the contract act, everyone is competent to contract Who has achieved the age of majority. Who is of sound mind. Not prohibited by the law to enter into a contract. Incompetent to contract.

34. There are certain guidelines for persons who are not eligible to enter into a contract. Following are some of the points which are described under the Indian contract act - A person with an unsound mind. Minors who have not attended the majority. The persons who are prohibited or disqualified by the law. The aspects of the  capacity of contract.

35. Free consent

36. meaning As stated in section 13 of the Indian contract act, 1932, free consent means when both the parties agree or are ready to do a thing in the same sense or harmony. An agreement is incomplete without free consent as both the parties should commit to a single thing, and it shows the mutual trust that both the parties have in each other.

37. Violating factors

38. Coercion When a person unlawfully, threatens or forces a person via some forbidden acts, leads to coercion. It means the entry of either of the parties might be forceful or any of them committed to illegal activities or commitments against the indian penal code etc. The effect of coercion leads to the cancellation of the entire contract after investigating thoroughly. The legal body will restrict the obligations of both parties in this case. If the commitment is done forcefully, clearly we can say that it is not free of consent.

39. Fraud Another important factor of free consent is fraud. When a person provides false assertion, makes any promises in order to deceive a person or plans to get an advantage over the other party, then the act is considered as fraud. It involves the omission of promises made during the agreement, the false assertion of facts, false actions to cheat the other party, etc. And many more deceiving actions come under this fraud. According to section 17 of the indian law of contract, the other party has been given rights to claim for the deceived amounts as well as to revoke the entire contract and can make modifications where he got damaged.

40. Misinterpretation Providing a false assertion or fake representation of the fact to the party or making unwarranted information to mislead the other party. According to section 18 of the Indian law of contract, the misrepresentation is nothing but showing the false information at the beginning of the contract itself. The facts which are committed at the ground level may not be reliable, then it is considered as misrepresentation of the contract. Again here we have two kinds of misrepresentations-one is innocent misrepresentation and the other is a negligent misrepresentation.

41. Undue influence When one of the parties has a dominating nature or uses its power to work against the will of the other party. Undue influence is another factor to violate free consent. It occurs when one of the other parties dominates the other party in any aspect. There is a chance of taking unfair advantage because of their dominating position on the other party. The principal behind undue influence is the doctrine of equity. The effect of undue influence leads to the voidability of the contract of free consent under section 19 A. It requires valid proof to file a case on the dominating party. Generally, the undue influence affects the below parties -

42. Breach of contract

43. introduction A breach of contract is a violation of any of the agreed-upon terms and conditions of a binding contract. The breach could be anything from a late payment to a more serious violation, such as the failure to deliver a promised asset.

44. meaning Business contracts create obligations between two parties. One party has to do something, and the other agrees to pay for it. Small business owners make dozens of these contracts every day. If one party fails to act on the terms of the contract, they have "breached" the contract.

45. What Is a Breach of Contract? A "breach" of the contract is one party's failure to fulfill any of its contractual obligations. There are three requirements for a breach: A valid contract, Performance by one party, and Damages suffered by the performing party.

46. If the breaching party: Fails to perform on time, Fails to perform at all, or Fails to perform according to the terms of the agreement.

47. Remedies for Breach of Contract When a promise or agreement is broken by any of the parties we call it a breach of contract. So when either of the parties does not keep their end of the agreement or does not fulfil their obligation as per the terms of the contract, it is a breach of contract. There are a few remedies for breach of contract available to the wronged party.

48. 1] Recession of Contract When one of the parties to a contract does not fulfil his obligations, then the other party can cancel the contract and refuse the performance of his obligations. As per section 65 of the Indian contract act, the party that withdraws the contract must restore any benefits he got under the said agreement. And section 75 states that the party that cancels the contract is entitled to receive damages and/or compensation for such a recession.

49. 2] Sue for Damages Section 73 clearly states that the party who has suffered, since the other party has broken promises, can claim compensation for loss or damages caused to them in the normal course of business. Such damages will not be payable if the loss is abnormal in nature, i.e. Not in the ordinary course of business. There are two types of damages according to the act, Liquidated damages : sometimes the parties to a contract will agree to the amount payable in case of a breach. This is known as liquidated damages. Unliquidated damages: here the amount payable due to the breach of contract is assessed by the courts or any appropriate authorities.

50. 3] Sue for Specific Performance This means the party in breach will actually have to carry out his duties according to the contract. In certain cases, the courts may insist that the party carry out the agreement. So if any of the parties fails to perform the contract, the court may order them to do so. This is a decree of specific performance and is granted instead of damages.

51. 4] Injunction An injunction is basically like a announcement for specific performance but for a negative contract. An injunction is a court order restraining a person from doing a particular act. So a court may grant an injunction to stop a party of a contract from doing something he promised not to do.

52. 5] Quantum Meruit Quantum meruit literally translates to “as much is earned”. At times when one party of the contract is prevented from finishing his performance of the contract by the other party, he can claim quantum meruit. So he must be paid a reasonable remuneration for the part of the contract he has already performed. This could be the remuneration of the services he has provided or the value of the work he has already done.

53. Discharge of contract

54. Discharge of contract The term discharge of contract means ending of the contractual relationship between the parties. A contract is said to have been discharged when it ceases to operate i.e. When the rights and obligations created by the parties came to an end. A contract can be discharged if the parties mutually agree to terminate the contract. Also there are different methods through which contracts can be discharged.

55. 1. Discharge by Performance Performing means doing all those things which are required by a contract. Discharge of performance occurs when the parties to the contract fulfill their obligations set out under the contract within the specified time and in the manner prescribed. In such a case, parties are discharged and contracts come to an end.

56. 2. Discharge of contract by breach Breach of contract is concerned with the termination of the original contract due to the failure of performing obligations by either or all of the parties, which discourages each of the other parties. It relates to void or terminating the original contract completely. These breaches of contracts may be either anticipatory or actual.

57. 3. Discharge of contract by the impossibility of performance: In this case, the discharge of the contract happens without any interference from both of the parties. Despite the fact that everything is acceptable at the place of pain, certain unexpected and undetermined issues might occur, which decreases the chance of playing out or performing a contract.

58. 4. Discharge of contract by lapse of time: It is indicated that in case if the agreement can’t be performed within the predetermined period, it might influence the other party and lead to the denial of the whole agreement. Then, at that point, it is treated as a contractual discharge of the agreement by a time-lapse.

59. 5. Discharge of contract by agreement: If both of the individuals or parties in the agreement aren’t willing to proceed with the agreement till the due date, then it is changed over to the next party, whether or not they might acknowledge the discharge of the agreement or contract by the understanding will occur.

60. BAILMENT

61. BAILMENT The term bailment is derived from a French word “ballier” which means ‘to deliver’. It means any kind of ‘handing over’ of goods from one person to another. Bailment implies ‘voluntary change of possession from one person to another’. It involves change of possession and not transfer of ownership.

62. PARTIES IN BAILMENT There are generally two parties to the contract of bailment. The person who is the owner and delivers the good is called ‘ bailor’  while the person to whom the goods are delivered is called ‘ bailee’ .

63. Essential Features of Bailment (I) Delivery of goods: the first important feature of bailment is the delivery of goods from one person to another. Delivery involves change of possession from one person to another and not a change of ownership. (II) Delivery of goods must be for some purpose. Section 148 requires that there must not only be a delivery of goods, but the delivery must be for some purpose. Where some goods are delivered by mistake, there is no bailment. Delivery of goods being for a purpose, the bailee is bound to return the goods as soon as the purpose is achieved.

64. (III) Contract: bailment is based upon a contract between the parties. The relationship of bailer and bailee is the creation of a contract. The contract may be expressed or implied. In certain exceptional cases, bailment is implied by law as between a finder of goods and the owner. (IV) Movable goods: the bailment can only be of movable goods. Money is not included in movable goods. Transfer of immovable property does not constitute bailment.

65. (V) Return of goods: bailment of goods is always for some purpose and is subject to the condition that when the purpose is achieved the goods will be returned to the bailor or disposed of according to his directions. If there is no contract to deliver back or otherwise to dispose of the goods according to his directions, there is no bailment at all.

66. guarantee

67. guarantee In business law, a guarantee is a legal commitment by a third party (the guarantor) to fulfill the obligation of a debtor (the principal) if the debtor fails to do so. This arrangement is commonly used in financial transactions to provide additional security to lenders or creditors.

68. Parties Involved: Principal debtor: the party whose obligation is being guaranteed. Guarantor : the party providing the guarantee. Creditor : the party to whom the obligation is owed.

69. Types of Guarantees: Financial guarantee: assures the repayment of a loan or credit. Performance guarantee: ensures the performance of a contractual obligation. Advance payment guarantee: protects the buyer if the seller fails to deliver goods or services after receiving an advance payment.

70. Legal Requirements: Written form: in many jurisdictions, guarantees must be in writing to be enforceable. Clear terms: the guarantee agreement should clearly outline the obligations of the guarantor, including the scope and duration of the guarantee. Consideration: there must be consideration (something of value) provided to the guarantor for the guarantee to be valid.

71. Rights and Obligations: Guarantor's rights: the guarantor may have rights of subrogation (stepping into the shoes of the creditor) and indemnity (reimbursement from the principal debtor). Creditor's rights: the creditor can seek payment or performance from the guarantor if the principal debtor defaults.

72. Example : A company (principal debtor) takes a loan from a bank (creditor). The company's parent company (guarantor) provides a guarantee to the bank that it will repay the loan if the company fails to do so. If the company defaults on the loan, the bank can demand repayment from the parent company under the guarantee.

73. indemnity

74. Meaning of indemnity In business law, indemnity is a Contractual obligation where one party (the indemnifier) agrees to compensate another party (the indemnified or indemnitee) for any loss, damage, or liability incurred as a result of specific events or actions. Indemnity clauses are commonly found in contracts to allocate risk and protect parties from potential losses arising from their business activities.

75. Parties Involved: Indemnifier : the party providing the indemnity. Indemnified/indemnitee : the party receiving the benefit of the indemnity

76. Nature of the Obligation: The indemnifier promises to compensate the indemnified for losses or damages specified in the contract. The scope of the indemnity can vary widely, covering direct losses, consequential damages, legal costs, or other specified liabilities.

77. Types of Indemnity: Broad indemnity: covers all losses and damages arising from the specified events, including those due to the indemnitee's own negligence. Intermediate indemnity: covers losses and damages arising from specified events, except those due to the indemnitee's sole negligence. Limited indemnity: covers losses and damages arising from specified events, excluding any negligence on the part of the indemnitee.

78. Legal Requirements: Written agreement: indemnity clauses should be clearly outlined in the contract. Specificity: the indemnity clause should specify the scope, extent, and conditions under which indemnity is provided. Consideration: as with other contracts, there must be consideration for the indemnity agreement to be valid.

79. Rights and Obligations: Indemnifier's obligations: the indemnifier must compensate the indemnified for covered losses or damages. Indemnified / Indemnitee rights: the indemnified can claim compensation for losses or damages covered by the indemnity clause.

80. Example : A software development company (indemnifier) enters into a contract with a client (indemnified) to develop a custom application. The contract includes an indemnity clause where the software company agrees to indemnify the client for any third-party claims of intellectual property infringement resulting from the use of the developed software. If a third party sues the client for patent infringement, the software company must compensate the client for any damages, legal fees, and other related costs.