The Indian Contract Act, 1872

1
The Indian Contract Act, 1872
2
Nature of Contract

• The fabric of modern industrial society is woven
  around economic relationships.
• The relational integration and determination of
  mutual rights and obligations are dependent, to a
  great extent, on ex contractum terms.
• Contracts arising out of economic and social
  relationships.
• Such relations are either contractual or akin to
  a contract.
• The market functions on the very premise of
  effective functioning of contractual
  relationship.

3
What is a contract

• A written or spoken agreement intended to be
  enforceable by law.
• An agreement enforceable by law is a contract.
  Section 2(h)
• A contract is an agreement made between two or
  more parties, which the law will enforce.
• Contract is a method through which individuals
  make law for themselves by creating rights and
  obligation ex contractas.

4

• Every agreement and promise enforceable at law is
  a contract. Pollock.
• A legally binding agreement between two or more
  persons by which rights are acquired by one or
  more to acts or forbearances on the part of the
  others. Sir William Anson.
• An agreement creating and defining obligations
  between the parties. Salmond

5
Proposal, Acceptance, Promise Agreement

• When a person signifies to another his
  willingness to do, or to abstain from doing
  anything, with a view to obtaining the assent of
  that other to such act or abstinence, he is said
  to make a proposal. Sec 2(a)
• A proposal is said to be accepted when the person
  to whom the proposal is made signifies his assent
  thereto. A proposal when accepted becomes
  promise. Sec 2(b)
• Every promise and every set of promises forming
  consideration for each other is a an agreement.
  (Sec 2(e)

6
Section 10

• All agreements are contracts if
• they are made by the free consent of the parties,
  
• competent to contract,
• for a lawful consideration and,
• with a lawful object, and
• are not expressly declared to be void.

7
Classification of Contracts

• On basis of Formation
• Express Contract
• Implied contract -
• Quasi Contract
• On basis of Performance
• Executed Contract
• Executory Contract

8

• On basis of Validity
• Voidable Contracts
• Void agreement
• Void Contract
• Valid Contract
• Illegal Agreements
• Unenforceable contract (technical defects)

9
Essential Elements of Contract

• Offer
• Acceptance
• Consensus ad idem
• Legal enforceability
• Lawful consideration
• Capacity of parties
• Free consent
• Lawful object
• Agreement not declared void
• Certainty and possibility of performance
• Legal formalities

10
Elements of Offer

• It must be made by one person to another person.
• It must be an expression of readiness or
  willingness to do or to abstain form doing
  something.
• It must be made with a view to obtain the consent
  of that other person.
• Terms of offer must be definite, unambiguous and
  certain.
• Offer must be communicated.
• Offer not to contain a term the non-compliance of
  which may amount to acceptance.
• A statement of price is not an offer.

11
Types of Offer

• Express Offer by words written or spoken.
• Implied Offer By conduct or circumstances.
• Specific Offer- Made to a specified or definite
  person.
• General Offer- Made to public at large

12
An offer must be distinguished from

• A declaration of intention and an announcement.
• An invitation to make an offer or do business.
• A statement of price. Harvey v. Facey, (1893)

13
Tenders

• A Definite Offer
• When tenders are invited for the supply of
  specified goods or services,
• each tender submitted is an offer.
• The party inviting tender may accept any tender
  he chooses
• thereby bringing about a contractual relationship
  with the person (tender) so chosen.

14
Tenders

• A Standing Offer
• Where goods or services are required continuously
  over a certain period,
• a trader may invite tenders as a standing offer
  which is a continuing offer.
• The effect is that as and when goods or services
  are required, an order is placed with the person
  whose tender has been accepted.
• However, at each such time a distinct contract is
  made.

15
Special terms in the contract

• A term limiting or excluding the liability of
  offeror.
• The special terms should be presented in such a
  manner that a reasonable man can become aware of
  it before a contract is entered into.
• The fact that he did not or could not read does
  not alter the legal position.
• If the conditions are contained in a voucher or
  receipt for payment of money, they do not bind
  the person receiving the voucher or receipt.

16
Legal Rules as to Acceptance

1. Must be absolute and unqualified.
2. Must be communicated to the offeror.
3. Must be according to the mode prescribed or usual
   and reasonable mode.
4. Must be given within a reasonable time.
5. Cannot precede an offer.
6. Must be given by the party to whom the offer is
   made.
7. Must be given before the offer lapse or is
   withdrawn.
8. It cannot be implied from silence.

17
Revocation or lapse of Offer (Sec. 6)

• By communication of notice of revocation.
• By lapse of time.
• By non-fulfillment by the offeree of a condition
  precedent to acceptance.
• By death or insanity of the offeror.
• If a counter offer is made.
• If an offer is not accepted according to the
  prescribed or usual mode.
• If the law is changed.

18
Consideration

• Consideration is some kind of an exchange between
  the parties to an agreement.
• Consideration is the price for which the promise
  of the other is bought and the promise thus given
  for value is enforceable. Pollock
• A valuable consideration in the sense of the law
  may consist either
• in some right, interest, profit or benefit
  accruing to one party, or
• some forbearance, detriment, loss or
  responsibility given, suffered or undertaken by
  the other.

19
Definition

• 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 to abstain from doing something
  
• such act or abstinence or promise is called a
  consideration. Section 2(d)

20
Legal Rules as to Consideration

• It must move at the desire of the promisor.
• It may move from promisee or any other person.
• It may be an act, abstinence or forbearance.
• It may be past, present or future.
• It need not be adequate.
• It must be real and not illusory.
• It must be something which the promisor is not
  already bound to do.
• It must not be illegal, immoral or opposed to
  public policy.

21
Capacity to contract

• Every person is competent to contract who-
• Is of the age of majority according to the law to
  which he is subject.
• Is of sound mind.
• Is not disqualified from contracting by any law
  to which he is subject. (Sec 11)

22
The position of Minors Agreements

• An agreement with or by minor is void ab initio
• No Estoppel
• Limited application of Restitution
• Contracts for the benefit of Minor
• No ratification of agreement on attaining
  majority
• No specific performance
• Cannot be adjudged insolvent
• He can be an agent
• Liability of Minors parents and guardians
• Minors liability in Tort
• Minor as a Partner
• Minor as a Shareholder
• Liability of minor for necessities supplied to him

23
Other Persons Disqualified by Law

• Alien Enemy
• Foreign Sovereigns and Ambassadors
• A Company and a Corporations
• Convicts
• Insolvents

24
Free Consent

• Consent means an act of approval or assenting to
  an offer.
• Two or more persons are said to consent when they
  agree upon the same thing in the same sense.
• Consent involves ad idem i.e. identity of mind
  about the subject matter of contract.
• A mere consent is not enough, it should be free
  and voluntary.
• Not to be caused by any vitiating factors given
  u/s 14.

25
Section 14

• Consent is said to be free when it is not caused
  by
• a) Coercion.
• b) Undue influence.
• c) Fraud.
• d) Misrepresentation.
• e) Mistake.
• The contract is said to be voidable at the option
  of the party whose consent was not free. Sec. 19

26
Presumption of Domination

• Master and Servant,
• Parent and Child,
• ITO and the Assessee,
• Trustee and Beneficiary,
• Spiritual Guru and Disciple,
• Solicitor and Client,
• Guardian and Ward,
• Medical Attendant and Patient.

27
Agreements Opposed to Public Policy

• While a contract serves private interest it
  should not conflict with any other private or
  public interests.
• Public interest policies invalidate any private
  agreement.
• Section 23 provides that the consideration or
  object of an agreement is lawful unless
• it is forbidden by law,
• is of such a nature that if permitted, it would
  defeat the provision of any law, or
• is fraudulent, or
• involves injury to the person or property of
  another, or
• the courts regard it as immoral or opposed to
  public policy.

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• Trading with enemy.
• Agreements interfering with the administration of
  justice
• a) Interference with justice using improper
  influence over judges or officers.
• b) Stifling Prosecution by way of an
  understanding not to prosecute an offender.
• c) Maintenance and Champerty financial or other
  assistance to bring or defend a lawsuit when the
  person has no legal interest.
• Trafficking in public offices or titles.
• Agreement creating interest opposed to duty.

29

• Agreements restricting personal liberty.
• Agreements in restraint of marriage.
• Agreement to commit a crime.
• Agreements in restraint of trade.
• Agreements in restraint of legal proceedings
• a) Agreement restricting enforcement of rights
• b) Agreement Limiting the Period of Limitation.

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Exceptions Restraint of trade

• Sale of Goodwill
• i) the restriction must relate to the same
  business
• ii) the restriction must be within a specified
  local limit
• iii) the restriction must be for the time so long
  as the buyer or any person, carries on a like
  business in the specified local limits
• iv) the specified local limit must be reasonable
  having regard to the nature of the business.

31

• Trade Combination
• Trade combination formed to regulate the business
  or to fix prices are not void,
• but trade combinations to create monopoly or
  cartel, and
• which are against the public interest are void.

32

• Employment Contracts
• A clause to serve the employer for a stipulated
  period is a valid clause if reasonable.
• A clause preventing employee from accepting
  similar engagement during the employment is also
  valid.
• A clause preventing the employee from accepting a
  similar engagement after the termination
• a) if the restraint is to protect an employer
  against making use of trade secret it is valid.
• b) if the restraint is intended to serve any
  other purpose, like to avoid competition, it is
  not valid.

33
Performance of Contract

• Performance of a contract is a mode of discharge
  of the contract.
• Performance of contract takes place when the
  parties to the contract fulfill their respective
  obligations under the 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 this Act, or of
  any other law.Sec 37

34
Requisite of a valid tender

• It must be unconditional.
• It must be of the whole obligation.
• It must be made at a proper time and place.
• It must be made to the proper person.
• It may be made to one of the several joint
  promisees.
• In case of tender of goods it must give a
  reasonable opportunity to the promisee for
  inspection of the good.
• In case of tender of money the debtor must make a
  valid tender in the legal tender money.

35
Performance and Demand of Performance

• By promisor himself. (S. 40)
• Promisors Agent. (S. 40)
• Legal representatives.
• Third person. (S 41)
• Joint promisors.
• Promisee
• Legal Representative
• Third Party
• Joint promisee

36
Discharge of Contract

• A contract is said to be discharged when it
  ceases to operate.
• The rights and obligations created by it comes to
  an end.
• A contract may be discharged -
• By Performance
• Actual performance doing what the parties
  intended to do when they entered in to the
  contract.
• Attempted performance or tender It is the
  legitimate attempt on the part of the promisor to
  perform his obligations

37
By Mutual Agreement or Consent

• Novation
• Rescission
• Alteration
• Remission
• Waiver
• Merger

38
By operation of Law

• By death.
• By merger.
• By insolvency.
• By unauthorized alteration of terms of a written
  contract.
• By rights and liabilities becoming vested in the
  same person.

39
By Impossibility of Performance

• Impossibility existing at the time of agreement
  
• Known to the parties the agreement is void ab
  initio.
• Unknown to the parties the agreement is void on
  the ground of mutual mistake.
• Impossibility arising subsequent to the formation
  of the contract.

40
By Supervening Impossibility

• Destruction of subject matter of contract
• Non-existence or non-occurrence of a particular
  state or things
• Death or incapacity for personal services
• Change of law or stepping in of a person with
  statutory authority
• Out break of war

41
By breach of contract

• Actual Breach
• a) On the due date of performance.
• b) During the course of performance of contract.
• i) Express Repudiation.
• ii) Implied Repudiation.
• Anticipatory Breach
• a) By express renunciation.
• b) Making the performance of promise become
  impossible by doing some act.

42
Remedies for Breach of Contract

• When the contract is broken, the injured party
  has one or more of the following remedies
• Rescission of the contract.
• Suit for damages.
• Suit upon quantum meruit.
• Suit for specific performance.
• Suit for injunction.

43
Rescission of the contract

• Rescission means a right not to perform an
  obligation.
• In case of breach of contract the promisee need
  not perform his obligation,
• he is not only discharged from his liabilities
  but also he is entitled to claim compensation for
  damages
• which he might have sustained due to non
  performance of the contract. Section 39

44
Suit for damages

• Damages are monetary compensation allowed to the
  injured party for the loss suffered.
• The object of awarding damages is not to punish
  the party at fault
• but to make good the financial loss suffered by
  the injured party due to breach of contract.

45
Quantum Meruit

• When an agreement is discovered to be void. Sec
  65
• When something is done without any intention to
  do gratuitously. Sec 70
• When there is an express or implied contract to
  render service but no agreement as to
  remuneration.
• When the completion of the contract has been
  prevented by the act of the other party to the
  contract.
• When a contract is divisible.
• When an indivisible contract is completely
  performed but badly.

46
Specific Performance

• The remedy of Specific Performance is in the
  nature of equitable remedies based on the
  principles of equities.
• Among the remedies are specific performance,
  injunction, rectification and cancellation of
  instruments and rescission of contract.
• In the discretion of the court, specific
  performance may be enforced
• where there is no standard for ascertaining the
  actual damage caused by the non-performance or
• where compensation in money for the
  non-performance would not afford adequate relief.

47
Suit for Injunction

• It is a judicial process whereby a party to the
  contract is ordered to refrain from doing a
  particular act or thing, or
• to do a particular act or thing.
• It a discretionary remedy and it acts only in
  personam.
• Injunction means a prohibitory order of the court
  to a person to
• not to do a particular act he has promised not to
  do under a contract, or
• to do an act which he has promised, under a
  contract, to do.

48
Quasi Contracts

• Sometime a person may receive a benefit which the
  law regards another person as better entitled, or
  for which the law considers he should pay to the
  other person, even though there is no contract
  between the parties. Such relationships are
  called quasi contracts.
• Because although there is no contract or
  agreement between the parties,
• they are put on the same pedestal as though there
  was a contract between them.
• This is based on the principles of equity.

49
Kinds of quasi contracts

• Right to recover the price of necessities
  supplied. Sec 68
• Payment by an interested person. Sec 69
• Right to recover for non-gratuitous Act. Sec 70
• Responsibility of the finder of Goods. Sec 71
• When money is paid or things are delivered by
  mistake or under coercion. Sec 72

50
Contracts of Indemnity

• In a contract of indemnity one party promises to
  compensate the other party against loss suffered
  by the latter.
• Section 125 confines itself to losses occasioned
  due to an act of promisor or due to act of any
  other persons.
• A contract by which one party promises to save
  the other from loss caused to him by the conduct
  of the promisor himself or by the conduct of any
  other person is called a contract of indemnity.
  Sec 124

51

• If a person who is interested in the payment of
  money which another is bound to pay and pays it,
  he is entitled to be indemnified. Sec 69
• The surety has a rights to claim indemnity from
  the principal debtor for sums he has rightfully
  paid towards the guarantee. Sec 145
• The principal is liable to indemnify the agent
  for all amount paid by him during the exercise of
  his authority. Sec 222

52
Rights of indemnity holder Sec 125

• All damages that he may be compelled to pay in a
  suit in respect of any matter to which the
  promise to indemnify applies.
• All cost that he may be compelled to pay in
  bringing or defending such suit.
• All sums which he may have paid under the terms
  of any compromise of any such suit.

53
Contract of Guarantee

• A contract of guarantee is essentially a contract
  
• to perform the promise or
• discharge the liability of a third person
• in case of his default.
• The basic function of a contract of guarantee is
• to enable a person to get a loan, or goods, or an
  employment. Sec 126

54
Essential features of guarantee

• Surety.
• Principal Debtor.
• Creditor.
• Not be vitiated by incapacity, flaw in consent,
  and unlawful character of the agreement.
• May be oral and it may either be expressed or
  implied.
• Concurrence of parties.
• Existence of Principal debt.
• Essential of a valid contract like Consideration
  and Free consent.

55
Extent of surety's liability

• The liability of surety is coextensive with that
  of the principal debtor. Sec 128
• The Surety may limit his liability by an express
  agreement.
• The liability of the surety arises immediately
  when a default is made by the principal debtor.
• The creditor can sue the surety without suing the
  principal debtor.
• If the guarantee is conditional upon another
  person joining it as co-surety, the guarantee is
  not valid if that person does not join. Sec 144

56
Kinds of Guarantees

• Specific guarantee extends to a specific
  transaction or a single debt.
• The liability of surety comes to an end when the
  guaranteed debt is duly discharged.
• Continuing guarantee extends to a series of
  transaction.
• This kind of guarantee is intended to cover a
  number of transactions over a period of time.
• Whether the guarantee is continuing guarantee or
  not is a question of intention, subject matter
  circumstance.

57
Revocation of Continuing Guarantee

• By Notice
• By Death of Surety
• By Novation. (Sec 62)
• By variance in the terms of contract. (Sec 133)
• By release or discharge of principal debtor.
• By compounding with the principal debtor. (Sec
  135)
• By creditor's act or omission imparting surety's
  eventual remedy. (Sec 139)
• By loss of security. (Sec 142)

58
Discharge of Surety

• By Revocation of Guarantee
• Discharge by conduct of creditor
• Variance in the terms of the contract
• Release or discharge of principal debtor
• Compounding by creditor with principal debtor
• Creditor compounding with principal debtor
• Creditor promising to give time to the principal
  debtor
• Creditor agreeing not to sue the debtor.

59

• By impairing surety's remedy
• Loss of security by the creditor
• Discharge of surety by invalidation of contract
• Guarantee obtained by misrepresentatio
• Guarantee obtained by concealment
• Guarantee on contract that creditor shall not act
  on it untill a co-surety joins
• Failure of consideration

60
Finder of Goods

• A person who finds goods belonging to another and
  takes them into his custody,
• is subject to the same responsibilities as a
  bailee. Sec 71
• He must take reasonable care.
• He must not use the goods for his own purpose.
• He must not mix goods with his own.
• He must try to find out the owner of the goods.

61
Rights of Finder of Goods

• Right of lien.
• Right to sue for rewards.
• Right of sale.

62
Contract of Agency

• An agent is a person employed to do any act for
  another, or
• to represent another, in dealings with third
  persons.
• The person for whom such act is done or who is so
  represented, is called the principal."
• Whatever the principal can do himself, he may get
  the same done through an agent, and
• What the principal does by another, he does it
  himself.
• The acts of the agents are the acts of the
  principal.

63
Creation of Agency

• By Agreement
• - Express Agreement.
• - Implied Agreement.
• Implied agency includes the following
• Agency by Estoppel.
• Agency by holding out.
• Agency by necessity
• Agent acceding his authority in an emergency.
• A person entrusted with another's property.
• Husband and Wife.
• Agency by ratification.

64
Essentials of a valid ratification

• The agent must act for an identifiable principal.
• The principal must be in existence.
• The principal must have contractual capacity.
• Ratification must be with full knowledge of
  facts.
• Ratification must be done within a reasonable
  time.
• The act to be ratified must not be void, illegal
  or ultra vires.
• The whole transaction must be ratified.
• Ratification can be of the acts the principal had
  power to do.
• Ratification should not put a third party to
  damages.
• Ratification relates back to the date of the act.

65
Duties of Agents

• To carry out the work according to the directions
  of principal.
• To carry out the work with reasonable care, skill
  and diligence.
• To render proper accounts.
• To communicate with the principal in case of
  difficulty.
• Not to deal on his own account.
• To pay sums received for the principal.

66

• To protect the interest of the principal in case
  of his death or insolvency.
• Not to use information obtained in the course of
  agency against the principal.
• Not to make secret profit.
• Not to set up an adverse title.
• Not to put himself in a position where his
  interest and duty conflict.
• Not to delegate authority.

67
Rights of Agents

• Right of retainer.
• Right to receive remuneration.
• Right of lien.
• Right of indemnification.
• Right of compensation.
• Right of stoppage in transit.

68
Delegation of Authority

• Delegatus non potest delegar
• A Sub-agent is a person employed by and
• acting under the control of the original agent
  and the business of the agency. Section 191
• A agent may appoint a sub-agent if -
• There is a custom of trade.
• The nature of work is such that sub-agent is
  necessary.
• Where the principal is aware of the intention of
  the agent to appoint a sub-agent.
• Where unforeseen emergencies arise rendering.
• Where the act to be done is purely ministerial.
• Where the principal permits appointment of
  sub-agent.

69
Effect of appointment of sub-agent Section 192
and 193

• Where a sub-agent is properly appointed, the
  following effect follows
• the principal is bound by the acts of the
  sub-agent
• the agent is responsible to the principal for the
  acts of the sub-agent
• the sub-agent is responsible for his acts to the
  agent, but not to the principal, except in case
  of fraud or willful wrong.

70

• Where the sub-agent is not properly appointed,
  the effect will be
• the principal is not bound by the acts of
  sub-agent
• the original agent is responsible for the acts of
  the sub-agent both to the principal and to he
  third party
• the sub-agent is responsible for his acts to the
  original agent but not to the principal even in
  case of fraud or willful wrong.

71
Position of Principal and Agent in relation to
third parties

• Named principal
• Acts of the agent are the acts of the principal.
• When the agent exceed his authority
• Notice given to agent as notice to principal.
• Principal inducing belief that agent's
  unauthorised acts were authorised.
• Misrepresentation or fraud of agent.
• Unnamed principal

72

• Undisclosed principal
• The position of Principal contracting party may
  sue either the principal or the agent or both.
• The principal may also require the performance of
  contract.
• The position of agent as between the principal
  and agent, the agent has all the rights of an
  agent as against the principal
• but as regards the third party, he is personally
  liable on the contract.

73

• The position of third parties
• the third party may elect to sue either the
  principal or the agent or both.
• If the principal discloses himself before the
  contract is completed, the other party may refuse
  to fulfill the contract on the ground of mistake
  of identity of party.
• The third party can also claim a right of set-off
  against the agent.

74
Personal Liability of an Agent - Exceptions Sec
230

• When the contract expressly provides.
• When the agent acts for a foreign principal.
• When he acts for an undisclosed principal.
• When he acts for a principal who cannot be sued.
• Where he signs a contract in his own name.
• Where he acts for a principal not in existence.
• Where he is liable for breach of warranty of
  authority.
• Where he receives or pays money by mistake or
  fraud.
• Where his authority is coupled with interest.
• Where trade usage or customs makes him personally
  liable.

75
Termination of agency Sec 201

• Termination of agency by act of parties
• a) Agreement.
• b) Revocation by the principal.
• c) Revocation by agent.
• Termination of agency by operation of law
• a) Performance of contract.
• b) Expiry of time.
• c) Death or Insanity.
• d) Insolvency.
• e) Destruction of subject matter.
• f) Principal becoming an alien enemy.
• g) Dissolution of a company.