CHAPTER

Indian Contract Act, 1872 – Basic

            1.

General Meaning of Contract

The term contract means, in ordinary sense, any agreement between any two persons. The word CONTRACT is common to all of us and virtually no business transactions can take place without any contracts. For business persons, making of contract with other is a very important process to put into effect their business plans.

In business dealings offers for sale are made and accepted, consideration is agreed, and conditions of sale are specified. Disputes arise when an offer or acceptance is violated, consideration is unpaid, and conditions of transactions are violated.

The law of contract seeks to regulate the behavior of persons who make contracts, so that any conflicts that may arise between these persons resolved amicably under judicial supervision.

EXTENT AND COMMENCEMENT

The ACT extends to the whole of India except the State of Jammu and Kashmir;

The ACT comes into force on 1^st September, 1872.

MEANING OF CERTAIN TERMS          (Sec. 2)

Proposal (i.e., offer) [Sec. 2(a)]	When one person signifies to another His willingness to do or to abstain from doing anything, with a view to obtaining the assent of that either to – Such act; or Abstinence, he is said to make a proposal (i.e., offer).
Promise [Sec. 2(b)]	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
Agreement [sec. 2(e)]	Every promise and every set of promises, forming consideration for each other, is an agreement.
Contract [Sec. 2(h)]	An agreement enforceable by law is a contract.
Promisor and Promisee [Sec. 2(c)]	When the proposal is accepted, - the person making the proposal is called as ‘promisor’; and the person accepting the proposal is called as ‘promisee’.
Consideration [Sec. 2(d)]	When, at the desire of the promisor, the promise or any other person has  done or abstained from doing something; or  does or abstains from doing something; or Promises to do or abstain form doing something, such act, abstinence or promise is called a consideration for the promise.
Void agreement [Sec. 2(g)]	An agreement not enforceable by law is said to be void.
Voidable contract [Sec. 2(i)]	An agreement is a voidable contract if –  it is enforceable by law at the option of one or more of the parties thereto, it is not enforceable by law at the option of the other or others.
Void contract [Sec. 2(j)]	A contract which ceases to be enforceable by law becomes void when it cases to be enforceable.

            Meaning of Contract

All Agreements enforceable by law are contract

ALL CONTRACTS ARE AGREEMENT, BUT ALL AGREEMENTS ARE NOT CONTRACTS

The various agreements may be classified into two categories:

Agreements not enforceable by law: Any essential of a valid contract is not available.

Agreements enforceable by law: All essentials of a valid contract are available.

Conclusion: Thus we can see that an agreement may be or may not be enforceable by law, & all so agreements are not contract, which are not enforceable by law.

Contract = Agreement + Enforceability by law

Essential elements of a valid contract

(i)         Agreement [Offer + Acceptance] – In order to constitute a contract, there must be an agreement in first place. An agreement in turn is composed of two elements-offer and acceptance. Thus there must be atleast two parties-one making the offer and another accepting it. The terms of offer must be definite and the acceptance must be absolute and unconditional.

(ii)        The parties must intend to create a legal relationship. Agreements of social or domestic nature do not contemplate legal relationship, so they are not contracts.

            For example, a husband promising his wife to buy her a ‘necklace’ on occasion of her birthday is not a contract.

(iii) Lawful consideration – The agreement must be supported by a lawful  consideration. Consideration means ‘something in return’. ‘Something in return’ may be an act or abstinence. But it must be real and lawful. Price paid by one party for the promise of the other is known as consideration.

            It is referred to as “quid pro quo” means something in return.

            For Example : Mr. A agrees to sell his watch for Rs. 500. For Mr. A, watch is a consideration & for Mr. B Rs. 500 is consideration.

(iv) The parties to an agreement must be capable of entering into a contract. A person is considered

            Competent if he is

(a)        eighteen years of age

(b)        of sound mind

(c)        not disqualified from contracting by any law to which he is subject.

            Example: X, a minor borrowed Rs.8000/- from Y and executed mortgage of his property in favour of the lender. This was not a valid contract because X is not competent to contract.  Therefore, the mortgage was not valid and the money advanced to minor could not be recovered.

(v)        Lawful Object: The object of an agreement must be lawful.  According to Section 23 “the object is considered lawful unless it is forbidden by law or is fraudulent or involves or implies injury to the person or property of person or is immoral or is opposed to public policy.”

            For Example:  Mr. A agrees to give Rs. 100,000 to Mr. B on the condition that Mr. B murders Mr. C. In this case object of the agreement is unlawful, therefore it will not be enforceable by law & therefore there will be no contract. 

(vi)       Free & Genuine Consent: The consent of the parties must be free and genuine i.e. not induced by coercion ,undue influence, fraud or misrepresentation.

            Example: X threatens to kill Y if he does not sell his house to X.  Y agrees to sell his house to X, In this case, Y’s consent has been obtained by coercion and therefore, it cannot be regarded as free.

(vii) Agreement Not Declared Void: The agreement not expressly declared void by the law or illegal by law.There are large number of agreements, which have expressly been declared void as these agreements are not in public interest.

            Example: X and Y carried on business in Chandni Chowk area of Delhi.  X promised to stop business in that locality if Y paid Rs.1,00,000/-.  X stopped his business but Y did not pay him the promised money.  It was held that X was not entitled to recover anything because the agreement was in restraint of trade and as such void.

(viii)     Certainty: The terms of agreement must be certain and capable of performance.

            For example, D agrees to sell C garments. The type, quality, value etc are not discussed. The agreement cannot be enforced as terms are uncertain.

            Similarly, if A promises B to bring rainfall through magic. Such agreement cannot be enforced.

(ix)       Legal formalities – Where nature of agreement is such that it requires compliance of certain formalities, such requirements should be fulfilled. A contract may require registration in addition of being in writing. However as regards to legal effects, an oral contract has same weightage as a contract in writing.

            Example I: An oral agreement for arbitration is unenforceable because the law requires that arbitration agreement must be in writing.

            Example II: An oral agreement for sale of immovable property is unenforceable because the law requires that such agreement must be in writing and registered.

DISTINCTION BETWEEN AN AGREEMENT AND A CONTRACT

Basis of difference	Agreement	Contract
Meaning	Agreement = offer + acceptance	Contract = agreement + enforceability
Creation of legal obligation	An agreement does not create a legal obligation unless it satisfies the requirements of Sec. 10, 29 and 56.	A contract necessarily creates legal obligations.
One in other	The term agreement is wider than contract. Every agreement is not a contract, i.e., an unenforceable agreement is not a contract.	Every contract is an agreement.+

AGREEMENT TO DO IMPOSSIBLE ACT        (Sec. 56)

Agreement to do an impossible act	If         -           an agreement is made to do a particular act;             -           at the time of making of agreement, it is certain that            such an act is impossible; Then    -           the agreement is void.
Agreement to do an act which subsequently becomes impossible	If         -           a contract is made to do a particular act;             at the time of making of contract, such an act is not impossible; after the contract is made, such an act becomes  Impossible; Then  -   the contract has become void.
Agreement to do an act known to be impossible or unlawful	If         - one person promises to do a particular act;             -           at the time of making such promise, he knows that such an act is impossible or unlawful;             -           the person to whom such promise is made did not know that such an act is impossible or unlawful; Then    -           the promisor must make compensation for any loss which the promise has sustained due to not- performance of the promise.

Illustrative cases

Situations	Result
A agrees with B to discover treasure by magic.	The agreement is void.
A and B contract to marry each other. Before the time fixed for the marriage, A becomes mad.	The contract has become void.
A contract to marry B, being already married to C, and being forbidden by the law to which he is subject to practice polygamy.	The agreement is void.  A must make compensation to B for the loss caused to her by non-performance of his promise.
A contract to take in cargo for B at an American port. A’s Government afterwards declares war against America.	The contract has become void.
A contract to at a theatre fore 6 months in a consideration of a sum paid in advance by B. On several occasions A is too ill to act.	The contract to act on such occasions, on which A is unable to act because he is ill, becomes void.

AGREEMENTS VOID FOR UNCERTAINTY – ILLUSTRATIVE CASES  (Sec. 29)

An agreements is void, if the meaning of such agreement is –

not certain; or

not capable of being made certain.

Illustrative cases

Situations	Result
A agrees to sell B ‘a hundred tons of oil’.	The agreement if void for uncertainty since the decri9ption of oil is not specified.
A agrees to sell B 100 tons of Kerosene oil at the rate of Rs. 15 per Litre.	There is no uncertainty and therefore the agreement is not void.
Mr. A, who is a dealer in coconut oil only, agrees to sell to B ‘100 tons of oil’ at the rate of Rs. 300 per Litre.	The nature of A’s trade implies that A intends to sell 100 tons of coconut oil. So, there is no uncertainty.
A agrees to sell to B all the grain in his granary at Laxmi Nagar at the rate of Rs, 15 per Kg.	There is no uncertainty since it is possible to determine the quantity of grain lying at B’s granary at Laxmi Nagar.
A agrees to sell to B 1,000 Kg, of rice at a price to be fixed by C.	As the price is capable of being made certain, there is no uncertainty to make the agreement void.
A agrees tosell to B his white horse for Rs. 500 or Rs. 1,000.	There is nothing to show which of the two prices was to be given. Therefore, the agreement is void.

CLASSIFICATION OF CONTRACTS    (Sec. 2 and 9)

On The basis of Creation

Express contract : A contract made by words spoken or written.

Implied contract : A contract, which is created by the acts or conducts of the parties i.e. these contracts are not created by word spoken or written.

quasi contract	It means a contract which lacks one or more of the essentials of a contract.
Basis of quasi contract	Quasi contracts are declared by law as valid contracts on the basis of principles of equity, i.e., no person shall be allowed to enrich himself at the expense of another.
Legal effect of a quasi contract	The legal obligations of parties remain same in case of a quasi contract also, i.e., the parties will have same obligations and rights as if such quasi contract fulfils all the essentials of a contract.

On the basis of execution

Executed contract : A contract in which both the parties have fulfilled their obligations under the contract.

Executor contract : A contract in which both the parties have still to fulfill their obligations.

Unilateral Contract : Partly executed and partly executor. A contract in which one of the partied has fulfilled his obligation but the other party is yet to fulfill his obligation.

On the basis of enforceability

Valid contract: An agreement which satisfies all the requirements prescribed by law.

Void contract: A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.

Void agreement: An agreement not enforceable by law is said to be void.

Void able contract: An agreement is a void able contract if –

it is enforceable by law at the option of one party,

it is not enforceable by law at the option of the other party.

Illegal agreement: An agreement the object of which is unlawful.

On the Basis of Formalities

Formal Contracts: A formal Contract is one which is entered into the prescribed form. These contracts may be sub-divided as follows:

i.          Contract of Records :

a)         Judgement: A Judgement is an obligation imposed by the court upon one or more person in favour of another person

b)         Recognizance: A recognizance is a written acknowledgement of a debt due to the crown of state. For Example, Bond to appear on Summon

ii.         Contract under Seal: These are written document signed, sealed & delivered by the parties. It is also called a deed or contract under seal. No consideration is required in case of deed.

Simple Contracts: A simple contract is a contract that is not formal. These can be made orally or in writing & must be supported by consideration

Question Answers

Q. 1.    WHAT AGREEMENTS ARE CONTRACTS?

Ans.     As discussed earlier, 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 be void.

            Nothing herein contained shall effect any law in force in India and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents.

Q. 2.    WHO ARE COMPETENT TO CONTRACT?

Ans.     Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.

Q. 3.    WHAT IS A SOUND MIND FOR THE PURPOSES OF CONTRACTING?

Ans.     A person is said to be of sound mind for the purposes of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests.

            A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind.

            A person, who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.

            Illustrations

            (a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.

            (b) A sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract or form a rational judgment as to its effect on his interests, cannot contract whilst such delirium or drunken-ness lasts.

Q. 4.    Father promised to pay his son a sum of Rs, one lakh if the son passed C.A. examination in the first attempt. The son passed the examination in the first attempt, but father failed to pay the amount as promised. Son files a suit for recovery of the amount. State along with reasons whether son can recover the amount under the Indian Contract Act, 1872.

Ans.

There is no contract between the father and son	Since there is no intention to create legal relations, as it is a domestic or social agreement; Since the father does not receive any consideration.
The son cannot sue the father for recovering Rs. 1 lakh	Since there is no contract between the father and the son.