CONTRACT ACT 1872;

By Nadya Narsidani
Contract Act extends to the whole of India and it shall come into force on the first day
of September, 1872

The definition of Contract is given under Sec.2(h) of the Act.

“A contract is an agreement enforceable by law.”
In other words, it is an agreement made between two or more parties which the law
will enforce.
Thus, for the formation of contract there must be: -
1. an agreement, and
2. the agreement should be enforceable by law.

Agreement + enforceability by law = Contract

Definition of Agreement: -
An agreement is defined as: - “Every promise and every set of promises, forming
consideration for each other.” (Sec. 2(e))
Definition of 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. (Sec.
2 (b))
Agreement = Offer + Acceptance
What Agreements are Contracts? Sec. 10
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
expressly declared to be void.
Offer & Acceptance -- There must be two or more parties.
-- There is an exchange of offer & their acceptance
According to section 2 (A) of the Indian Contract Act,1872 “When one person
signifies to other his willingness to do or to abstain from doing anything, to obtain
the assent of that other to such act or abstinence, he is said to propose”

The ”Offeror” or ”Promisor” is the one who makes the offer and vice versa the
person to whom the offer has been made is named as Offeree or Promisee.

Offer must be definite, clear, complete, and final. A proposal when accepted
becomes a promise or agreement. Once the offer is accepted and such acceptance
has been communicated, to the offeror, the parties are bound by their respective
promises. Same as the offer, before the communication of acceptance reaches the
offeror it can be revoked.
Eg A owns several cars enters into agreement with B to sell once of his cars. He
tells if B would buy his car for 2 lac. This is not a valid offer as A did not
specify which car he is talking about. Here offer is ambiguous.

Lalman Shukla Vs Gauri Dutt (1913) -Lalman Shukla v Gauri Datt[1] is one of
the crucial cases that talk about the validity of a contract when there is no
acceptance and the condition of knowledge about the proposal to accept the
offer under the Indian Contract Act 1872. This case mainly deals with the
general offer and communication of the proposal.
Intention to create a legal relationship: There should be an intention by both parties
to make a legal relationship and to bind themselves legally as an outcome of such
agreement.
Lawful consideration: It is the price for which the promise of another is bought. It is
something in return. There must be a consideration from both the side of the
agreement must be enforceable by law. Section 2(d) of the Act states that When the
promisee upon the will of the promisor, do, does, or promise to do something or
abstained from doing, such act or abstinence or promise is known as a consideration
for the promise.
Lawful object: The object of the agreement must be lawful and must not violate the
law.
Capacity of parties to undertake contract: The parties to the contract must be
competent to the contract - Should not be a minor,- Should be of sound mind,-
Should not be disqualified by law.
Free Consent : This means parties that are getting into a contract should perform it
with their will without the external factors or forces. Consent should not be affected
due to coercion, undue influence, fraud, misrepresentation or mistake.
Agreement not declared void : Not void by the law in force in the country.
Certainty & possibility of performance: agreement should be certain and capable
of performance.
Eg A agrees to sell B 100 tons of oil, there is nothing to show what kind of oil is
intended, the agreement is void due to absence of certainty.

Legal Formalities : There should be an intention by both parties to make a legal

relationship and to bind themselves legally as an outcome of such agreement. May
be Expressed or Implied.
Contract on the basis of validity -
1. Valid Contract Valid contract is simply explained as those agreements which can
be enforceable by law. Basically, it fulfills the basic requirements or elements of the
contract.

2. Void Contract Void Contract is those Contract which isn't enforceable in the
court of law and hasn't fulfilled the elements of a contract. It creates no rights &
obligations.
Mohori Bibee v. Dharmodas Ghose It was held that minor is not competent to
contract therefore the contract with minor is void and he won't be liable to perform
his duty mentioned in the Contract.

3. Voidable Contract It means when the party to the contract has the choice to
declare the void in the court of law. It happens when the consent of the parties isn't
free and caused by coercion, undue influence, fraud, misrepresentation, and
mistake.
Chikham Amiraju v. Chikham Seshamma In this case the consent was taken by
the threat of suicide for properties. It was held that the threat of suicide amounts to
coercion and therefore, the consent of the parties isn't free, and hence it is a voidable
contract.
4. Illegal Contract Illegal Contracts are those contracts that are forbidden by the
law and the parties are not allowed to form the Contract over such matters. Court
will not enforce such contracts as the purpose of the agreement is to achieve an
illegal end.
Eg - Contract for the sale of narcotics.

5. Unenforceable Contract It is the contact whose substance is good and valid but
due to some technical defect or any other issue they can't be enforced and damages
can't be claimed. Eg - If A agreed to buy 20 kgs of wheat for 80,000 then this
Unenforceable contract.
Contract on the basis of formation -
1. Express Contract: This type of contract is expressed clearly in written or oral.

2. Implied Contract: Implied contracts are constituted by the implication of law

or action. Eg - Relationship between Doctor and patient.

3. Quasi Contract: A quasi contract is a legal obligation imposed by law to prevent

unjust enrichment. This is also called a contract implied in law or a constructive
contract. A quasi-contract refers to a legal obligation created by the court to prevent
one party from unjustly benefiting at the expense of another party, even without an
initial agreement between them and a dispute between the parties.
Contract on the basis of performance -
1. Executed Contract When the performance of the contract has been done or
performed then it is considered as an executed contract.

2. Executory Contract When the performance is yet to be performed and the parties
are still obligated in the contract. It is further subdivided as Unilateral Contract and
Bilateral Contract
3. Unilateral Contract is created by an offer that can be performed by acceptance. Eg
- Insurance Party contract

4. Bilateral Contract is the contract where the consideration is binding upon both the
parties after an exchange of promise.
Offer and acceptance & their rules
Types of Offer
Express offer
Implied offer
Specific offer
General offer
Cross offer
Counter offer
Standing offer
Essentials of a valid offer
1. Proposal must be definite and certain.
2. Proposal must be such capable of being accepted and give rise to legal
relationship.
3. Proposal must be communicated.
4. Proposal must be made with a view to obtaining the assent.
5. Proposal must be distinguished from a mere intention or invitation.
(Display of goods)
6. Proposal must be in the shape of request.
7. Proposal may be express or implied.
8. Proposal may be general or specific.
9. A statement of price is not an offer.
Acceptance
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.

Valid Essentials
1. Acceptance must be absolute and unconditional.
2. Acceptance must be made according to the mode prescribed or in some
usual words.
3. Acceptance must be made by the person named in the proposal.
4. Acceptance must be communicated to the offeror.
5. Acceptance must be made within a reasonable time.
6. Acceptance cannot be made in ignorance of proposal.
7. Acceptance cannot be implied from silence.
8. Acceptance must be given by the party or parties to whom the offer is
made.
9. Acceptance must be given before the offer lapses or before the offer is
withdrawn.
Communication of Offer and Acceptance (Sec.4)
When it is complete?
Communication of Acceptance
Communication of a Revocation
Communication when complete.—The communication of a proposal is
complete when it comes to the knowledge of the person to whom it is
made.
The communication of an acceptance is complete,—
as against the proposer, when it is put in a course of transmission to him, so
as to be out of the power of the acceptor;
as against the acceptor, when it comes to the knowledge of the proposer.
The communication of a revocation is complete,—
as against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of the power
of the person who makes it;
as against the person to whom it is made, when it comes to his knowledge.
Illustrations
(a) A proposes, by letter, to sell a house to B at a certain price.
The communication of the proposal is complete when B receives the letter.
(b) B accepts A’s proposal by a letter sent by post.
The communication of the acceptance is complete,
as against A when the letter is posted;
as against B, when the letter is received by A.
(c) A revokes his proposal by telegram.
The revocation is complete as against A when the telegram is despatched. It
is complete as against B when B receives it.
B revokes his acceptance by telegram. B’s revocation is complete as
against B when the telegram is despatched, and as against A when it
reaches him.
Revocation or Lapse of Proposal (Sec.6)
1. By communication of Revocation of the proposal before the communication
of acceptance is complete against him.
2. By lapse of time.
3. By failure to fulfill condition precedent.
4. By death or insanity of offerer.
5. If a counter-offer is made to it.
6. If an offer is not accepted according to the prescribed or usual mode.
7. By rejection of the proposal.
8. Subsequent illegality or destruction of the matter.
Lapse of an offer
Lapse of an offer
Revocation of the offer by the offeror
Consideration
A Contract without Consideration is void. Are there any exception to this
rule?

1. Natural Love & Affection. [Sec.25(1)]

2. Compensation for voluntary services. [Sec.25(2)]
3. Promise to pay time barred debt. [Sec.25(3)]
Capacity to Contract

Following are the condition for a person to enter into contract

He must be major
He must be of sound mind
He must not be disqualified by any other law.
According to Sec.3 of the Indian Majority Act 1875, a minor is a person who has
not attained the age of 18.
This limit is 21 in only following 2 cases.
1 Where a guardian of a minor’s person or property is appointed under the
Guardian & wards Act 1890.
2. Where the superintendence of a minor’s property is assumed by a court of wards.

Sound Mind
A person is said to be of sound mind for the purpose of making a contract if, at
the time when he makes it, he is capable of understanding it and of forming a
rational judgement as to its effect upon his interests. (Sec. 12)
Lunatics: Mentally deranged person
Idiots: Completely lost his mind.
Drunken or intoxicated persons: temporary intoxicated by alcohol or drugs etc.
Agreement entered into by persons of unsound mind are void.

Person’s Disqualified by law

Alien Enemies
Foreign sovereigns their staff and accredited representatives of foreign states
Corporations
Insolvents
Convicts
“Coercion” defined.—“Coercion” is the committing, or threatening to commit, any act
forbidden by the Indian Penal Code (45 of 1860)or the unlawful detaining, or
threatening to detain, any property, to the prejudice of any person whatever, with the
intention of causing any person to enter into an agreement.

Explanation.—It is immaterial whether the Indian Penal Code (45 of 1860) is or is not in
force in the place where the coercion is employed.

Illustration

A, on board an English ship on the high seas, causes B to enter into an agreement by an
act amounting to criminal intimidation under the Indian Penal Code (45 of 1860). A
afterwards sues B for breach of contract at Calcutta. A has employed coercion, although
his act is not an offence by the law of England, and although section 506 of the Indian
Penal Code (45 of 1860) was not in force at the time when or place where the act was
done.
1 [16.“Undue influence” defined.—(1) A contract is said to be induced by “undue
influence” where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and uses that position to
obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a
person is deemed to be in a position to dominate the will of another— (a) where he
holds a real or apparent authority over the other, or where he stands in a fiduciary
relation to the other; or (b) where he makes a contract with a person whose mental
capacity is temporarily or permanently affected by reason of age, illness, or mental
or bodily distress.
(3) Where a person who is in a position to dominate the will of another, enters into a
contract with him, and the transaction appears, on the face of it or on the evidence
adduced, to be unconscionable, the burden of proving that such contract was not
induced by undue influence shall lie upon the person in a position to dominate the will
of the other. Nothing in this sub-section shall affect the provisions of section 111 of the
Indian Evidence Act, 1872 (1 of 1872).
Illustrations (a) A having advanced money to his son, B, during his minority, upon B’s coming
of age obtains, by misuse of parental influence, a bond from B for a greater amount than
the sum due in respect of the advance. A employs undue influence.

“Fraud” defined.—“Fraud” means and includes any of the following acts committed by a
party to a contract, or with his connivance, or by his agent2 , with intent to deceive another
party thereto of his agent, or to induce him to enter into the contract:—
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be
true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
Explanation.—Mere silence as to facts likely to affect the willingness of a person to enter
into a contract is not fraud, unless the circumstances of the case are such that, regard
being had to them, it is the duty of the person keeping silence to speak3 , or unless his
silence is, in itself, equivalent to speech.
Illustrations (a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing
to B about the horse’s unsoundness. This is not fraud in A.
(b) B is A’s daughter and has just come of age. Here, the relation between the parties would
make it A’s duty to tell B if the horse is unsound.
(c) B says to A—“If you do not deny it, I shall assume that the horse is sound.” A says nothing.
Here, A’s silence is equivalent to speech.
(d) A and B, being traders, enter upon a contract. A has private information of a change in
prices which would affect B’s willingness to proceed with the contract. A is not bound to
inform B.

“Misrepresentation” defined.—“Misrepresentation” means and includes—

(1) the positive assertion, in a manner not warranted by the information of the person making
it, of that which is not true, though he believes it to be true;
(2) any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or any one claiming under him; by misleading another to his prejudice, or to the
prejudice of any one claiming under him;
(3) causing, however innocently, a party to an agreement, to make a mistake as to the
substance of the thing which is the subject of the agreement.
Voidability of agreements without free consent.—When consent to an agreement is
caused by coercion,1*** fraud or misrepresentation, the agreement is a contract
voidable at the option of the party whose consent was so caused.
A party to a contract whose consent was caused by fraud or misrepresentation, may, if
he thinks fit, insist that the contract shall be performed, and that he shall be put in the
position in which he would have been if the representations made had been true.
Exception.—If such consent was caused by misrepresentation or by silence, fraudulent
within the meaning of section 17, the contract, nevertheless, is not voidable, if the
party whose consent was so caused had the means of discovering the truth with
ordinary diligence.
Explanation.—A fraud or misrepresentation which did not cause the consent to a
contract of the party on whom such fraud was practised, or to whom such
misrepresentation was made, does not render a contract voidable.

Illustration
(a) A, intending to deceive B, falsely represents that five hundred maunds of indigo
are made annually at A’s factory, and thereby induces B to buy the factory. The
contract is voidable at the option of B.
Power to set aside contract induced by undue influence.—When consent to an
agreement is caused by undue influence, the agreement is a contract voidable at the
option of the party whose consent was so caused.

Any such contract may be set aside either absolutely or, if the party who was entitled to
avoid it has received any benefit thereunder, upon such terms and conditions as to the
Court may seem just.

Illustration (a) A’s son has forged B’s name to a promissory note. B under threat of
prosecuting A’s son, obtains a bond from A for the amount of the forged note. If B sues
on this bond, the Court may set the bond aside.

Agreement void where both parties are under mistake as to matter of fact.—Where
both the parties to an agreement are under a mistake as to a matter of fact essential to
the agreement, the agreement is void.
Explanation.—An erroneous opinion as to the value of the thing which forms the subject-
matter of the agreement, is not to be deemed a mistake as to a matter of fact.

Illustration (a) A agrees to sell to B a specific cargo of goods supposed to be on its way
from England to Bombay. It turns out that, before the day of the bargain, the ship
conveying the cargo had been cast away and the goods lost. Neither party was aware
of the these facts. The agreement is void.

Effect of mistakes as to law.—A contract is not voidable because it was caused by a

mistake as to any law in force in 1 [India]; but a mistake as to a law not in force in 1
[India] has the same effect as a mistake of fact.

Illustration A and B make a contract grounded on the erroneous belief that a particular
debt is barred by the Indian Law of Limitation: the contract is not voidable.
Contract caused by mistake of one party as to matter of fact.—A contract is not
voidable merely because it was caused by one of the parties to it being under a
mistake as to a matter of fact.

What considerations and objects are lawful, and what not.—The consideration or
object of an agreement is lawful, unless—

it is forbidden by law ; or
is of such a nature that if permitted, it would defeat the provisions of any law; or
is fraudulent ; or
involves or implies injury to the person or property of another; or
the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be

unlawful. Every agreement of which the object or consideration is unlawful is void.
Illustration
(a) A agrees to sell his house to B for 10,000 rupees. Here B’s promise to pay the sum
of 10,000 rupees is the consideration for A’s promise to sell the house, and A’s promise
to sell the house is the consideration for B’s promise to pay the 10,000 rupees. These
are lawful considerations.
Void agreements

Agreements void, if considerations and objects unlawful in part—If any part of a

single consideration for one or more objects, or any one or any part of any one of
several considerations for a single object, is unlawful, the agreement is void.

Agreement without consideration, void, unless it is in writing and registered, or is a

promise to compensate for something done or is a promise to pay a debt barred by
limitation law.—An agreement made without consideration is void, unless—
(1) it is expressed in writing and registered under the law for the time being in force
for the registration of 1 [documents], and is made on account of natural love and
affection between parties standing in a near relation to each other ; or unless
(2) it is a promise to compensate, wholly or in part, a person who has already
voluntarily done something for the promisor, or something which the promisor was
legally compellable to do; or unless;
(3) it is a promise, made in writing and signed by the person to be charged therewith,
or by his agent generally or specially authorized in that behalf, to pay wholly or in
part a debt of which the creditor might have enforced payment but for the law for
the limitation of suits. In any of these cases, such an agreement is a contract.

Explanation 1.—Nothing in this section shall affect the validity, as between the donor
and donee, of any gift actually made.

Explanation 2.—An agreement to which the consent of the promisor is freely given is
not void merely because the consideration is inadequate; but the inadequacy of the
consideration may be taken into account by the Court in determining the question
whether the consent of the promisor was freely given.
Illustrations
(a) A promises, for no consideration, to give to B Rs. 1,000. This is a void agreement.

Agreement in restraint of marriage, void.—Every agreement in restraint of the

marriage of any person, other than a minor, is void.

Agreement in restraint of trade, void.—Every agreement by which any one is

restrained from exercising a lawful profession, trade or business of any kind, is to that
extent void.

Exception 1.—Saving of agreement not to carry on business of which good-will is

sold.—One who sells the good-will of a business may agree with the buyer to refrain
from carrying on a similar business, within specified local limits, so long as the buyer,
or any person deriving title to the good-will from him, carries on a like business
therein, provided that such limits appear to the Court reasonable, regard being had
to the nature of the business.

Agreements in restraint of legal proceedings, void.— [Every agreement,—

(a) by which any party thereto is restricted absolutely from enforcing his rights under
or in respect of any contract, by the usual legal proceedings in the ordinary tribunals,
or which limits the time within which he may thus enforce his rights; or
(b) which extinguishes the rights of any party thereto, or discharges any party
thereto, from any liability, under or in respect of any contract on the expiry of a
specified period so as to restrict any party from enforcing his rights, is void to the
extent.]

Exception 1.—Saving of contract to refer to arbitration dispute that may arise.—This

section shall not render illegal a contract, by which two or more persons agree that
any dispute which may arise between them in respect of any subject or class of
subjects shall be referred to arbitration, and that only the amount awarded in such
arbitration shall be recoverable in respect of the dispute so referred.

Exception 2.—Saving of contract to refer questions that have already arisen.—Nor

shall this section render illegal any contract in writing, by which two or more persons
agree to refer to arbitration any question between them which has already arisen, or
affect any provision of any law in force for the time being as to references to
arbitration.

Exception 3.—Saving of a guarantee agreement of a bank or a financial

institution.—This section shall not render illegal a contract in writing by which any
bank or financial institution stipulate a term in a guarantee or any agreement making
a provision for guarantee for extinguishment of the rights or discharge of any party
thereto from any liability under or in respect of such guarantee or agreement on the
expiry of a specified period which is not less than one year from the date of
occurring or non-occurring of a specified event for extinguishment or discharge of
such party from the said liability.
Wagering Agreement:

An agreement wherein two parties in which one of the parties agrees to pay
money if some unknown event occurs, with the understanding that if the event does
not happen, the other party must pay the same amount back, is called an
agreement of Wager.

Wagering agreement is an agreement between two parties for an uncertain future

event, where both parties without any considerations decide to pay a certain sum
of the money, to the party according to whose assumption the uncertain event has
turned out. Wagering agreement has not been defined in any of the clauses of The
Indian Contract Act, 1872.

Illustration – A and B are two F1 car racers. Ram Said that he’ll pay 1000 to
Shayam if A wins and Shyam said he’ll pay 1000 to Ram if A loses. This is a
wagering agreement between Ram and Shyam.
The word wager means bet, it is a promise between two people to pay money or
assets previously on the basis of the outcome of an uncertain event. Agreements by
way of wager are void under the Section 20 of Indian Contract Act, 1872.

Section 20 of the Indian Contract Act states that “Agreement void where both parties
are under mistake as to matter of fact. Where both the parties to an agreement are
under a mistake as to a matter of fact essential to the agreement the agreement is
void.”

Agreements by way of wager are not enforceable by law, and hence are considered
illegal, However The Indian Contract Act,1872 does not define wager or agreements
by way of wager it simply states that agreements by the way of wager are void, and
no party can take an action to file a suit for recovery of the waging amount in any
form of court, Wagering agreements have characteristics of contingent contract, but
cannot be enforced by law under Section 30.

According to Supreme Court Agreements by the way of wager are void and hence
illegal, but not forbidden by the law.
Rights of surety

Surety is a promise by one party to take responsibility for another party’s debts if
the borrower defaults.

Section 141 of the Indian Contract Act of 1872 covers the surety's right to benefit
from the creditor's securities. It states that the surety is entitled to the benefit of
any securities held by the creditor against the primary debtor at the time the
suretyship contract was entered.
• Agency by express agreement: the majority of agency contracts come into force
under this method. Under this method, the contract can be either through oral,
documentary or preparing of a power of attorney.
• Agency by operation of law: agencies also come into existence through the
operation of law. For example under the companies act, promoters are considered as
agents & in the case of a partnership firm, partners become the agents of the
partnership firm.
• Agency by ratification: ratification takes place with the subsequent happening
of an event. It is only after ratification the principal-agent relationship comes into
force. A person who performed the action is called an agent & the person who gave
the ratification is known as the principal.
Agency by implied authority can be further into following types,
• Agency by necessity: at times there can be situations where one person
would be forced to become the agent of the other person. For example, a
company has loaded some vegetables & fruits for delivery to another point.
This is a bailment contract & because of some issue, the transit got stopped
in between because of which no further movement is not possible. Hence
because of the perishable nature of the goods, the vehicle authorities sold all
of them to the people in the nearby place. Hence this becomes an agency by
necessity.
• By estoppels: there are three parties X, Y & Z. In front of X, Y says to Z
that he is the agent of X. X also did not interrupt Y from making such
statements.
Summary:

A contract is an agreement enforceable by law.

Agreement + enforceability by law = Contract

Agreement = Offer + Acceptance

A valid contract should have a valid offer and acceptance, lawful

consideration, lawful object, intention of parties must be to create a legal
relationship, parties must have the capacity to create a contract, there should
be free consent, contract should be certain and possible to be able to perform,
the agreement must not be expressly declared as void and all legal formalities
need to be completed.
A contract should be discharged by performance, mutual consent, by
impossibility of performance, by operation of law, by lapse of time and by
breach of contract.

Surety is a promise by one party to take responsibility for another party’s debts
if the borrower defaults.

A contract of guarantee is an agreement to fulfil a third party's promise.

A contract of indemnification states one party will pay the other in case of any
losses.

A contract which creates the relationship of principal and agent is known as a

contract of agency.