Basic Primer on the Indian Contract Act

Table of Content

1. Introduction
2. Definitions & Essential Elements of Valid Contract
3. Offer & Acceptance
4. Consideration
5. Capacity to Contract

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1. Introduction

The Law of Contract constitutes the most important branch of Mercantile or Commercial Law. It affects everybody, more so, trade, commerce and industry. It may be said that the contract is the foundation of the civilized world. Therefore, it is essential for the students to be familiar with the law relating to Contract.

The Contract Act came into force on 1st September, 1872. The Act does not affect the usage or custom of trade. A Contract is an agreement made between two or more parties, which the law will enforce.

2. Definitions & Essential Elements of Valid Contract

• 2.1 Contract [Section 2(h)]

A Contract is an agreement which is enforceable by law.

2.2 Agreement [Section 2(e)]

Every promise and every set of promises forming the consideration for each other is an agreement.

An agreement comes into existence by the process of offer by one party and its unqualified acceptance by the other party.

2.3 Promise [Section 2(b)]

When the person to whom the proposal is made signifies his assent, the proposal is said to be accepted. Proposal when accepted becomes a promise.

2.4 Consensus ad idem

The parties who enter into an agreement must agree upon the subject matter in the same sense and at the same time, i.e. there must be consensus ad idem.

Example 1: X owns two horses, one is white & other is black. X wants to sale white horse to Y. Y thinks that he is purchasing black horse. There is no contract as there no consensus ad idem.

Example 2: Arun has two cars – one of white colour and another of red colour. He offers to sell one of the cars to Basu thinking that he is selling the car which has white colour. Basu agrees to buy the car thinking that Arun is selling the car which has red colour. Will this agreement become a valid contract? Give reasons.

The parties who enter into an agreement must agree upon the subject-matter in the same sense and at the same time, i.e. there must be consensus ad idem. In the given problem, the agreement between Arun and Basu will not become a valid contract because there is no consensus ad idem.

2.5 Jus in personam & Jus in rem

Jus in personam means right against specific person.

Example: Baban owes ` 5,000 to Sameer. Sameer has right to recover ` 5,000 from Baban. In this case right of Sameer is against specific person i.e. Baban. Hence this right is called as jus in personam.

Jus in rem means a right against whole world.

Example: Arun is the owner of a plot of land. He has right to have quit possession and enjoyment of that land against every member of public. This right of Arun is jus in rem.

2.6 Social Agreement

An agreement may be a social agreement or a legal agreement. A social agreement is that which does not give rise to legal consequences. In case of its breach the parties cannot go to the Law Court to enforce a right.

A legal agreement is that which gives rise to legal consequences and remedies in the Law Court in case of its breach.

Example: A invites his friend B to take dinner. When B came, A refuses to perform his obligation. B has no remedy as obligation of A is social obligation & not a legal or contractual.

2.7 E-Contract

• • Electronic contracts are not paper based but rather in electronic form are born out of the need for speed, convenience and efficiency.
  • In the electronic age, the whole transaction can be completed in seconds, with both parties simply affixing their digital signatures to an electronic copy of the contract.
  • The conventional law relating to contracts is not sufficient to address all the issues that arise in electronic contracts.
  • The Information Technology Act, 2000 solves some of the peculiar issues that arise in the formation and authentication of electronic contracts.
  • As in every other contract, an electronic contract also requires to fulfil the essential element of contract laid down in Section 10 of the Indian Contract, 1872.

2.8 What agreements are contracts [Section 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.

Essential elements of a valid contract are as follows:

(1) There must be an agreement. This involves two parties, one party making the offer and the other party accepting it.
(2) The parties must intend to create legal relationship.
(3) The parties must be capable of entering into an agreement as regards age and understanding. Thus, person making contract should not be minor, idiot or lunatic.
(4) The agreement must be supported by consideration on both sides.
(5) The consent of the parties must be free and genuine.
(6) The object of the agreement must be lawful.
(7) The terms of the agreement must be certain and capable of performance.
(8) The agreement must not have been expressly declared as void.

2.9 Classification of contracts/agreements

Void Agreement [Section 2(g)]: An agreement not enforceable by law.
Example: A agrees to give B ` 10,000 if he beats C. B accept it. This is void agreement.

Void Contract [Section 2(j)]: A contract which, ceases to be enforceable by law. Thus, A contract which is valid initially however, ceases to enforceable subsequently become void when it ceases be enforceable.
Example: A enters into contract with P of Pakistan to sale 10,000 kg of wheat. P accepts it. But subsequently Government of India declares war with Pakistan. Now the contract will become void contract.

Voidable Contract [Section 2 (i)]: A Contract, which is enforceable by law at the option of one party thereto, but not at the option of the other.
Example: Sachin at point of pistol ask Arun to sign the documents for transfer of house. This is voidable contract at the option of Arun because Arun can go into Court of law but not Sachin.

Unlawful Agreement: An unlawful agreement is agreement, which is not enforceable by law. It is void ab initio. It affects immediate parties only and has no further consequences.

Illegal Agreement: An agreement, which involves the transgression of, some rule of basic public policy and is criminal in nature or immoral. It is not only void as between the immediate parties but it also taints the collateral transactions with illegality.

Express Contract: A contract is which the terms are stated in words (written or spoken) by the parties.

Implied Contract: A contract which is inferred from the circumstances of the case or from the conduct of the parties is known as implied contract.

Tacit Contract: Where a contract has to be inferred from the conduct of parties.
Example: Drawing cash from ATM, Sale by fall of hammer at auction sale etc.

Quasi Contract: An obligation created by law, regardless of agreement.

Executed Contract: A contract which is wholly performed by both parties.

Executory Contract [Bilateral Contract]: A contract in which the promises of both the parties have yet to be performed.

Partly executory, partly executed [Unilateral Contract]: A contract in which one party has performed his obligation, but the other party has yet to perform his obligation.

2.10 Distinction between Agreement & Contract

2.11 Distinction between Void Agreement & Void Contract

3. Offer & Acceptance

3.1 Proposal [Section 2(a)]

A person is said to have made a proposal, when he 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.

The person making the offer is known as the offeror, proposer or promisor.

The person to whom the offer is made is called as offeree, proposee or promisee.

3.2 Kinds of offer

Express Offer: When offer is made by express words, spoken or written it is known as express offer.

Implied Offer: An offer may be inferred from the circumstance of the case or conduct of the parties. This is known as implied offer.

Specific Offer: When offer is made to definite person or definite group of persons it is known as specific offer. Specific offer is also known as special offer.

General Offer: When an offer is made to public or world at large it is called as general offer.

3.3 Rules relating to an offer

Following are various rules relating to valid offer:

(1) Offer must be capable of creating legal relationship: Social invitation cannot be called as offer in legal terms because they create social obligation which are not enforceable by law.

(2) Offer must be in clear words: That is to say offer must be certain, definite & unambiguous. If the terms of an offer are vague or indefinite, its acceptance cannot create any contractual relationship.

(3) An offer may be distinguished from

– A declaration of intention or an announcement.
– An invitation to make an offer or to do business.

(4) Offer must be communicated: There can be no acceptance unless the offer is communicated to the offeree by the offeror.

(5) Offer must be made with a view of obtaining the assent.

(6) Offer should not contain a term the non-compliance of which may be assumed to amount to acceptance.

Example 1: Pratap goes to super market to buy a washing machine. He selects a branded washing machine having a price tag of ` 15,000 after a discount of ` 3,000. Pratap reaches at cash counter for making the payment, but cashier says, “Sorry sir, the discount was up to yesterday. There is no discount from today. Hence you have to pay ` 18,000.” Pratap got angry and insists for ` 15000. State with reasons whether under the Contract Act, 1872, Pratap can enforce the cashier to sale at discounted price i.e. ` 15,000.

An offer may be distinguished from – An invitation to make an offer or to do business. Quotations, menu cards, price tags, advertisements in newspaper for sale are not offer. These are merely invitations to public to make an offer.

Thus, price tag with washing machine was not offer. It is merely an invitation to offer. Hence, it is the Pratap who is making the offer not the super market. Cashier has right to reject the Pratap’s offer. Therefore, Pratap cannot enforce cashier to sale at discounted price.

Example 2: Shambhu Dayal started? “self service” system in his shop. Smt. Prakash entered the shop, took a basket and after taking articles of her choice into the basket reached the cashier for payments. The cashier refuses to accept the price. Can Shambhu Dayal be compelled to sell the said articles to Smt. Prakash? Decide.

An offer may be distinguished from – An invitation to make an offer or to do business. Display of goods by a shopkeeper in his window, with prices marked on them, is not offer but merely an invitation to the public to make an offer.

When Smt. Prakash articles of her choice into the basket reached the cashier for payments it amount to offer and when cashier accepts money it will become contract. As cashier refuses to accept the price there is not contract and hence Shambhu Dayal cannot be compelled to sell the said articles to Smt. Prakash.

3.4 Distinction between Offer & An invitation to offer

3.5 Cross Offer

When two parties make identical offers to each other, in ignorance of each others offer, the offers are cross offers.

Making cross offers does result into valid contract, as there is only offer by each party but there absence of acceptance to offer.

3.6 Counter Offer

Offer to an original offer is known as counter offer. When counter offer is made original offers come to an end.

Example 1: Pavan says to Chetan will you purchase my car for ` 50,000. Chetan replies – “will you sale it for ` 45,000?” Reply of Chetan is counter offer and original offer of Pavan comes to an end.

Example 2: ‘B’ offered to sell his car to ‘A’ for ` 75,000. ‘A’ accepts to purchase at ` 74,950. ‘B’ refuses. Subsequently ‘A’ agrees to purchase at ` 75,000 but ‘B’ refused. ‘A’ sued ‘B’ for specific performance of the contract. State legal position.
Offer to an original offer is known as counter offer. When counter offer is made original offers come to an end.

In given case when B makes offer to A, to which A makes counter offer and hence original offer of B comes to end. Again when A makes offer, there is only offer and no acceptance as offer previously made by B already come to end by the counter offer of A and hence there is no contract at all between parties. B is not liable to sell the car to A.

3.7 Special terms in contract

(1) Where any special terms are to be included in a contract, these must be duly brought to the notice of the offeree at the time when the proposal is made. If it is not done and if the contracts subsequently entered into, the offeree will not be bound by them. Also these terms should be presented in such a manner that a reasonable man can become aware of them before he enters into a contract.

(2) Certain conditions are attached to transactions like purchase of a ticket for a journey or deposit of luggage in a clock room. Wherever on the face of a ticket the words “For conditions see back” are printed, the person concerned is as a matter of law held to be bound by the conditions subject to which the ticket is issued whether he takes care to read them or not. The fact that he did not or could not read does not alter the legal position.

Example 1: A hotel put a notice in bed room, exempting the proprietor from liability for the loss of client’s goods. Held, the notice was not effective as it came to the knowledge of the client only when the contract to take a room had already been entered into. [Olley v. Marlborough Court Ltd.]

Example 2: Parag Deshpande deposited a bag in the clock room of railway company station. On the face of the ticket, issued to him, was written, “see back”. One of the printed conditions limited the liability of the company for loss of a package to ` 100. The bag was lost and Parag Deshpande claimed ` 2,450 as its value. Parag Deshpande is bound by the conditions on the back of the ticket even if he had not read them and can claim damage up to ` 100 only.

3.8 Acceptance [Section 2(b)]

A proposal or offer is said to have been accepted when the person to whom the proposal is made signifies his assent to the proposal to do or not to do something.

Offer is a train of gunpowder while acceptance is lighted match: After offer is accepted then only it becomes contract. So an offer may laps for want of acceptance or be revoked before acceptance.

3.9 Rules regarding acceptance of an offer

Following are the rules for valid acceptance:

1. Acceptance must be absolute and unqualified.
2. Acceptance must be communicated to the offeror. Mere mental acceptance is not acceptance.
3. Acceptance must be according to the mode prescribed/usual and reasonable mode.
4. Acceptance must be given within a prescribed time. Acceptance cannot precede an offer.
5. Acceptance must show an intention on the part of the acceptor to fulfil terms of the promise.
6. Acceptance must be given by the party to whom the offer is made.
7. Acceptance must be given before the offer lapses or offer comes to an end.
8. Acceptance cannot be implied from silence.

Example: A offers to sell 80 quintals of sugar to B at a certain price. B accepts to buy 50 quintals only. Is it valid contract?
Acceptance must be absolute and unqualified. Acceptance by B is not valid and there is no concluded contract between A and B.

3.10 Communication when complete [Section 4]

The communication of a proposal is complete when it becomes to the knowledge of the person to whom it is made.

Example 1: Anish proposes by a letter to Gauri, to sell a house at ` 50,000. The letter is posted on 10th July 2022. It reaches to Gauri on 12th July 2022. The communication of the offer is complete when Gauri receives the letter i.e. on 12th July 2022.
The communication of an acceptance is complete –

• • As against the proposer: When it is put in a course of transmission to him so at to be out of the power of the acceptor.
  • As against the acceptor: When it comes to the knowledge of the proposer.

Example 2: Suppose in above example Gauri sends a letter on 14th July 2022 accepting the offer of Anish, which reach in the hands of Anish on 16th July 2022, then communication of acceptance is compete.

– As against Anish (Offeror): 14th July 2022
– As against Gauri (Accepter): 16th July 2022

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.

Example 3: A proposes by a letter to B, to sell his house and sends letter on 27th September 2022. Letter reaches to B on 5th October 2022. Thus, A can revoke his offer before communication of offer completed i.e. before 5th October 2022.

Example 4: A offers to sale his house to B. The letter of acceptance was send by B on 25th November 2022 and it reaches to A on 4th December 2022. In this case B can revoke his acceptance before 4th December 2022.

Example 5: Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his acceptance by post. Next day, Ramanathan sends a telegram withdrawing his acceptance. Examine the validity of the acceptance in the light of the following:

(i) The telegram of revocation of acceptance was received by Ramaswami before the letter of acceptance.

(ii) The telegram of revocation and letter of acceptance both reached together.

The revocation of acceptance is valid. The acceptance can be revoked at any time before the letter of acceptance is received by the offerer. In the case, A withdrew his acceptance by a telegram which reached B earlier than the letter of acceptance. Hence, it is a valid revocation and A is not bound to purchase the house.

It the letter of acceptance and the telegram cancelling acceptance reach B at the same time, which of the two is opened first decides the issue. If B opens the telegram first and reads it, revocation is valid but if the letter is read first, revocation is not possible. Ordinarily, if a letter and a telegram reach simultaneously, a person is more likely to open the telegram first, for a telegram is supposed to convey more significant message than a letter. If, therefore, it is assumed that the telegram is read first (which is a normal thing), the revocation is valid. Thus, there would be no change in the answer if the two reach together.

3.11 Various modes of revocation of offer

Offer may lapse or come to an end by various modes as given below:

1. Offer may come to an end by communication of notice of revocation by the offeror at any time before acceptance.
2. If the offeree does not accept the offer within given time or if no time is given, then within reasonable time.
3. If condition precedent is not fulfilled then offer may come to an end.
4. Offer may come to an end by death or insanity of the offeror.
5. When counter offer is made original offers come to an end.
6. If an offer is not accepted according to the prescribed mode.
7. Offer may come to an end due to change in law.

4. Consideration

4.1 Consideration [Section 2(d)]

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 for the promise.

In simple words we can say that – Consideration means, “Something in return” (quid pro quo). Without consideration there is no contract. Contract without consideration is known as nudum pactum.

A valuable consideration in the sense of the law may consist either in some:

1. 1. Right
   2. Interest
   3. Profit
   4. Forbearance
   5. Detriment
   6. Loss
   7. Responsibility

Example: X, the uncle of Y, promised to pay ` 2,00,000 to Y if he refrained from drinking for two years, Y does not drink for two years and thereby saves his money. Can he now claim ` 2,00,000 from X?

In this case, Y restricted his lawful freedom of action upon the promise of his uncle to pay ` 2,00,000. This is the consideration which is moving from him to support the promise of his uncle to pay him and in law mere abstinence of an act is a lawful consideration. The agreement is made between competent parties; the object is lawful and is made with free consent. This is, therefore, a contract. Now having fully performed his part of the agreement, Y is entitled to ` 2,00,000. It is of no significance whether this turns out to be a benefit to Y in the form of saving of his money.

4.2 No Consideration no contract [Section 25]

Consideration is one of essential element of valid contract. Without consideration there is contract.

Contract without consideration is known as nudum pactum.

In following cases even if there is no consideration contracts are valid:

(1) Agreement made on account of natural love and affection. If they are written & duly registered.
(2) Compensation for voluntary services.
(3) Promise to pay time barred debt made in writing and signed by the person liable to pay the amount.
(4) Completed gifts.
(5) No consideration is required to make an agency.
(6) In case of charitable subscription, if a person (promisor) promises to pay certain amount and on the basis of that promise, other person (promise) incurs liability, then promisor is bound to pay the amount promised, even if there is absence of  consideration.

Example 1: Father promised to pay his son a sum of ` 1 lakh if the son passed CS Executive 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 Contract Act, 1872.

One of the essential elements of contract is that there should be an intention to create legal relationship. Agreements of a social nature or domestic nature do not contemplate legal relationship and as such are not contracts.

However, as per Section 25 of the Contract Act, 1872, agreement made on account of natural love and affection is valid contract if it is written & duly registered. In given case fathers promise though made on account natural love and affection is not written and duly registered and hence son cannot recover the amount of ` 1 lakh from father.

Example 2: Madhuri gets into difficulties while swimming in public swimming pool and cries for help. Anil hears the cry, removes his coat and dives into water and rescues Madhuri. Madhuri, who is full of gratitude, promises to pay Anil ` 20,000 but fails to do so. The promise of Madhuri is not in writing. Advise Anil.

As per Section 25 of the Contract Act, 1872, a promise to compensate for voluntary acts done by a party is valid even though promise is not supported by consideration and is not in writing. Anil helped Madhuri voluntarily but if she promised to pay Anil for that voluntary work; she cannot avoid her liability later on. Hence, Anil is advised to register a case for recovery of money due to him.

Example 3: A person verbally promised the Secretary of the Mosque Committee to subscribe ` 5,000 for rebuilding a mosque. Later, he declined to pay the said amount?

As per Section 25 of the Contract Act, 1872, in case of charitable subscription, if a person promises to pay certain amount and on the basis of that promise, other person incurs liability, then promisor is bound to pay the amount promised, even if there is absence of consideration.

As per facts given case, the promise was not enforceable because there is no consideration for promisor. However, if Mosque Committee incurs liability, on the basis of that promise, then promisor is bound to pay the amount promised, even if there is absence of consideration.

4.3 Legal rules as to consideration

Legal rules as to consideration are as follows:

(1) Consideration must move at the desire of the promisor.
(2) Consideration may move from the promisee or any other person.
(3) Consideration may be in form of an act, abstinence or forbearance or a return promise.
(4) Consideration may be past, present or future.
(5) Consideration need not be adequate.
(6) Consideration must be real and not illusory.
(7) Consideration must not be something which the promisor is already bound to do.
(8) Consideration must not be illegal or opposed to public policy.

Example: Singh, an old man, by a registered deed of gift, granted certain landed property to A, his daughter. By the terms of the deed, it was stipulated that an annuity of ` 20,000 should be paid every year to B, who was the brother of Singh. On the same day A made a promise to B and executed in his favour an agreement to give effect to the stipulation. A failed to pay the stipulated sum. In an action against her by B, she contended that since B had not furnished any consideration, he has no right of action. Whether the contention of A is valid?

Consideration may move from the promisee or any other person. It is not necessary that the consideration must be from promisee. It is immaterial who has furnished it, whether promisee, or any other person. In the given case, consideration is moving from Mr. Singh to her daughter for the promise to pay ` 20,000 to uncle (B). Therefore, his daughter (A) is not justified.

4.4 Privity of contract

When a contract is created between two or more person it confers rights or impose obligation under it on the person executing the contract. A contract never bins third party. It is binding only party to contract.

A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract.

In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd., D supplied tyres to a wholesaler X, on condition that any retailer to whom X re-supplied the tyres should promise X, not to sell them to the public below Ds list price. X supplied tyres to S upon this condition, but nevertheless S sold the tyres below the list price.

Held: There was a contract between D and X and a contract between X and S. Therefore, D could not obtain damages from S, as D had not given any consideration for Ss promise to X nor was he party to the contract between D and X.

Thus, a person who is not a party to a contract cannot sue upon it even though the contract is for his benefit. A, who is indebted to B, sells his property to C, and C the purchaser of the property, promises to pay off the debt to B. In case C fails to pay B, B has no right to sue C for there is no privity of contract between B and C. The leading English case on the point is Tweddle v. Atkinson. In this case, the father of a boy and the father of a girl who was to be married to the boy, agreed that each of them shall pay a sum of money to the boy who was to take up the new responsibilities of married life. After the demise of both the contracting parties, the boy (the husband) sued the executors of his father-in-law upon the agreement between his father-in-law and his father.

Held: The suit was not maintainable as the boy was not a party to the contract.

4.5 Exception to the doctrine of privity of contract

Both the Indian law and the English law recognize certain exceptions to the rule that a stranger to a contract cannot sue on the contract. In the following cases, a person who is not a party to a contract can enforce the contract:

(1) Beneficiary in a trust: A beneficiary under an agreement to create a trust can sue upon the agreement, though not a party to it, for the enforcement of the trust so as to get the trust executed for his benefit.

In Khawaja Muhammad v. Hussaini Begum, it was held that where a Mohammedan lady sued her father-in-law to recover arrears of allowance payable to her by him under an agreement between him and her own father in consideration of her marriage, she could enforce the promise in her favour insofar as she was a beneficiary under the agreement to make a settlement in her favour, and she was claiming as beneficiary under such settlement.

(2) Assignee: An assignee under an assignment made by the parties, or by the operation of law (e.g. in case of death or insolvency), can sue upon the contract for the enforcement of his rights, title and interest. But a mere nominee (i.e. the person for whose benefit another has insured his own life) cannot sue on the policy because the nominee is not an assignee.

(3) Beneficiary in case of family arrangements or settlements: In cases of family arrangements or settlements between male members of a Hindu family which provide for the maintenance or expenses for marriages of female members, the latter though not parties to the contract, possess an actual beneficial right which place them in the position of beneficiaries under the contract, and can therefore, sue.

(4) Agency: Principal can sue in case of contract entered through agent.

5. Capacity to Contract

5.1 Who are competent to contract [Section 11]

One of the essential elements of valid contract is that, the parties must be competent to contract. Capacity to contract means competence of persons to enter into a valid contract.

Every person is competent to contract if he fulfils all following three qualifications:

(a) He is major.
(b) He is of sound mind.
(c) He has not been disqualified to contract under any law.

Any person who does not fulfil the above conditions is disqualified from entering into contract.

5.2 Position of minor as regards his agreements

Position of minor as regards his agreements may be summed up as under:

• An agreement with or by a minor is void and in-operative ab initio. Minor cannot be promisor.
• Minor can be a promisee or beneficiary.
• Minor cannot rectify the agreement, which was entered during the minority on attaining the age of majority.
• Minor can always plead minority.
• No specific performance can be brought against agreement with minor.
• Minor cannot enter into a contract of partnership. But he may be admitted to the benefits of an already existing partnership.