[FAQs] on Indian Contract Act

An agreement may be a social 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.

• 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 of the Indian Contract, 1872.

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:

• There must be an agreement. This involves two parties, one party making the offer and the other party accepting it.
• The parties must intend to create legal relationship.
• 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.
• The agreement must be supported by consideration on both sides.
• The consent of the parties must be free and genuine.
• The object of the agreement must be lawful.
• The terms of the agreement must be certain and capable of performance.
• The agreement must not have been expressly declared as void.

Following are the main points of distinction between offer & an invitation to offer:

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

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

Contracts by Post: Contracts by post are subject to the same rules as others, but because of their importance, these are stated below separately:

• An offer by post may be accepted by post, unless the offeror indicates anything to the contrary.
• An offer is made only when it actually reaches the offeree and not before, i.e., when the letter containing the offer is delivered to the offeree.
• An acceptance is made as far as the offeror is concerned, as soon as the letter containing the acceptance is posted, to offerors correct address; it binds the offeror, but not the acceptor. An acceptance binds the acceptor only when the letter containing the acceptance reaches the offeror. The result is that the acceptor can revoke his acceptance before it reaches the offeror.
• An offer may be revoked before the letter containing the acceptance is posted. An acceptance can be revoked before it reaches the offeror.

Contracts over the Telephone: Contracts over the telephone are regarded the same in principle as those negotiated by the parties in the actual presence of each other. In both cases an oral offer is made and an oral acceptance is expected. It is important that the acceptance must be audible, heard and understood by the offeror. If during the conversation the telephone lines go ‘dead’ and the offeror does not hear the offerees word of acceptance, there is no contract at the moment. If the whole conversation is repeated and the offeror hears and understands the words of acceptance, the contract is complete. [Kanhaiyalal v. Dineshwarchandra]

The communication of the offer may be general or specific. Where an offer is made to a specific person it is called specific offer and it can be accepted only by that person. But when an offer is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer.

In Harbhajan Lal v. Harcharan Lal, a young boy ran away from his father’s home. The father issued a pamphlet offering a reward of ` 500 to anybody who would bring the boy home. The plaintiff saw the boy at a railway station and sent a telegram to the boy’s father. It was held that the handbill was an offer open to the world at large and was capable to acceptance by any person who fulfilled the conditions contained in the offer. The plaintiff substantially performed the conditions and was entitled to the reward offered.

Same rule will also apply for reply through e-mail.

As per Section 2(b) of the Contract Act, 1872, when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted and a proposal when accepted becomes a promise. In broad sense, therefore, a contract is an exchange of promises by two or more persons, resulting in an obligation to do or abstain from doing a particular act, where such obligation is recognized and enforced by law.

An agreement between two persons to go together to the cinema, or for a walk, does not create a legal obligation on their part to abide by it. Similarly, if I promise to buy you a dinner and break that promise, I do not expect to be liable to legal penalties. There cannot be any offer and acceptance to hospitality.

Keeping in view of above discussion, it can be concluded that there is no contract if Mr. A invites to Mr. B to stay with him during winter vacation at his residence as it is a social contract and offer and acceptance to hospitality does not create contract.

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.

Example: 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.]

As per facts given in case, hotel has failed to brought to the notice of Aman special term that hotel will not be responsible for article lost or stolen in hotel at the time of entering into contract and hence hotel cannot escape its liability as special terms in contract should be presented in such a manner that a reasonable man can become aware of them before he enters into a contract.

• The communication of the offer may be general or specific.
• Where an offer is made to a specific person it is called specific offer and it can be accepted only by that person. But when an offer is addressed to an uncertain body of individuals i.e. the world at large, it is a general offer and can be accepted by any member of the general public by fulfilling the condition laid down in the offer.
• The leading case on the subject is Carlill v. Carbolic Smoke Ball Co. The company offered by advertisement, a reward of £100 to anyone who contacted influenza after using their smoke ball in the specified manner. Mrs. Carlill did use smoke ball in the specified manner, but was attacked by influenza. She claimed the reward and it was held that she could recover the reward as general offer can be accepted by anybody. Since this offer is of a continuing nature, more than one person can accept it and can even claim the reward. But if the offer of reward is for seeking some information or seeking the restoration of missing thing, then the offer can be accepted by one individual who does it first of all. The condition is that the claimant must have prior knowledge of the reward before doing that act or providing that information.

An acceptance never precedes an offer.

There can be no acceptance of an offer which is not communicated. Similarly, performance of conditions of an offer without the knowledge of the offer, is no acceptance.

It was held in the case of Lalman Shukla v.Gauri Dutt that where a servant brought the boy without knowing of the reward, he was held not entitled to reward because he did not know about the offer and therefore could not have accepted it.

Suresh brought the boy without knowing of the reward and hence he cannot claim the reward because he did not know about the offer.

Consideration is one of essential element of valid contract. Without consideration there is contract. Contract without consideration is known as nudum pactum.

No consideration, no contract [Section 25]: In following cases even if there is no consideration contracts are valid.

• Agreement made on account of natural love and affection. If they are written & duly registered.
• Compensation for voluntary services.
• Promise to pay time barred debt made in writing and signed by the person liable to pay the amount.
• Completed gifts.
• No consideration is required to make an agency.
• 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.

Consideration is one of essential element of valid contract. Without consideration there is contract. Contract without consideration is known as nudum pactum. However, there are certain exception to the rule that “no consideration, no contract”.

Once of the exception is “agreement made on account of natural love and affection which are written & duly registered”.

As per facts given in case husband had promised to pay wife a sum of money for her maintenance and separate residence which is duly registered but frequent quarrels between them show absence of natural love and affection and hence it is not valid contract enforceable by law.

Privity of contract means only party to contract can sue each other or only party to contract impose obligation on each other. In other words as per doctrine of privity of contract third party i.e. stranger to a contract cannot sue to a party to a contract.

Exception to the rule that a stranger to a contract cannot sue: In following cases stranger to contract can sue to the parties to 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.

(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.

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 D’s 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.

Consideration is one of essential element of valid contract. Without consideration there is contract. Contract without consideration is known as nudum pactum.

Section 25 lays down exception to this rule which read as if an agreement is expressed in writing and registered and is made out of natural love and affection between parties standing in a near relation of each other, the agreement is valid and enforceable and requires no consideration.

Though in the present problem F promises to give her daughter 1,00,000 out of natural love and affection and the parties are standing in near relation to each other but his promise is not in writing and registered, so daughter D is not entitled to get the promise by her father enforced i.e. Oral promise without consideration is not legally enforceable.

Thus, D is not entitled to get the promise of her father enforced in the court of law.

An agreement with or by a minor is void and in-operative ab initio.

Where the loan was obtained by fraudulent representation by the minor or some property was sold by him and the transactions are set aside as being void, the Court may direct the minor to restore the property to the other party. For example, a minor fraudulently overstates his age and takes delivery of a motor car after executing a promissory note in favour of the trader for its price. The minor cannot be compelled to pay the amount to the promissory note, but the Court on equitable grounds may order the minor to return the car to the trader, if it is still with the minor.

An agreement with or by a minor is void and in-operative ab initio.

Where the loan was obtained by fraudulent representation by the minor or some property was sold by him and the transactions are set aside as being void, the Court may direct the minor to restore the property to the other party. For example, a minor fraudulently overstates his age and takes delivery of a motor car after executing a promissory note in favour of the trader for its price. The minor cannot be compelled to pay the amount to the promissory note, but the Court on equitable grounds may order the minor to return the car to the trader, if it is still with the minor.

Thus, motor car dealer cannot recover the amount of promissory note but can recover the motor car if is still with the minor.

There may be the circumstances under which a contract made under these rules may still be bad, because there is a flaw or error somewhere. The chief flaws in contract are:

• Incapacity
• Mistake
• Misrepresentation
• Fraud
• Undue Influence
• Coercion
• Illegality
• Impossibility

A mistake in the nature of miscalculation or error of judgment by one or both the parties has no effect on the validity of the contract. To be operative so as to render the contract void, the mistake must be:

(a) of fact, and not of law or opinion;
(b) the fact must be essential to agreement i.e. so fundamental as to negative the agreement;
(c) must be on the part of both the parties. Thus, where both the parties to an agreement are under a mistake as to a matter of fact essential to agreement, the agreement is void. [Section 20]

Mistakes are of two kinds:

(i) mistake of law, and

(ii) mistake of fact.

If there is a mistake of law of the land, the contract is binding because everyone is deemed to have knowledge of law of the land and ignorance of law is no excuse (ignorantia juris non-excusat).

Following are the main points of difference between Fraud & Misrepresentation:

Agreement in restraint of trade, void [Section 27]: Every agreement, by which, anyone is retrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Exception to agreement in restraint of trade: That is to say in following cases agreement even though in restraint of trade are valid:

(1) Employment Agreement: An agreement of employment under which, employee agrees to serve a certain employer for certain duration, and that he will not serve anybody else during such period is a valid agreement.

(2) Sale of goodwill: Where the seller of the goodwill of a business undertakes not to compete with the purchaser of the goodwill, the contract is enforceable provided the restraint appears to be:

• • • Reasonable as to territorial limits and
    • The length of time.

Example: N was inventor and a manufacturer of guns and ammunition. He sold his world-wide business to M and promised not to manufacture guns anywhere in the world for 25 years. The House of Lords held that the restraint was reasonable as it was necessary for the protection of company. [Nordenfelt v. Maxim Nordenfelt Guns & Co.]

(3) Restriction on existing partner: Section 11(2) of the Partnership Act, 1932 provides that a partner shall not carry on any business other than that of the firm while he is a partner.

Restriction on outgoing partner: Section 36(2) and Section 54 of the Partnership Act, 1932 provide that a partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within specified period or within specified limits. Such agreements are valid if the restrictions are reasonable.

Agreement to do impossible acts [Section 56]: An agreement to do an act impossible in itself is void.

A contract to do an act which becomes impossible after the contract is made by reason of some event which the promisor could not prevent then such contract becomes void when the act.

Where one person has promised to be something which he knew to be impossible and the promisee did not know to be impossible, such promisor must make compensation to such promise for any loss which the promisee may sustains through the non-performance of the promise.

Illustrations:

• 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 goes mad. The contract becomes void.

Following are the main points of distinctions between illegal agreement & void agreement:

Termination of contractual relationship between the parties is known as discharge of contract. A contract may be discharged by:

• Performance
• Agreement or consent
• Impossibility
• Lapse of time
• Operation of law
• Breach of contract

Discharge by supervening impossibility: Impossibility which arises subsequent to the formation of a contract is called as post-contractual or supervening impossibility. In England the doctrine of frustration is the parallel concept of “supervening impossibility”.

A contract is discharged by supervening impossibility in following cases:

(1) Accidental destruction of subject matter of contract: After formation of contract if subject matter is destroyed without any fault of the either party, the contract is discharged.

Example: Ram owns a big hall which can be used for multi-purpose. Lata, a singer, takes the hall on hire for a show to be performed on next Sunday. Before the show is performed, the hall was completely destroyed by a fire. Contract between Ram and Lata becomes void, due destruction of subject matter. As per Section 65, if any person receives any benefit under such contract he is bound to restore such benefit to the person from whom he had received it. Thus, if Ram had received any benefit from Lata, in form of advance, he is bound to repay it to Lata.

(2)  Change in particular state of things.

Example: Anil promises to marry Madhuri. Before marriage, Madhuri becomes mad. The contract is discharged, as it becomes void due to change in particular state of thing.

(3) Serious illness or death or incapacity of party: Where a contract depends on the personal skill or qualification of a party.

Example: A agreed with B to perform a dance show on a particular date. Before the date of show A was seriously ill. Here contract between A & B is discharged.

(4) Change in law or stepping in of a person with statutory authority.

Example: A agreed to sale certain land to B. Before the sale is effected, the land was compulsorily acquired by the Government. Here, contract is discharged due to Government action.

(5)  The contract becomes void when war is declared and hence discharged.

In the following cases, a contract is not discharged on the ground of supervening impossibility:

(a) Difficulty of performance: A contract is not discharged by the mere fact that it has become more difficult of performance due to some uncontemplated events or delays.

(b) Commercial impossibility: A contract is not discharged merely because expectation of higher profits is not realised, or the necessary raw material is available at a higher price because of the outbreak of war, or there is a sudden depreciation of currency.

(c) Impossibility due to failure of a third person: Where a contract could not be performed because of the default by a third person on whose work the promisor relied, it is not discharged.

(d) Strikes, lock-outs & civil disturbances: Such events do not discharge a contract unless the parties have specifically agreed in this regard at the time of formation of the contract.

(e) Failure of one of the objects: When a contract is entered into for several objects, the failure of one of them does not discharge the contract.

Impossibility of performance is not an excuse for non-performance. Ordinarily when a person undertakes to do something, he must do it unless its performance becomes absolutely impossible. However, events like strikes, lock-outs & civil disturbances do not discharge a contract unless the parties have specifically agreed in this regard at the time of formation of the contract.

As per facts given in case, A agreed to supply B certain goods to be produced from Indonesia. However, goods could not be produced due to riots and civil disturbances in Indonesia. As discussed above such events do not discharge a contract unless the parties have specifically agreed in this regard at the time of formation of the contract. Thus, non-performance of contract by A cannot be excused and he will have to perform the contract as agreed otherwise B may claim damages/compensation from A for non-performance of contract.