CONTRACT ACT 1872CONTRACT ACT 1872

CONTRACTCONTRACT

A contract is an agreement made between A contract is an agreement made between two or more parties which the law will two or more parties which the law will enforce.enforce.

“ “ A Contract is an agreement enforceable by A Contract is an agreement enforceable by law. ” sec 2(h)law. ” sec 2(h)

CONTRACT = AGREEMENT + ENFORCEABILITYCONTRACT = AGREEMENT + ENFORCEABILITY

AGREEMENTAGREEMENT

“ “ Every promise and every set of promises,Every promise and every set of promises,

forming consideration for each other. ” forming consideration for each other. ”

sec 2(e)sec 2(e)

Agreement = Offer + AcceptanceAgreement = Offer + Acceptance

CONSENSUS AD IDEMCONSENSUS AD IDEM

The essence of an agreement is the The essence of an agreement is the Meeting Meeting of the Mindsof the Minds of the parties in full and final of the parties in full and final agreement .agreement .

An agreement, to become a contract, must An agreement, to become a contract, must give rise to a give rise to a Legal ObligationLegal Obligation . .

OBLIGATIONOBLIGATION

An Offer An Offer

““When one person signifies to another his When one person signifies to another his willingness to do or to abstain from doing willingness to do or to abstain from doing anything, with a view to obtaining the assent anything, with a view to obtaining the assent of that other to such act or abstinence, he is of that other to such act or abstinence, he is said to make a proposal.” – Sec 2(a)said to make a proposal.” – Sec 2(a)

An AcceptanceAn Acceptance

““When a person to whom the proposal is When a person to whom the proposal is made signifies his assent thereto, the made signifies his assent thereto, the proposal is said to be accepted.” – Sec 2(b)proposal is said to be accepted.” – Sec 2(b)

Some vital points :Some vital points :

All contracts are agreements but all All contracts are agreements but all agreements are not contracts.agreements are not contracts.

A legal obligation having its source in an A legal obligation having its source in an agreement only will give rise to a contract.agreement only will give rise to a contract.

Law of contracts creates rights in Law of contracts creates rights in personam personam nor rights in nor rights in remrem . .

Agreement Vs ContractAgreement Vs Contract An agreement is a promise or set of promises (s). A contract is

essentially an agreement, i.e., a promise or set of promise (s).

Differences

Enforceability – An agreement may or may not be enforceable at law. For example,

social agreements are generally not enforceable while business agreements are enforceable at law.

A contract is an agreement which is enforceable at law.

Effect – An agreement is not always a binding on the concerned parties. A contract is always concluded and binding on the concerned parties,

Scope – All agreements are not contracts. All contracts are agreements.

ESSENTIALS OF VALID CONTRACTESSENTIALS OF VALID CONTRACT

Offer and acceptanceOffer and acceptance Intention to create legal relationshipIntention to create legal relationship Lawful considerationLawful consideration Capacity of partiesCapacity of parties Free and genuine consentFree and genuine consent Lawful objectLawful object Agreement not declared VoidAgreement not declared Void Certainty & possibility of performanceCertainty & possibility of performance Legal formalitiesLegal formalities

CLASSIFICATION OF CONTRACTSCLASSIFICATION OF CONTRACTS Classification according toClassification according to validity validity : :

Valid Contract - Valid Contract - According to section 2(i), it is”an agreement enforceable by law”, an agreement becomes enforceable by law when all the essential elements of a valid contract

Void contract - Void contract - Section 2(j) defines: A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable.”

Voidable contract- Voidable contract- According to section 2(i), “an agreement which” is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.”

Unenforceable contract - Unenforceable contract - An unenforceable contract is one which is valid in itself, but is not capable of being enforced in a court of law because of some technical defect such as absence of writing, registration, requisite stamp, etc., or time barred by the law of limitation.

Classification according to Classification according to formationformation Express contract - Express contract - Where both the offer and acceptance constituting an agreement enforceable

at law are made in words spoken or written, it is an express contract.

Implied contract - Implied contract - Where both the offer and acceptance constituting an agreement enforceable at law are made otherwise than in words i.e., by acts and conduct of the parties, it is an implied contract.

Classification according to Classification according to performanceperformance Executed contract – a contract where both the parties have duly fulfilled their Executed contract – a contract where both the parties have duly fulfilled their

obligations in the contract.obligations in the contract.

Executory contract – a contract where the work is not wholly performed or in Executory contract – a contract where the work is not wholly performed or in which something still remains to be done.which something still remains to be done.

Unilateral contract – Unilateral contract – a contract wherein at the conclusion of the contract a contract wherein at the conclusion of the contract there is an obligation yet to be performed on the part of one party only.there is an obligation yet to be performed on the part of one party only.

Bilateral contract - Bilateral contract - a contract where there is obligation on the part of both a contract where there is obligation on the part of both to do or to refrain from doing the particular thing. These are similar to to do or to refrain from doing the particular thing. These are similar to executory contracts. executory contracts.

Classification according to Classification according to English LawEnglish Law Formal contractFormal contract Simple contractSimple contract

CLASSIFICATION OF CONTRACTSCLASSIFICATION OF CONTRACTS

Free ConsentFree Consent Sec 13 defines “consent” as “Two or more Sec 13 defines “consent” as “Two or more

persons are said to consent when they agree persons are said to consent when they agree upon the same thing in the same.upon the same thing in the same.

Coercion (sec 15)Coercion (sec 15) Undue Influence (sec 16)Undue Influence (sec 16) Fraud (sec 17)Fraud (sec 17) Misrepresentation (sec 18)Misrepresentation (sec 18) Mistake (sec 20 & 21)Mistake (sec 20 & 21)

Coercion (sec 15)Coercion (sec 15)

Coercion is the commitment of threatening to commit any act forbidden Coercion is the commitment of threatening to commit any act forbidden by the Indian penal code or unlawful detaining or threatening to detain by the Indian penal code or unlawful detaining or threatening to detain any property to the prejudice of any person whatever with the intention any property to the prejudice of any person whatever with the intention of causing the person to enter into an agreement.of causing the person to enter into an agreement.

Effect of coercionEffect of coercion : : An agreement under coercion is voidable at the option of the party An agreement under coercion is voidable at the option of the party

whose consent was so obtained.whose consent was so obtained.

Undue Influence (sec 16)Undue Influence (sec 16) A contract is said to be induced by undue influence where the relations subsisting between the 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 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 otherthat position to obtain an unfair advantage over the other . .

Ability to dominate the will of other party :Ability to dominate the will of other party : Such a will is said to exists where a person - Such a will is said to exists where a person -

Holds a real and apparent authority over the other eg, Income tax authority and Holds a real and apparent authority over the other eg, Income tax authority and assessee, police and accusedassessee, police and accused

Stands in a fiduciary relation (relation of trust and confidence)Stands in a fiduciary relation (relation of trust and confidence)Eg. Solicitor and client, spiritual guru and devotee, husband and wifeEg. Solicitor and client, spiritual guru and devotee, husband and wife

Makes a contract with a person whose mental capacity is temporarily or permanently Makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distressaffected by reason of age, illness or mental or bodily distress

The following relationships raise the assumptions of undue influence :The following relationships raise the assumptions of undue influence :• Parent and childParent and child• Guardian and wardGuardian and ward• Trustee and beneficiaryTrustee and beneficiary• Religious advisors and devoteesReligious advisors and devotees• Doctor and patientDoctor and patient• Solicitor and clientSolicitor and client• Fiancé and fiancéeFiancé and fiancée

Fraud (sec 17)Fraud (sec 17) Fraud means and includes any of the following acts Fraud means and includes any of the following acts

committed by a party to a contract or connivance or by his committed by a party to a contract or connivance or by his agent with the intent to deceive or to induce a person to agent with the intent to deceive or to induce a person to enter into a contract .enter into a contract . The suggestion that a fact is true when it is not true and the The suggestion that a fact is true when it is not true and the

person making the suggestion does not believe it to be true.person making the suggestion does not believe it to be true. The active concealment of a fact by a person having knowledge The active concealment of a fact by a person having knowledge

or belief of the fact or belief of the fact A promise made without any intention of performing it A promise made without any intention of performing it Any other act aimed to deceiveAny other act aimed to deceive Any such act of omission as the law specially declares to be Any such act of omission as the law specially declares to be

fraudulent fraudulent

Fraud Fraud There should be a suggestion as to a fact There should be a suggestion as to a fact The fact suggested should not be trueThe fact suggested should not be true The suggestion should have been made by the person who does not The suggestion should have been made by the person who does not

believe it to be true believe it to be true The suggestion should have been made by the person with an intention The suggestion should have been made by the person with an intention

of inducing the other party to enter into the contract of inducing the other party to enter into the contract

Contracts of Uberrimae Fidei :Contracts of Uberrimae Fidei : Contracts on which law imposes a special duty to act with utmost faith to Contracts on which law imposes a special duty to act with utmost faith to

disclose all material information. eg. Contracts of insurance, Company disclose all material information. eg. Contracts of insurance, Company prospectus inviting public to subscribe for shares, contract of sale of prospectus inviting public to subscribe for shares, contract of sale of land, contract of family arrangementsland, contract of family arrangements

Effects of fraud: Effects of fraud: Voidable contract Voidable contract

Misrepresentation (sec 18)Misrepresentation (sec 18)

Misrepresentation is the innocent or unconscious presentation of wrong Misrepresentation is the innocent or unconscious presentation of wrong facts by one party which are taken into account by the other party before facts by one party which are taken into account by the other party before entering into a contract.entering into a contract. Sec 18 defines misrepresentation to be existingSec 18 defines misrepresentation to be existing

When a person positively asserts that a fact is true when his information When a person positively asserts that a fact is true when his information does not warrant it to be, though he believes it to be so .does not warrant it to be, though he believes it to be so .

The misrepresentation should be made before the conclusion of the The misrepresentation should be made before the conclusion of the contract and with the intention of inducing the other party to act upon it contract and with the intention of inducing the other party to act upon it

The other party should have acted upon the misrepresentationThe other party should have acted upon the misrepresentation Consequences :Consequences :

The aggrieved party may avoid or rescind the contract or accept the The aggrieved party may avoid or rescind the contract or accept the contract while insisting that he shall be placed in the position in which he contract while insisting that he shall be placed in the position in which he would have been if the representation made had been true.would have been if the representation made had been true.

Mistake (sec 20 and 21)Mistake (sec 20 and 21)Mistake may be of two types :Mistake may be of two types :

Mistake of LawMistake of Law Ignorance of law is no excuse Ignorance of law is no excuse (ignorantia juris non-excusat)(ignorantia juris non-excusat)

Mistake of law :Mistake of law : Mistake of the law of the countryMistake of the law of the country Mistake of foreign lawMistake of foreign law Mistake of private rights Mistake of private rights

Mistake of factMistake of fact Mistake of foreign law and mistake of private rights Mistake of foreign law and mistake of private rights

are treated as mistake of facts and may be declared are treated as mistake of facts and may be declared as void.as void.

Bilateral MistakeBilateral Mistake

Bilateral MistakeBilateral Mistake As per sec 20 where both the parties to an agreement As per sec 20 where both the parties to an agreement

are under a mistake as to the matter of fact essential are under a mistake as to the matter of fact essential to the agreement . Such a contract is declared as to the agreement . Such a contract is declared as void.void.

An agreement is void on ground of mistake if :An agreement is void on ground of mistake if :• The mistake is mutualThe mistake is mutual• The mistake relates to a matter of fact essential to the The mistake relates to a matter of fact essential to the

agreement.agreement.

Bilateral mistake may be :Bilateral mistake may be : Mistake as to subject matter Mistake as to subject matter Mistake as to the possibility of performanceMistake as to the possibility of performance

Mistake as to subject matter :Mistake as to subject matter : Mistake regarding existenceMistake regarding existence Mistake regarding identityMistake regarding identity Mistake regarding titleMistake regarding title Mistake regarding price Mistake regarding price Mistake regarding quantityMistake regarding quantity Mistake regarding qualityMistake regarding quality

Mistake as to possibility of performanceMistake as to possibility of performance

Mistake of fact Mistake of fact Unilateral mistake :Unilateral mistake :

Where one of the parties to the contract is under a Where one of the parties to the contract is under a mistake it is called Unilateral mistake. The one sided mistake it is called Unilateral mistake. The one sided mistake with regard to either the subject matter, terms mistake with regard to either the subject matter, terms of contract or legal implications of the contractof contract or legal implications of the contract

Effect :Effect : Sec 22 provides that a contract is not voidable merely Sec 22 provides that a contract is not voidable merely

because it is caused by one of the parties to it being because it is caused by one of the parties to it being under a mistake of fact.under a mistake of fact.

In the following cases unilateral mistake will render a In the following cases unilateral mistake will render a contract void :contract void :

• Identity of persons contracted with Identity of persons contracted with • Nature of contract or character of document that is being Nature of contract or character of document that is being

signed signed

Void Agreements Void Agreements Agreements by incompetent parties (sec 11)Agreements by incompetent parties (sec 11) Agreements made under a mutual mistake of fact (sec 20)Agreements made under a mutual mistake of fact (sec 20) Agreements the object or consideration of which is unlawful Agreements the object or consideration of which is unlawful

(sec 23)(sec 23) Agreements the object or consideration of which is unlawful Agreements the object or consideration of which is unlawful

in part (sec 24)in part (sec 24) Agreements made without consideration (sec 25)Agreements made without consideration (sec 25) Agreements in restraint of marriage (sec 26)Agreements in restraint of marriage (sec 26) Agreements in restraint of trade (sec 27)Agreements in restraint of trade (sec 27) Agreements in restraint of legal proceedings (sec 28)Agreements in restraint of legal proceedings (sec 28) Agreements the meaning of which is uncertain (sec 29)Agreements the meaning of which is uncertain (sec 29) Agreements by way of wager (sec 30)Agreements by way of wager (sec 30) Agreements to do impossible acts (sec 56)Agreements to do impossible acts (sec 56)

Restitution (sec 64 & 65)Restitution (sec 64 & 65)

Restitution implies restoration or return.Restitution implies restoration or return. Sec 65 gives a right of restitution under two Sec 65 gives a right of restitution under two

circumstances :circumstances : When an agreement is discovered to be voidWhen an agreement is discovered to be void When a contract after its formation becomes When a contract after its formation becomes

subsequently voidsubsequently void Sec 65 does not apply to persons who are wholly Sec 65 does not apply to persons who are wholly

incompetent to enter into contract.incompetent to enter into contract. Sec 65 does not apply to agreements which were Sec 65 does not apply to agreements which were

known to be void when they were entered into.known to be void when they were entered into.

Performance of ContractPerformance of Contract A contract is entered into with the object that it will A contract is entered into with the object that it will

be performed. be performed. The parties to a contract must either perform or The parties to a contract must either perform or

offer to perform their respective promises unless offer to perform their respective promises unless such performance is dispensed with or excused. such performance is dispensed with or excused. (sec 37)(sec 37)

Performance may be :Performance may be : Actual Performance Actual Performance Attempted performance – when one of the parties to Attempted performance – when one of the parties to

the contract offers to perform the contract but the the contract offers to perform the contract but the other party does not accept it, there is an attempted other party does not accept it, there is an attempted performance.performance.

Tender Tender (an attempted performance)(an attempted performance)

Section 38 specifies that where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract. Certain essentials of a valid tender:

It must be unconditional It must be made at proper time and place. It must be made by the person who is able and willing. In case of tender of goods it must be for the quality/quantity of

goods agreed upon. In case of tender of goods reasonable opportunity must be given

to the promisee to examine the goods. It must be made to the promisee or his authorized agent.

Time and place of performanceTime and place of performance Where no time for performance is fixed and the performance is to be Where no time for performance is fixed and the performance is to be

done without any request of the promisee, the promise is to be done without any request of the promisee, the promise is to be performed within a reasonable time. performed within a reasonable time.

The question what is a reasonable time is in each particular The question what is a reasonable time is in each particular case, a question of fact. case, a question of fact. Sec 46Sec 46

When a promise is to be performed on a certain day and the promisor When a promise is to be performed on a certain day and the promisor has undertaken to perform it without request by the promise then the has undertaken to perform it without request by the promise then the promisor can perform the obligation within the official hours of business promisor can perform the obligation within the official hours of business on such day and at the place stated. on such day and at the place stated. Sec 47Sec 47

When a promise is to be performed on a certain day at the request of When a promise is to be performed on a certain day at the request of the promisee, the promisee must apply for performance at a proper the promisee, the promisee must apply for performance at a proper place and within usual hours. place and within usual hours. Sec 48Sec 48

When a promise is to be performed without request by the promisee and When a promise is to be performed without request by the promisee and no place is fixed for its performance it is the duty of the promiser to no place is fixed for its performance it is the duty of the promiser to apply to the promisee to appoint a reasonable place for the performance apply to the promisee to appoint a reasonable place for the performance of the promise and to perform it at such place. of the promise and to perform it at such place. Sec 49Sec 49

The performance of the promise may be made in any manner or at any The performance of the promise may be made in any manner or at any time which the promisee prescribes or sanctions. time which the promisee prescribes or sanctions. Sec 50Sec 50

Discharge of ContractDischarge of Contract Discharge of contract means termination of rights and obligations arising Discharge of contract means termination of rights and obligations arising

out of a contract.out of a contract. By Act of the partiesBy Act of the parties By Operation of lawBy Operation of law

A contract may be discharged in any of the following ways :A contract may be discharged in any of the following ways : By Performance (sec 37)By Performance (sec 37) By death (sec 37)By death (sec 37) By tender (sec 38)By tender (sec 38) By breach of contract (sec 39)By breach of contract (sec 39) By impossiblity (sec 56)By impossiblity (sec 56) By non existence of a state of thingsBy non existence of a state of things By agreement :By agreement :

Novation Novation RescissionRescission AlterationAlteration RemissionRemission WaiverWaiver Merger Merger

…………

Discharge by performanceDischarge by performance Actual performanceActual performance

Discharge by death Discharge by death Contracts of personal nature comes to an end Contracts of personal nature comes to an end

by the death of promisor.by the death of promisor. Discharge by tender Discharge by tender

The promisor is discharged if the promisee The promisor is discharged if the promisee doesn't accept the performance.doesn't accept the performance.

………… Discharge by breachDischarge by breach

Actual Breach – when the party refuses to perform the contract on the Actual Breach – when the party refuses to perform the contract on the date of contract. The promisee is discharged but not the promisor.date of contract. The promisee is discharged but not the promisor.

Anticipated Breach – It takes place before the date of actual Anticipated Breach – It takes place before the date of actual performance.performance.

ExpressExpress Implied Implied

Discharge by ImpossibiltyDischarge by Impossibilty Impossibilty existing at the time of formation of contractImpossibilty existing at the time of formation of contract

Known to the parties – void ab initioKnown to the parties – void ab initio Unknown to the parties – Void on the ground of mutual mistakeUnknown to the parties – Void on the ground of mutual mistake

Impossibilty arising subsequent to the formation of the contractImpossibilty arising subsequent to the formation of the contract By death of party By death of party By destruction of subject matterBy destruction of subject matter Object becoming illegal or unlawfulObject becoming illegal or unlawful Out-break of war Out-break of war By non-existence of a state of things the continued existence of a state By non-existence of a state of things the continued existence of a state

formed the basis of contract.formed the basis of contract.

Discharge by agreement :Discharge by agreement : Novation : A novation takes place when parties to a contract agree Novation : A novation takes place when parties to a contract agree

to substitute a new contract in place of an old one either between the to substitute a new contract in place of an old one either between the old parties or the new parties with the consent of the parties to the old parties or the new parties with the consent of the parties to the contract. (sec 62)contract. (sec 62)

Rescission : It means cancellation of all or some of the terms of Rescission : It means cancellation of all or some of the terms of contract or one party fails to perform the contract and other party contract or one party fails to perform the contract and other party rescinds the contract.rescinds the contract.

Alteration : Changing material terms of the contract eg. Ate or amt to Alteration : Changing material terms of the contract eg. Ate or amt to be paid.be paid.

Bilateral alteration Bilateral alteration Unilateral alteration Unilateral alteration

Remission – Exempting the party to perform the contract. It may Remission – Exempting the party to perform the contract. It may be full or partial.be full or partial.

Waiver – Refers to the giving up or foregoing certain rights . Its Waiver – Refers to the giving up or foregoing certain rights . Its same as remissionsame as remission

Merger – When inferior rights of a person under a contract merge Merger – When inferior rights of a person under a contract merge with the superior rights under a new contract, the contract with with the superior rights under a new contract, the contract with inferior rights will come to an end.inferior rights will come to an end.

Remedies for breach of contractRemedies for breach of contract

Right of rescissionRight of rescission Right to claim compensation or damagesRight to claim compensation or damages

Ordinary damagesOrdinary damages Special damagesSpecial damages Vindictive or exemplary damagesVindictive or exemplary damages Nominal damagesNominal damages Damages for personal inconvenience and discomfort Damages for personal inconvenience and discomfort

Quantum Meruit Quantum Meruit Special performance Special performance Injunction orderInjunction order RestitutionRestitution Cancellation or rectificationCancellation or rectification

CASE STUDYCASE STUDY

‘‘A’ applies to a banker for a loan at a time A’ applies to a banker for a loan at a time where there is stringency in the money market. where there is stringency in the money market. The banker declines to make the loan except The banker declines to make the loan except at an unusually high rate of interest. A accepts at an unusually high rate of interest. A accepts the loan on these terms. Whether the contract the loan on these terms. Whether the contract is induced by undue influenceis induced by undue influence

SOLUTIONSOLUTION Section 16 of the Indian Contract Act, 1872, states that a Section 16 of the Indian Contract Act, 1872, states that a

contract is said to be induced by undue influence where the contract is said to be induced by undue influence where the relations subsisting between the parties are such that the relations subsisting between the parties are such that the parties are in a position to dominate the will of the otherparties are in a position to dominate the will of the other

In the given problem, A applies to the banker for a loan at In the given problem, A applies to the banker for a loan at a time when there is stringency in the money market. The a time when there is stringency in the money market. The banker declines to make the loan except at an unusually banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the is a transaction in the ordinary course of business, and the contract is not induced by undue influence. As between contract is not induced by undue influence. As between parties on an equal footing, the court will not hold a bargain parties on an equal footing, the court will not hold a bargain to be unconscionable merely on the ground of high Interest to be unconscionable merely on the ground of high Interest and therefore, there is no undue influenceand therefore, there is no undue influence..

CASE STUDYCASE STUDY Sohan induced Suraj to buy his motorcycle saying that it Sohan induced Suraj to buy his motorcycle saying that it

was in a very good condition. After taking the motorcycle, was in a very good condition. After taking the motorcycle, Suraj complained that there were many defects in the Suraj complained that there were many defects in the motorcycle. Sohan proposed to get it repaired and promised motorcycle. Sohan proposed to get it repaired and promised to pay 40% cost of repairs After a few days, the motorcycle to pay 40% cost of repairs After a few days, the motorcycle did not work at all. Now Suraj wants to rescind the contract. did not work at all. Now Suraj wants to rescind the contract. Decide giving reasonsDecide giving reasons

SOLUTIONSOLUTION According to Section 18 of the Indian Contract Act, According to Section 18 of the Indian Contract Act,

1872,misrepresentation is there1872,misrepresentation is there The aggrieved party, in case of misrepresentation by the The aggrieved party, in case of misrepresentation by the

other party, can avoid or rescind the contract [Section 19, other party, can avoid or rescind the contract [Section 19, Indian Contract Act, 1872]. The aggrieved party loses the Indian Contract Act, 1872]. The aggrieved party loses the right to rescind the contract if he, after becoming aware of right to rescind the contract if he, after becoming aware of the misrepresentation, takes a benefit under the contract or the misrepresentation, takes a benefit under the contract or in some way affirms it. Accordingly in the given case Suraj in some way affirms it. Accordingly in the given case Suraj could not rescind the contract, as his acceptance to the offer could not rescind the contract, as his acceptance to the offer of Sohan to bear 40% of the cost of repairs impliedly of Sohan to bear 40% of the cost of repairs impliedly amount to final acceptance of the saleamount to final acceptance of the sale