Indian Contract Act

Indian Contract Act, 1872

• The law relating to contracts in India is contained in INDIAN CONTRACT
ACT, 1872.
• Act passed by British India and is based on the principles of English
Common Law.
• Applicable to all the states of India except the state of Jammu and Kashmir.
• Determines the circumstances in which promises made by the parties to a
contract shall be legally binding on them.
• All of us enter into a number of contracts everyday knowingly or
unknowingly. Each contract creates some rights and duties on the
contracting parties.
• Indian Contract Act codifies the way we enter into a contract, execute
a contract, implement provisions of a contract and effects of breach
of a contract.
• Basically, a person is free to contract on any terms he chooses.
• The Contract Act consists of limiting factors subject to which contract
may be entered into, executed and breach enforced.
• It provides a framework of rules and regulations which govern
formation and performance of contract.
• The rights and duties of parties and terms of agreement are decided
by the contracting parties themselves. The court of law acts to
enforce agreement, in case of non-performance.
Development
• The Act as enacted originally had 266 Sections, it had wide scope and
included.

• General Principles of Law of Contract- Sections 01 to 75

• Contract relating to Sale of Goods- Sections 76 to 123
• Special Contracts- Indemnity, Guarantee, Bailment & Pledge- Sections 124 to
238
• Contracts relating to Partnership- Sections 239 to 266
• Indian Contract Act had embodied the simple and elementary rules
relating to Sale of goods and Partnership.

• Developments of business world found provisions contained in the

Indian Contract Act inadequate to deal with the new regulations or
give effect to the new principles.

• Subsequently the provisions relating to the Sale of Goods and

Partnership contained in the Indian Contract Act were repealed
respectively in the year 1930 and 1932 and new enactments namely
Sale of Goods and Movables Act 1930 and Indian Partnership act
1932 were re-enacted.
At present the Indian Contract Act divided into two parts

• Part 1: deals with the General Principles of Law of Contract

• Sections 1 to 75

• Part 2: deals with Special kinds of Contracts

• Contract of Indemnity and Guarantee
• Contract of Bailment and Pledge
• Contract of Agency
Law of contract creates jus in personem and
not in jus in rem.
• Law of contract is different from other branches of law. It does not lay down any rights
and duties that the law will enforce. It contains the limiting principles on the basis of
which the parties can create there own rights and duties which the law will up hold. Law
of contract creates jus in personam and not jus in rem.

• ‘jus in rem’ means the right against a thing at large and ‘jus in personam’ means the right
against a specific person.

• A owes an amount of Rs.10,000 to B. Here B has the right to recover this amount from A
and only from A and not from anybody else. This right is known as jus in personam.

• X owns 10 acres of land. Here X is having the full liberty to enjoy the land against every
members of the public. Likewise every members of the public is having an obligation that
they should not disturb the right of X. This right of X is Jus in rem.
Why Contracts
• Why do we enter into contracts. Why do we do so?
• A contract with employers, for example.

• A contract helps the two sides of the deal work together over a long period of
time. What would happen if each company would have to search for new
employees at the start of every day, or vice versa.
• The contract creates rules that allow agents with different interests to cooperate
to achieve some goal. No market economy can work without such cooperation
premised on trust but also backed by the law. How contracts are designed defines
our incentives in various situations in the real world.
• They could be formal or informal, depending on whether they are enforced by
law or social norms. They could be complete or incomplete, which is based on
whether they take into account all possibilities that lay in the future.
 Indian Contract Act
• Contract need not be in writing, unless there is specific provision in law

• An agreement enforceable by law is a contract.

• Steps involved in the contract are –

• proposal and its communication
• acceptance of proposal and its communication
• Agreement by mutual promises
• Performance of Contract.

• All agreements are not contract. Only those agreements which are
enforceable by law are ‘contracts’.
Essential requirements of a valid contract

• Offer and its unconditional and unqualified acceptance

• Free consent of both parties
• Mutual and lawful consideration for agreement
• It should be enforceable by law. Hence, intention should be to create legal
relationship. Agreements of social or domestic nature are not contracts
• Parties should be competent to contract
• Object should be lawful
• Certainty and possibility of performance
• Contract should not have been declared as void under Contract Act or any
other law
Some definitions
2(a) When one person signifies to another his willingness to do or to abstain
from doing anything, with a view to obtaining the assent of that other to
such act or abstinence, he is said to make a proposal;
(b) When the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. A proposal, when accepted,
becomes a promise;
(c) The person making the proposal is called the “promisor”, and the person
accepting the proposal is called the “promisee”;
(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;
Some definitions
(e) Every promise and every set of promises, forming the consideration for
each other, is an agreement;
(f) Promises which form the consideration or part of the consideration for
each other are called reciprocal promises;
(g) An agreement not enforceable by law is said to be void;
(h) An agreement enforceable by law is a contract;
(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;
(j) A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable.
Offer and invitation to treat
• 2(a) When one person signifies to another his willingness to do or to abstain from doing anything, with
a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal

• A proposal or an offer has to be distinguished from an invitation to

treat.
• A person may not offer to sell his goods, but may make some
statements or give some information with a view to invite others to
make offers on that basis.
• Offer must be given with an intention to create a legal
relationship.(Balfour Vs. Balfour)
• Offer must be definite.
• Express offer - When offer is given to another person either in writing or in oral.
• Implied offer - When offer is given to another person neither in writing nor in
oral.
• Specific offer - When offer is given to a specific person.
• General offer - When offer is given to entire world at a large.(Carlill Vs. Carbolic
smoke ball Co.,)
• Cross offer - When both the persons are making identical offers to eachother in
ignorance of other’s offer.
• Counter offer - When both the persons are making offers to eachother which are
not identical in ignorance of other’s offer.
• Standing offer - An offer which remains continuously enforceable for a certain
period of time.
Acceptance
Section 2(b) - When the person to whom the proposal is made, signifies his assent there to, the proposal is said to be
accepted.
• Acceptance must be given as per the mode prescribed by the offerer.
• Acceptance must be given before the lapse of time or within reasonable
time.
• Acceptance must be unconditional.
• Acceptance may be given by any person in case of general offer.
• Acceptance may be given by any specific person in case of specific offer.
• Acceptance must be communicated.
• Mental acceptance is no acceptance or acceptance must not be derived
from silence.
• Acceptance must not be precedent to offer.
Promise
Promisor and promisee
Section 2(b)
• A Proposal when accepted becomes a promise.

Section 2 (C)
• When the proposal is accepted, the person making the proposal is
called as promisor and the person accepting the proposal is called as
promisee
Consideration
Section 2(d)
• When at the desire of the promisor, the promisee or any other person
has done or abstained from doing something or does or abstains from
doing something or promises to do or abstain from doing something,
such act or abstinence or promise is called a consideration for the
promise.
• Consideration should be something which not only the parties regard but the
law can also regard as having some value. It must be real and not illusory,
whether adequate or not.
• A promise founded on motive of generosity, prudence and natural duty is a
promise without consideration
Agreement
Section 2(e)

• Every promise and set of promises forming the consideration for each
other. In short, agreement = offer + acceptance.
• Contract 2(h) - An agreement enforceable by Law is a contract.

• Void agreement 2(g) - An agreement not enforceable by law is void.

• Voidable contract 2(i) - An agreement is a voidable contract if it is

enforceable by Law at the option of one or more of the parties there to
(i.e. the aggrieved party), and it is not enforceable by Law at the option of
the other or others.

• Void contract 2(j) - A contract which ceases to be enforceable by Law

becomes void when it ceases to be enforceable
• Proper offer and proper acceptance with intention to create legal relationship.

• Consideration must not be unlawful, immoral or opposed to the public policy

• In case of social agreement there is no intention to create legal relationship and

there the is no contract

• In case of commercial agreements, the law presume that the parties had the
intention to create legal relations.

• an agreement of a purely domestic or social nature is not a contract

Communication, acceptance and revocation
of proposals
Section 3

• The communication of proposals, the acceptance of proposals, and

the revocation of proposals and acceptance, respectively, are deemed
to be made by any act or omission of the party proposing, accepting
or revoking, by which he intends to communicate such proposal,
acceptance or revocation, or which has the effect of communicating
it.
Communication of offer
An offer when accepted results in a contract. An offer can be
accepted only after the same has come to the knowledge of the
offeree. It means that the offer has to be communicated to the
offeree in order that the offeree can accept it.

Section 4

“ the communication of a proposal is complete when it comes to the

knowledge of the person to whom it is made.”

23
Capacity
• The parties to a contract must have capacity (legal ability) to make valid
contract.

Section 11
• Every person is competent to contract provided
i. is of the age of majority according to the Law which he is subject, and
Ii. Who is of sound mind and
Iii. is not disqualified from contracting by any law to which he is subject.
• Person of unsound mind can enter into a contract during his lucid interval.
• An alien enemy, foreign sovereigns and accredited representative of a
foreign state, insolvents and convicts are not competent to contract
Free consent
• Consent of the parties must be genuine

• Consent means agreed upon same thing in the same sense i.e. there
should be consensus

• A consent is said to be free (section 14) when it is not caused by

coercion (Section 15), Undue influence (Section 16), Fraud (Section
17), Misrepresentation (Section 18), Mistake (Section 20, 21,22)
Lawful object
• The object of agreement should be lawful and legal.
• Two persons cannot enter into an agreement to do a criminal act.
• Consideration or object of an agreement is unlawful if it
a. is forbidden by law; or
b. is of such nature that, if permitted, would defeat the provisions of any law;
or
c. is fraudulent; or
d. Involves or implies, injury to person or property of another; or
e. Court regards it as immoral, or opposed to public policy
Possibility of performance

• The terms of the agreement should be capable of performance.

• An agreements to do act, impossible in itself cannot be enforced

• The terms of the agreements are certain or are capable of being
made certain
• Example : A agreed to pay Rs.5 lakh to B for ultra-modern decoration of his
drawing room. The agreement is void because the meaning of the term “ ultra
– modern” is not certain.
• Not declared Void
• The agreement should be such that it should be capable or being enforced by
law.
• Certain agreements have been expressly declared illegal or void by the law.
Necessary legal formalities
• A contract may be oral or in writing.
• Where a particular type of contract is required by law to be in writing
and registered, it must comply with necessary formalities as to
writing, registration and attestation
• If legal formalities are not carried out then the contract is not
enforceable by law.
Types of contracts
On the Basis of creation

a. Express contract - a contract made by word spoken or written

b. Implied or Tacit contract - contract inferred by the conduct of person or
circumstances of the case; a contract is said to be tacit when it has to be
inferred from the conduct of the parties. Example obtaining cash through
automatic teller machine, sale by fall hammer of an auction sale.
c. Quasi contract - created by law. (A leaves his goods at B’s shop by
mistake, it is for Mr. B to return the goods or to compensate the price. In
fact, these contracts depend on the principle that nobody will be allowed
to become rich at the expenses of the other.
d. E contract - entered into between two parties via the internet
On Validity
• Valid contract - An agreement which satisfies all the requirements prescribed by law
• Void contract (2j) - contract which ceases to be enforceable by law because void when it
ceased to be enforceable : When both parties to an agreement are
• Under a mistake of facts (20)
• Consideration or object of an agreement is unlawful (23)
• Agreement made without consideration (25)
• Agreement in restrain of marriage (26), Restraint of trade (27) or Restrain legal proceeding (28)
• Agreement by wage of wager [30]
• Voidable contract 2(i) :- an agreement which is enforceable by law at the option of one
or more the parties but not at the option of the other or others is a voidable contract.
Result of coercion, undue influence, fraud and misrepresentation.
• Unenforceable contract: - where a contract is good in substance but because of some
technical defect i.e. absence in writing or barred by limitation etc. one or both the
parties cannot sue upon but is described as unenforceable contract.
• Illegal contract
On the basis of execution
• Executed contract - A contract in which both the parties have fulfilled
their obligations under the contract.

• Executory contract:- A contract in which both the parties have still to

fulfilled their obligations.

• Partly executed and partly executory:- A contract in which one of the

parties has fulfilled his obligation but the other party is yet to fulfill
his obligation.
Relevant IT Act provisions
• IT law provides for the authentication of electronic records by affixing
a digital signature. The law provides for use of an asymmetric crypto
system and hash function and also recommends standards to be
adhered.
Information Technology Act addresses
• Legal recognition of electronic documents

• Legal Recognition of digital signatures

• Offenses and contraventions

• Justice dispensation systems for cybercrimes

Chapter III - Electronic Governance
4. Legal Recognition of Electronic Records.
5. Legal recognition of Electronic Signature.
6. Use of Electronic Records and Electronic Signature in Government and its
agencies.
7. Retention of Electronic Records
7-A. Audit of Documents etc. in Electronic form
8. Publication of rules, regulation, etc. in Electronic Gazette
9. Sections 6, 7 and 8 Not to Confer Right to insist document should be
accepted in electronic form
10-A. Validity of contracts formed through electronic means.
Chapter IV - Attribution, Acknowledgment
and Dispatch of Electronic Records

11. Attribution of Electronic Records

12. Acknowledgement of Receipt

13. Time and place of dispatch and receipt of electronic record.

Attribution of Electronic Records
Section 11.

• An electronic record shall be attributed to the originator— (a) if it was

sent by the originator himself; (b) by a person who had the authority
to act on behalf of the originator in respect of that electronic record;
or (c) by an information system programmed by or on behalf of the
originator to operate automatically.
• According to section 2(1)(za) of the IT Act, originator is a person who:

• Sends, generates, stores or transmits any electronic message or

• Causes any electronic message to be sent, generated, stored or
transmitted to any other person
• According to section 12(1) of the IT Act Where the originator has not
agreed with the addressee that the acknowledgment of receipt of
electronic record be given in a particular form or by a particular
method, an acknowledgment may be given by—

• any communication by the addressee, automated or otherwise; or

• any conduct of the addressee, sufficient to indicate to the originator that the
electronic record has been received.
Time and place of despatch and receipt
• Section 13(1) - Save as otherwise agreed to between the originator
and the addressee, the despatch of an electronic record occurs when
it enters a computer resource outside the control of the originator.
• Section 13(2) -Time of receipt of an electronic record shall be
determined as follows,
• if the addressee has designated a computer resource for the purpose
of receiving electronic records,(i) receipt occurs at the time when the
electronic record enters the designated computer resource; or (ii) if
the electronic record is sent to a computer resource of the addressee
that is not the designated computer resource, receipt occurs at the
time when the electronic record is retrieved by the addressee;
Contingent contracts
Section 31 to 36 of The Indian Contract Act, 1872 deal with contingent
contracts.

• Section 31 of the Act defines ‘contingent contract’ as a contract to do or

not to do something, if some event, collateral to such contract does or
does not happen.

• Every contingent contract is thus a contract primarily. Like any other

contract, it is also a contract to do or not to do something. It is not,
however, an absolute and unconditional one, without any reservations or
conditions, which is to be performed under any event. Its performance is
dependent on some event’s happening or not happening- the contingency.
Discharge of a Contract
• Discharge by performance
• Discharge by agreement or consent
• Discharge by impossibility of performance
• Discharge by lapse of time
• Discharge by operation of law
• Discharge by breach of contract
Contract of Bailment

• A "bailment" is the delivery of goods by one person to another for some

purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the
direction of the person delivering them. The person delivering the goods is
called the "bailor". The person to whom they are delivered is called the
"bailee".

• Explanation: If a person is already in possession of the goods of other

contracts hold them as a bailee, he thereby becomes the bailee, and the
owner becomes the bailor of such goods, although they may not have been
delivered by way of bailment.
Essentials of a Valid Contract of Bailement
(Sec.148)
• Contract
• There must be a contract.
• The contract may be expressed or implied.
• Bailment of goods only.
• There must be delivery of goods by one person to another person.
• The goods must be delivered for some purpose.
• The purpose may be expressed or implied.
• The delivery of goods must be conditional
• The condition shall be that the goods shall be returned (either in original
form or in any altered from); or
• Disposed of according to the directions of the bailor, when the purpose is
accomplished.
Classification of bailment
• Gratuitous bailment
• Bailment without any charges or reward, i.e. – No hire charges are paid by
bailee; and No custody charges are paid by bailor.

• Non gratuitous bailment

• Bailment for some charges or reward, i.e.- Hire charges are paid by bailee; or
Custody charges are paid by bailor
Duties of a bailor
• Disclose faults in goods (Sec. 150): Bailor is bound to disclose to
Bailee, faults in the goods bailed, of which he has knowledge. He
should also disclose such information which – (a) materially interferes
with the use of goods, or (b) expose the Bailee to extraordinary risk.
• Liability for Defects in Goods
• In case of Gratuitous bailment - Bailor is liable only for those losses which
arise due to non – disclosed risks.
• In case of Non Gratuitous Bailment - Bailor is liable for damages whether or
not he was aware of the existence of faults.
 Duties of a bailor

Bear expenses (Sec.158)

• In case of Gratuitous bailment
• Bailor shall repay to Bailee, all necessary expenses incurred by him for the
purpose of Bailment

• In case of Non Gratuitous bailment

• Bailor is liable to repay only extraordinary expenses, and not the ordinary
expenses
Duties of a bailee
• Take reasonable care
• The bailee must take such case of goods as a man of ordinary prudence would
take care of his own goods.
• The bailee shall not be liable for any loss or destruction of goods, if he is not
negligent; or the loss was caused due to an act of God or other unavoidable
reasons.
• Not to make unauthorized use of goods
• The bailee must not make any unauthorized use of the goods. If he does, then
the bailment becomes voidable at the option of the bailor; and the bailee
shall be liable for any loss or damage even if such loss is caused due to an act
of God or other unavoidable reasons.
 Duties of a bailee

• Not to mix goods

• If goods are mixed with bailor’s consent The parties shall have a proportionate
interest in such mixture.
• Goods are mixed without bailor’s consent, but the goods are separable. The bailee
shall pay the expenses of separation. The bailee shall pay damage incurred by the
bailor.
• Goods are mixed without bailor’s consent, and goods are not separable The bailee
shall compensate the bailor for any loss caused to him
• Return the goods
• The bailee must return the goods, without waiting for demand from bailor, if the
time specified in the contract has expired; or the purpose specified in the contract is
accomplished. If the goods are not so returned, then the goods shall be at the risk of
the bailee; the bailee shall be liable for any loss or damage, even if such loss is
caused without any fault or negligence of the bailee or due to an act of God or other
unavoidable reasons.
Rights of a bailor
• Terminate the bailment if the bailee does any act inconsistent with
the terms and conditions of the contract of bailment. Bailment
becomes voidable at the option of the bailor.
• Demand back the goods
• if the bailment is gratuitous and for a specific period then the bailor may
compel the bailee to return the goods before expiry of the period of bailment.
• File suit against wrongdoer
• Bailor has the right to sue a third party who does any damages to the goods;
or a third party who deprives the bailee from using the goods
• Sue the bailee to enforce his duties.
Rights of a bailee
• Right to compensation
• The bailee has the right to be indemnified by the bailor, if the bailor has no
title to the goods; and as a consequence, the bailee suffers some loss
• Return the goods
• It is the duty as well as the right of the bailee to return the goods to the
bailor.
• Recover charges incurred
• The bailor is liable to pay the extraordinary expenses
• If the bailment is gratuitous, the bailor is liable to pay the ordinary necessary
expenses,