Understanding the The Indian Contract Act, 1872 - SSRANA

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The Indian Contract Act, 1872

Essential Features of a Contract

All contacts are agreement but all agreements are not contractsThis implies that for an agreement to become a contract there are essential considerations and stipulations which have to be complied. Thus, an agreement which is legally enforceable is a contract.

All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.

According to Section 14 of the Indian Contracts Act, 1872, Consent is said to be free when it is not caused by-

  1. Coercion, as defined in section 15, or
  2. Undue influence, as defined in section 16, or
  3. Fraud, as defined in section 17, or
  4. Misrepresentation, as defined in section 18, or
  5. Mistake, subject to the provisions of sections 20, 21, and 22.

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation, or mistake.

The Act defines an agreement as every promise and set of promises forming consideration for each other (Section 2(e)) and a contract as an agreement enforceable by law (Section 2(h)).

Balfour v. Balfour (1919)2 K.B. 571- In this case, a husband promised to pay maintenance allowance to his wife every month. When he failed to pay the amount, the wife brought an action to enforce the agreement. However, the Court was of the view that as the agreement was of a domestic nature, it was not enforceable under law.

The essential elements of a valid contract

  • A valid offer and acceptance
  • The intention to form a legal relationship
  • Capacity of the parties to contract
  • A lawful consideration
  • Free consent of parties
  • A lawful object
  • Agreement nit expressly declared to be void

Void and Voidable Contracts– Void contracts are those contracts which cannot be enforced by a Court of law and voidable contracts are those which are enforceable by law at the option of one or more parties but not at the option of others is a voidable contract.

Express and Implied ContractsExpress contracts are those where the proposal or acceptance of any promise is made in words and a contract which is not express is an implied contract or contracts which are inferred from the circumstances of a case.

Offer and Invitation to Offer– An offer is a proposal and is definite whereas an invitation to offer is to invite someone to make a proposal and is done with an intent to induce a negotiation.

In Harvey v. Facey [(1893) A.C. 552], the Court explained the difference between offer and invitation to offer. In this case, the Plaintiffs sent a telegram to the Defendant asking “Will you sell us the Bumper Hall Pen? Telegraph lowest cash price.” The Defendants telegraphed “Lowest price for Bumper Hall Pen as £900.” The Plaintiffs sent another telegram to the Defendant saying- “We agree to buy Bumper Hall pen for £900 asked by you, please send us your title deeds.”

In the case the Privy Council observed that the first telegram had asked two questions, one regarding willingness to sell and the other regarding lowest price. In reply only lowest price was quoted and this quoting of the price was not an offer. The third telegram from the Plaintiffs saying “we agree to buy” was only on offer and not the acceptance of an offer. Since this offer had not been accepted there was no binding contract between the parties.

Special and General Offers– When an offer is made to a specific or special person, it is known as a specific offer but when the same is not made to any particular person but to the public at large it is known as general offer.

Acceptance­– As per the Act, 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 (Section 2(b)).

Essentials of a valid acceptance are as under:

  • Acceptance should be communicated by the offeree to the offeror
  • Acceptance should be absolute and unqualified
  • Acceptance should be made in some usual and reasonable manner
  • Acceptance shall be made while  the offer is still subsisting

Revocation of Offer and Acceptance– As per the Act, a proposal can be revoked at any time before the communication of its acceptance is complete as against the proposer nut not afterwards. Similarly, an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards.

Privity of Contract – Privity of contract means that a stranger to a party cannot sue. According to this doctrine, only those parties who are a party to a contract can sue each other and a stranger to a contract cannot sue those parties. This is done to protect the interest of parties to the contract.

Coercion – According to Section 15 of the Indian Contracts Act, 1872, Coercion is the committing, or threatening to commit, any act forbidden by the Indian Penal Code or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

Undue Influence – According to Section 16 of the Indian Contracts Act, 1872, the following acts are called as undue influence;

  1. A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.
  2. In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another-
  3. where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or
  4. where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.
  5. Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.

Fraud – According to Section 17 if the Indian Contracts Act, 1872, Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

  1. the suggestion as a fact, of that which is not true, by one who does not believe it to be true;
  2. the active concealment of a fact by one having knowledge or belief of the fact;
  3. a promise made without any intention of performing it;
  4. any other act fitted to deceive;
  5. any such act or omission as the law specially declares to be fraudulent.

Misrepresentation – According to Section 18 of the Indian Contracts Act, 1872, Misrepresentation means and includes-

  1. the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;
  2. any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him; by misleading another to his prejudice, or to the prejudice of anyone claiming under him;
  3. causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.

Standard Form Contracts- are one of the most sought after contract these days. When large number of contracts have to be entered by a person then from a practical point of view and for convenience a standard form of contract is used. Thus, a contract with standard terms and conditions are drafted by one party and on the same terms contract is made with numerous persons having similar interest in the contract.

Such contracts may include Insurance Contracts, Property Development Contracts etc. It is a contract between two parties, where the terms and conditions are set by one of the parties to the contract and the other party has little or no say regarding the terms and conditions of the Contract.

Remedies for breach of contracts

Remedies available to the party suffering loss under the Act are following:

  1. Compensation of loss and damage for breach of contracts.
  2. Compensation of breach of contract where penalty is stipulated.
  3. Right for rescission of contract

Compensation of loss and damage for breach of contracts

Compensation for loss and damage are of 4 kinds:

  1. Liability for Special Damages.
  2. Liability for Exemplary Damages.
  3. Liability to pay Nominal Damages.
  4. Liability to pay damages for deterioration caused by the day.

Right of Rescinding – When there is a breach of contract then the aggrieved party has the right to cancel the contract and sue the other party for damages under the provisions provided by the Indian Contracts Act, 1872.

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To know more about Commercial Contracts & Agreements in India, read below:

Commercial Contracts in India

Commercial Contracts & Agreements in India

Merger & Acquisitions in India

Joint Ventures in India

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