Contract Act

Definition, Meaning and Nature of Contract The term “Contract” has been defined under Section 2(h) of Indian Contract Act, 1872. As per this, “an agreement enforceable by law is a contract”. Thus to constitute a contract, firstly there must be an ‘agreement’ and secondly such an agreement must be ‘enforceable by law’. Section 2(e) of Indian Contract Act, 1872 defines the term agreement as, “every promise and every set of promises forming the consideration for each other is an agreement”. It may be noted that for an agreement to be enforceable, it must be coupled with obligation to do or abstain from doing a particular act. Therefore, in the broadest sense, 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, which obligation is recognized and enforced by law. It may be noted that those agreements in which there is no intention to create legal relations are not contracts. For instances, agreements relating to socials matters are not contracts. Thus, all agreements are not contracts. But all contracts are agreements. Essential Elements of a Valid Contract Sections 10 of the Indian Contract Act, 1872 provides the following : “All agreement are contracts, if they are made by free consent of parties competent to contract, for a lawful consideration and with a lawful objects, and are not hereby expressly declared to be void.” Thus, the essential elements of a valid contract are :- An offer or proposal by one party and an acceptance of that offer by another party resulting is an agreement. Free consent of the parties is present. The parties to contract are legally capable of contracting. The agreement is supported by consideration. The consideration and object of the contract is legal. An offer or proposal by one party and acceptance of that offer by another party resulting in an agreement. Offer or proposal : Section 2(a) of Indian Contract Act,1872 defines the term ‘Offer or proposal’. It provides that “When one person (offeror) signifies to another person (offeree) 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 or offer.” A valid offer must comply with the following rules :- An offer must be clean, definite, complete and final. It must not be vague. An offer must be communicated to the offeree. An offer may be communicated orally, in writing or it may be implied by conduct. Further, communication of the offer may be particular i.e., when it is made to a particular person or group of persons; or general i.e., when it is made to the public at large. An offer is revoked in the following ways :- If the revocation is communicated by offeror to the offeree before its acceptance; If it is not accepted with in the specified time, if any, or after a reasonable time, if no time is specified; If the offeree fails to fulfill a condition precedent to acceptance; or If the offeror dies or becomes insane and the fact of his death or insanity comes to the knowledge of the offeree before acceptance. Invitation to Offer / Proposal / Contract : It means inviting the other persons for making an offer to the first person. For instance, display of goods by a shopkeeper in his window, with prices marked on them, is not an offer but merely an invitation to the public to make an offer to the shopkeeper to buy the goods at the marked prices. Acceptance of Contract / Proposal: Section 2(b) of Indian Contract Act, 1872 defines the term ‘acceptance. It provides that “When the person, to whom the proposal or offer is made, signifies his assent thereto, the proposal or offer is said to be accepted.” A valid acceptance must comply with the following rules :- Acceptance must be unqualified and absolute and must correspond with the terms of the offer. If an offer is accepted with conditions, then it is not a valid acceptance and is called conditional acceptance and amounts to a new offer by the second party to the first party. That is why conditional acceptance is also called counter offer. Acceptance must be before the revocation of the offer. Acceptance must be communicated to the offeror. Communication of acceptance may be oral, written or implied from conduct. Contracts by Post : Following points may be noted in the case of contracts by post :- An offer is made only when the letter containing the offer actually reaches the offeree and not before. For offeror, an acceptance is made as soon as the letter containing the acceptance is posted by the offeree. Thus, the offeror may resolve the offer only before the letter containing the acceptance is posted and not after that. For offeree, an acceptance is made only when the letter containing the acceptance reaches the offeror. Thus, the offeree may revoke the acceptance only before it reaches the offeror and not after that. Contracts over Telephone : Contracts over telephone are valid contracts. Here, an oral offer is made and an oral acceptance is expected. However, it is important to note that the acceptance must be audible, heard and understood by the offeror. If during the conversation, the telephone lines go “dead” so that the offeror does not hear the offeree’s words of acceptance, there is no contract at the moment. However, if the whole conversation is repeated and offeror hears the words of acceptance, the contract is complete. Free consent of the parties is present Two or more persons are said to consent when they agree upon the same thing in same sense. This is known as consensus-ad-idem i.e., meeting of two minds upon the same thing in the same sense. For instance, Amar, who owns two horses named X and Y, is selling horse X to Shyam. Shyam thinks he is purchasing horse Y. Thus, there is no consensus-ad-idem and consequently no contract. Further, consent is said to be free when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. The parties to contract are legally capable of contracting The expression ‘competent to contract’ has been explained in Section 11 of Indian Contract Act, 1872. As per this, “Every person is competent to contract who is of the age of majority and who is of sound mind and is not disqualified from contracting by any law to which he is subject.” It may be noted that the age of majority is 18 years i.e, before attaining the age of 18 yrs., a person is minor . However, where a guardian has been appointed to a minor person, the person continues to be minor until he or she completes the age of 21 yrs. It may be noted that for the validity of a contract, a person should be of sound mind only at the time of entering into a contract. It is irrelevant whether he is a person of sound mind or not before or after the time of entering into a contract. During the war, an Indian citizen cannot enter into a contract with an alien enemy because he is subject to Indian law and is disqualified by that law to enter into such contracts. Contracts made before the war are either suspended or dissolved. The agreement is supported by consideration The term ‘ Consideration’ is defined under Section 2(d) of the Indian Contract Act,1872. It provides that “When at the desire of the promisor, the promisee (offeree) 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, abstinence or promise is called a consideration for the agreement.” It may be noted that consideration meet move at the desire or request of the promisor. For instance, if A rushes to B’s help whose house is on fire, there is no consideration here but a voluntary act. But if A goes to B’s help at B’s request, there is good consideration as A did not wish to do the act voluntarily. Further, consideration may move from either the promisee or any other person. In the case of Chinnaya v. Ramaya, a lady gifted her property to her daughter by a deed of gift and directed her to pay an annuity (amount of money every year) to lady’s brother. On the same day, the daughter also executed an agreement in favour of lady’s brother (maternal uncle) agreeing to pay the annuity. Later on, she declined to fulfill her promise to pay her uncle saying that no consideration had moved from him. The Court, however, held that the uncle could claim the annuity even though no part of the consideration received by his niece moved from him. The consideration from her mother was sufficient consideration. Types of Consideration: The consideration may be of three kinds. It may be past consideration, executed or present consideration and executory or future consideration. On the basis of this, contracts are also called past, executed and executory contracts. Rules governing Consideration: Following are some of the rules relating to consideration: Consideration may be an act, abstinence or promise. There must be mutuality i.e, each party must do or agree to do something. Consideration must be real and definite and not vague. Although consideration must have same value, it need not be adequate i.e, a full return for the promise. For example, where A agreed to sell his motor car for Rs 500 to B, it become a valid contract despite the inadequacy of the consideration. When consideration not necessary: The general rule is that an agreement made without consideration is void. But Sec. 25 of the Indian Contract Act, 1872 lays down certain exceptions which make an agreements, without consideration, valid and binding. Sec. 25 provides that following agreements, even without consideration, are valid:- An agreement expressed in writing and registered, which as made out of natural love and affection between parties standing in near relation to each other. For instance, A registered agreement between a husband and his wife to pay his earnings to her is a valid contract. A promise (agreement) to compensate a person who has already done something voluntarily for the promisor. An agreement expressed in writing and signed by the erstwhile debtor or his agent, to pay a debt barred by the law of limitation. No consideration is necessary to create an agency. Gifts also do not require any consideration. In the case of Rajlukhy Dabee v. Bhootnath Mookerjee, the defendant promised to pay his wife a certain amount every month as maintenance. The promise was made in writing and the quarrels the husband and wife had were also mentioned. A case was filed to recover the amount promised to be paid as maintenance. However, the judge decided in favour of the defendant as although the two were in a near relation, the court held that there was no natural love and affection between them. In another case, Bhiwa vs Shivaram two brothers quarreled regarding some property. One of them lost, upon which the other brother promised through a written and duly registered agreement that he would give half his property away to him. He later backed out. When taken to court, however, the court held that, in spite of the earlier property dispute, Section 25(1) applies since the brother had made the promise out of natural love and affection for someone who was a near relative, and therefore the brother was held liable to comply with his promise. Doctrine of Privity of Contract : Doctrine of privity of Contract provides that a stranger to a contract cannot sue on the contract. Thus, a person who is not a party to a contract cannot sue upon it, even though the contract is for his benefit. For example, 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. However, there are certain exceptions to the doctrine of privity of contract. For instance, in the following cases, a person who is not a party to a contract, can sue upon it :- 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 the case of death or insolvency of parties to a contract, an assignee can sue upon the contract for the enforcement of his rights, title and interest. In the case of family settlement, if the terms of settlement are reduced into writing, the members of family who originally had not been parties to the settlement may enforce the agreement. The consideration and object of the agreement is legal Section 23 of the Indian Contract Act, 1872 provides that the consideration or object of an agreement is lawful, unless it is- forbidden by law; or it is of such nature, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injure to the person or property of another; or the court regards it as immoral or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Void, Voidable and Illegal Agreement/ Contracts A Contract may have a flaw, vice or error somewhere in it. On the basis of those flaws, vices or error, contracts may be classified as :- Void Contracts/ Agreements. Voidable Contracts. Illegal Contracts/ Agreement Void Contracts/ Agreements A void agreement is one which is destitute of all legal effects. It cannot be enforced and confers no rights on either party. A contract becomes void when by reason of some event, which the promisor (offeror) cannot prevent, the performance of the contract becomes impossible, after the formation of the contract. The following types of agreements have been expressly declared void under the Indian Contract Act, 1872 :- Agreement by or with a minor or a person of unsound mind or a person disqualified to enter into a contract. Agreement made under a mistake of fact. Agreement in restraint of trade. Agreement by way of wager. Agreement made without consideration, subject to three exceptions as provided in Section 25. Agreement of which the consideration or object is unlawful. Agreement, the meaning of which is not certain / clear. Agreement to enter into an agreement in the future. Minor’s Contracts : According to Indian Contract Act, only a major person is competent to contract. Thus, contract with or by a minor is altogether void. The word ‘Void’ when used in relation to a minor, it should be understand as “void against the minor.” Thus, an agreement by or with a minor is void only if it involves a promise on his part or his promise is a necessary part of the agreement because a minor is incapable of giving a promise imposing a legal obligation. But if the minor has carried out his part of the contract, the contract is valid and he can proceed, against the other party. The rationale is to protect minor’s interest. In the case of Mohiri Bibee v. Dharmodas Ghose, a minor borrowed Rs. 20,000/- from Y, a money lender. As a security for the money advanced, X executed a mortgage in the Y’s favour. When sued by Y, the court held the contract by X was void and he cannot be compelled to repay the money advanced to him. It was also held that mortgage was also void and, therefore, it was cancelled. Following points may be noted in respect of Minor’s Contracts :- A minor can be a beneficiary under a contract. A minor can always plead minority. For instance, even when a minor procures a loan by falsely representing that he is of the age of majority, it will not stop him from pleading his minority in a suit to recover the amount and the suit will be dismissed.(Exception to the rule of estoppel) Since a minor’s contract is void-ab-initio, it cannot be ratified by the minor on attaining the age of majority. A minor is liable to pay out of his property for ‘necessaries’ supplied to him. It may be noted that here only the estate of the minor is liable and he is not personally liable. A minor can be admitted to the benefits of an already existing partnership with the consent of the other partners. Agreement made under a mistake of fact : Where both the parties to an agreement are under a mistake as to a matter of fact essential to agreement, the agreement is void. For instance, A agrees to buy from B a certain horse. It was later found out that the horse was dead at the time of agreement, though neither party was aware of the fact. The agreement is void. A mistake must satisfy the following conditions, so as to render the contract void :- Mistake must be of fact, and not of law or opinion; The fact must be essential for the performance of contract; and Mistake must be on the part of both the parties. Agreement in restraint of trade: An agreement by which any person is restrained from exercising a lawful profession, trade or business of any kind is, to that extent, void. But the court held that if the restraint is one, which is really necessary for the carrying on business, the same is not prohibited and it shall not render the contract void. For instance, where a person sells the goodwill of a business and agrees with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer carries on a like business therein, such an agreement is valid. The words “to that extent” make it clear that if in an agreement, there are some conditions which are prohibited whereas the others are not and if the two parts can be separated, then only those conditions which operate as restraint of trade would be void and not the whole agreement itself. Agreement by way of wager : The literal meaning of the word “wager” is “bet”. Thus, wagering agreement is nothing but ordinary betting agreements and they are void. For example, A and B enter into an agreement that if England’s Cricket Team wins the test match, A will pay B Rs.100, and if it loses, B will pay Rs. 100 to A. This is wagering agreement and hence void and thus, the winning party cannot legally recover anything under the agreement. It may be noted that in a wagering contract, there must be mutuality in the sense that the gain of the one party should be loss to the other on the happening of an uncertain event, which is the subject- matter of the contract. Voidable Contracts A voidable contract is a contract in which one party gets an option to avoid it or to put an end to it, if his consent was not free. The consent of a party is not free, if he has given consent under misrepresentation, fraud, coercion or under influence and so he is entitled to avoid the contract. Misrepresentation : If a person makes a representation which is actually not true but believing what he says is true, he commits innocent misrepresentation. The effect of innocent misrepresentation is that party misled by it can avoid the contract, but cannot sue for damages (compensation) in the normal circumstances. It may be noted that misrepresentation as to fact renders a contract voidable but misrepresentation as to law does not, ordinarily, make the contract voidable, as ignorance of law is no excuse. Fraud : Fraud means and includes any of the following acts committed by a party to a contract with intent to deceive another party or to induce him to enter into the contract :- the suggestion, as to a fact, of that which is not true, by one who does not believe it to be true; the active concealment of a fact by one having knowledge or belief of the fact; a promise made without any intention of performing it; any other act fitted to deceive; any such act or omission as the law specially declares to be fraudulent. It may be noted that mere silence as to facts likely to affect the willingness of a person to enter into a contract is no fraud; but where it is the duty of a person to speak, or his silence is equivalent to speech, silence amounts to fraud. For instance, in contracts uberrimae fidei , law imposes a special duty to disclose all material information and non-disclosure of the same will render the contract voidable. For example, in contracts of insurance, the insured must disclose to the insurer all material facts, otherwise the contract will be voidable at the option of the insurer. Difference between Misrepresentation and Fraud : Following are the important points of distinction between misrepresentation and fraud :- Coercion : Coercion means the committing or threatening to commit any act forbidden by the Indian Penal Code, or 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. It may be noted that coercion may proceed from any person and may be directed against any person, even a stranger & it makes a contract voidable. Undue Influence : A Contract is said to be produced by undue influence where the relations subsisting between the parties is 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. For example, A father, by reason of his authority over the son, can dominate the will of the son. Thus in a contract between father and son, father can use his dominant position to obtain an unfair advantage and such undue influence makes the contract voidable. Difference between Coercion and Undue Influence : Following are the important points of distinction between coercion and undue influence :- Illegal Contracts / Agreements An illegal agreements is one which, like the void agreement, has no legal effects as between the immediate parties. Further, transactions collateral to it also become tainted with illegality and are, therefore, not enforceable. Therefore, it may be said that all illegal agreements are void; but all void agreements are not necessarily illegal. For instance, A borrows from B Rs. 1,000/- for lending to C, a minor. The contract between A and C is void, but B can nevertheless recover the money from A. On the other hand, if A had borrowed Rs. 1,000/- from B to buy a pistol to shoot C, the question whether B can recover the money hinges on whether B was aware of the purpose for which money was borrowed. If B had knowledge of the illegal purpose, he cannot recover the money. Discharge or Termination of Contract A contract is said to be discharged or terminated, when the rights and obligations out of it are extinguished (i.e. cease to exist). Thus, a contract may be discharged or terminated in any of the following ways :- By performance of contract ; By mutual consent or agreement; By lapse of time ; By operation of law; By impossibility of performance ; and By breach of contract. Performance of Contract Section 37 of the Indian Contract Act , 1872 provides that the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with (made unnecessary) or excused under the provisions of this Act, or of any other law.