Indian Contract Act, 1872

SYLLABUS

1. General nature of Contract

2. Essentials of valid Contract
3. Types of Contract
4. Performance of Contract
5. Breach of Contract and its remedies
6. Special Contract
 I General Nature of Contract

Contracts have occupied a significant place in the regular vocabulary of individuals, especially those
that are engaged in various forms of business operations. It is usually understood as a form of
understanding between two or more persons, by which rights are acquired on the one side to acts or
forbearances on the other. Various criteria are required to be fulfilled for transforming an agreement
into a contract that includes an offer and an acceptance as well as the promises emanating from
these offers and acceptances to the promises that are guided by law garbed in obligation to which
the concerned parties are bound. In other words, the groups who enter into contracts enter into a
form of legal relationship. The nature of contract refers to a branch of law that determines various
situations and circumstances in which promises made by a party to a contract shall be binding on
them. It consists of a number of limiting principles but does not lay down the rules and
responsibilities enforced by the law. In this comprehensive guide, we will provide you with an
understanding of the concept, and at the end of the guide; you will acquire a distinct understanding
of the concept.

II. ESSENTIAL ELEMENTS OF A VALID CONTRACT [Section 10]

According to Section 10, “All agreements are contracts if they are made by free consent of parties,
competent to contract, for a lawful consideration and with a lawful object and are not hereby
expressly declared to be void”.

The analysis of section 10 and section 2(b) reveals that an agreement must have certain essential
elements to

constitute contract. The essential elements of a valid contract are:

1. Two Parties: To constitute a contract there must be at least two parties, i.e. one party making an
offer (offerer/proposer) and the other party accepting the offer (offeree / proposee). The terms of
the offer must

be definite.

2. Agreement: A contract is initially an agreement when person whom the offer has given signifies
his acceptance on it there arises an agreement which is the foundation of a contract.

3. Consent: There must be consensus-ad-idem (meeting of minds) to constitute a valid contract unity
of

minds i.e. consensus-ad-idem means that the parties must agree to the same thing in the same
sense

and at the same time. An agreement without consent is void.

4. Intention to create legal relationship: There must be an intention by both parties to create legal

relationship and to legally bind themselves as a result of such agreement. Thus, agreements of social
or household nature are not contracts, as the usual presumption is that the parties do not intend to
create legal relationship unless otherwise agreed upon. However, in case of commercial transaction
the usual presumption is that parties intend to create legal relationship.
5. Contractual Capacity: The parties to the agreement must be capable of entering into a valid
contract.

According to Section 11, every person is competent to contract if he or she,

(a) is of the age of majority;

(b) is of sound mind; and

(c) is not disqualified from contracting by any law to which he/she is subject.

These persons are not competent to contract. Section 11 provides that every “person is competent
to contract who is of the age of majority according to the law to which he is subject, and who is of
sound mind, and is not disqualified from contracting by any law to which he is subject”. A valid
agreement requires that both the parties should understand the legal implications of their conduct.
Thus, both must have a mature mind. The legal yardstick to measure maturity according to the law of
contract is, that both must be major and of sound mind and if not, the law would presume that the
maturity of their mind has not reached to the extent of visualising the pros and cons of their acts,
hence, a bar on minors and lunatics competency to contract. The contractual capacity of a
corporation depends on the manner in which it was created.

Agreement with Minor :

1. An agreement by a minor being void, the Court will never direct specific performance of the
contract.

2. A minor can be an agent, but he cannot be a principal nor can he be a partner. He can, however, be
admitted to the benefits of a partnership.

3. Since a minor is never personally liable, he cannot be adjudicated as an insolvent.

4. An agreement by a parent or guardian entered into on behalf of the minor is binding on him
provided it is for his benefit or is for legal necessity. For, the guardian of a minor, may enter into
contract for marriage on behalf of the minor, and such a contract would be good in law and an action
for its breach would lie, if the contract is for the benefit of the minor (Rose Fernandez v. Joseph
Gonsalves, 48 Bom. L. R. 673) e.g., if the parties are of the community among whom it is customary
for parents to contract marriage for their children. (i) The contract of apprenticeship is also binding.
The Act, inter alia, provides that the minor must not be less than fourteen years of age and the
contract must be entered into by minor’s guardian.

However, it has been held that an agreement for service, entered into by a father on behalf of his
daughter who is a minor, is not enforceable at law (Raj Rani v. Prem Adib, (1948)

Agreement by person of unsound mind (Section 2)

For the purposes of making contract, a person is of unsound mind if at the time when he makes the
contract, he is incapable of understanding it and of forming rational judgment as to its effect upon
his interests.

A person of unsound mind cannot enter into a contract. A lunatics agreement is therefore void. But if
he makes a contract when he is of sound mind, i.e., during lucid intervals, he will be bound by it.

A sane man who is delirious from fever, or who is so drunk that he cannot understand the terms of a
contract, or form a rational judgement as to its effect on his interests cannot contract whilst such
delirium or state of drunkenness lasts. A person under the influence of hypnotism is temporarily of
unsound mind. Mental decay brought by old age or disease also comes within the definition.

Agreement by persons of unsound mind are void. But for necessaries supplied to a lunatic or to any
member of his family, the lunatics estate, if any, will be liable. There is no personal liability incurred
by the lunatic.

6. Consideration: An agreement by incompetent person is void. A valid contract must be supported

by consideration. Consideration means “something in return” (quid pro quo). It can be cash, kind, an
act or abstinence. It can be past, present or future. However, consideration must be real and lawful.
An agreement without consideration is void however, it need not to be adequate, if parties are
agreed in it.

Need for Consideration

Consideration is one of the essential elements of a valid contract. The requirement of consideration
stems from the policy of extending the arm of the law to the enforcement of mutual promises of
parties. A mere promise is not enforceable at law. For example, if A promises to make a gift of ` 500
to B, and subsequently changes his mind, B cannot succeed against A for breach of promise, as B has
not given anything in return.

Kinds of Consideration

Consideration may be:

(a) Executory or future which means that it makes the form of promise to be performed in the
future, e.g., an engagement to marry someone; or

(b) Executed or present in which it is an act or forbearance made or suffered for a promise. In other
words, the act constituting consideration is wholly or completely performed, e.g., if A pays today `
100 to a shopkeeper for goods which are promised to be supplied the next day, A has executed his
consideration but the shopkeeper is giving executory consideration—a promise to be executed the
following day. If the price is paid by the buyer and the goods are delivered by the seller at the same
time, consideration is executed by both the parties.

(c) Past which means a past act or forbearance, that is to say, an act constituting consideration which
took place and is complete (wholly executed) before the promise is made.

7. Free consent: The parties are said to be in consent when they are agree upon the same thing in
the same sense, in addition to it, to constitute a valid contract there must be free and genuine
consent of the parties to the contract, consent is said to be free if it is not be obtained by
misrepresentation, fraud, coercion, undue influence or mistake. If the consent is not free, the
contract becomes voidable.

8. Agreement not declared void: Under the provisions of Indian Contract Act, 1872 certain
agreement are expressly declared as void. Agreements which have been expressly declared void are
not enforceable at law; hence does not constitute a valid contract. For example agreement of wager,
agreement in restraint of trade and marriage.
 III Types of Contracts

Basis of Classification
A contract is classified on the basis of the following:

 Formation

 Nature of Liability

 Execution

 Validity

On the Basis of Formation

1. Express Contract

2. Implied Contract

3. Quasi Contract

4. E-Contract

1. Express Contract

A contract is said to be “Express” if the proposal or acceptance of any promise is made in words, be it
in the written or oral form. The provision is subject to the condition that the offer so made gains the
acceptance of the acceptor.

2. Implied Contract

An implied contract is in stark contrast to an express contract, i.e. it isn’t expressed in written or oral
form.

3. Quasi Contract
Quasi Contracts, unlike others, hold no contractual relations between the partners but are created by
virtue of law. The court may form a Quasi-Contract under any of the following circumstances:

The following types of quasi-contracts have been dealt within the Indian Contract Act –

(a) Necessaries supplied to person incapable of contracting or to anyone whom he is illegally bound
to support - Section 68.

(b) Suit for money had and received - Section 69 and 72.

(c) Obligations of a finder of goods - Section 71.

(d) Obligation of person enjoying benefit of a non-gratuitous act - Section 70

(e) Liability for money paid or thing delivered by mistake or by coercion

4. E-Contract

Electronic, Cyber or Electronic Data Interchange contracts are formed by electronic means. The
means and devices that aid in such formation include email, telephone, digital signatures, and the
likes of it. The contractual terms here are listed by electronic means or implied by the actions of the
users.

On the Basis of Liability

1. Bilateral Contract

2. Unilateral Contract

1. Bilateral Contract

A contract is called bilateral, or in other words reciprocal, when it comes with mutual considerations.
It is formed when two parties agree to the contractual terms of each other.

2. Unilateral Contract

A contract is classed as unilateral where only one party makes a promise, which could be availed by
anyone who is ready to be committed to the same. Such a contract can only be fulfilled if someone
else fulfils the promise.

On the Basis of Execution

1. Executed Contract

2. Executory Contract

1. Executed Contract

A contract is termed as executed if the performance stipulated under it has been completed by one,
both or all parties. Most of these contracts are performed instantaneously, such as buying of goods
and/or services.

2. Executory Contract

An executory contract involves the performance of consideration at a future point of time; which
means the promises of consideration cannot be completed instantaneously as in an executed
contract.
On the Basis of Validity

1. Valid Contract

2. Void Contract

3. Voidable Contract

4. Illegal Contract

5. Unenforceable Contract

1. Valid Contract

Valid contracts must satisfy all the contract requirements, making it legally binding and enforceable.
These requirements include:

 The making of offer and its acceptance, making it eligible for registration.

 The existence of a legal relationship.

 The existence of a lawful consideration and object.

 The parties concerned are competent to form a contract.

 Free consent of the parties.

 Certainty in the terms of the contract.

 The capability of performance (of the contract).

 The contract hasn’t been expressly declared void under the contract laws.

2. Void Contract

Any contract which is not in line with the contract requirements as highlighted above is classified as
void.

3. Voidable Contract

A contract is considered as voidable on the existence of an agreement which is enforceable by law at

the option of one or more of the parties concerned, but not at the option of the others. In simple
terms, at least one of the parties to the contract must be bound to the terms specified in it. The
other party, who could be a minor or is temporarily incapable of a contract owing to other reasons,
isn’t bound by it and may repudiate or accept the terms of the contract. If the latter chooses to
repudiate, the contract becomes void.

4. Illegal Contract

A contract is termed illegal by the court if:

 It allows one or all the parties to break the law or not adhere to society’s norms.

 It is opposed to public policy.

All illegal contracts can be void/voidable/valid, but it cannot be the other way around. For example,
party X may have a contract to sell narcotics to party Y, and the contract may be on par with the
essentials. Such a contract is valid on the basis of these essentials but is otherwise illegal and non-
enforceable by law. Parties in default of these contracts are legally punishable.

5. Unenforceable Contract

A contract is unenforceable if it fails to complete the required legal obligations. Such a contract can
be enforced upon completing these formalities, the likes of which mostly occur in the form of
technical defects.

IV PERFORMANCE OF A CONTRACT

Section 27 of Indian contract Act says that The parties to a contract must either perform, or offer to
perform, their respective promises, unless such performance is dispensed with or excused under the
provisions of this Act, or any other law.

Thus, it is the primary duty of each contracting party to either perform or offer to perform its
promise. For performance to be effective, the courts expect it to be exact and complete, i.e., the
same must match the contractual obligations. However, where under the provisions of the Contract
Act or any other law, the performance can be dispensed with or excused, a party is absolved from
such a responsibility.

Example:- A promises to deliver goods to B on a certain day on payment of Rs 1,000. A expires before
the contracted date. A‘s representatives are bound to deliver the goods to B, and B is bound to pay Rs
1,000 to A‘s representatives.

Types of Performance

Performance, as an action of the performing may be actual or attempted.

Actual Performance :

When a promisor to a contract has fulfilled his obligation in accordance with the terms of the
contract, the promise is said to have been actually performed. Actual performance gives a discharge
to the contract and the liability of the promisor ceases to exist. For example, A agrees to deliver10
bags of cement at B’s factory and B promises to pay the price on delivery. A delivers the cement on
the due date and B makes the payment. This is actual performance.

Actual performance can further be subdivided into substantial performance, and partial Performance

Attempted Performance

When the performance has become due, it is sometimes sufficient if the promisor offers to perform
his obligation under the contract. This offer is known as attempted performance or more commonly
as tender. Thus, tender is an offer of performance, which of course, complies with the terms of the
contract

V Breach of a Contract and Its Remedies

Where the promisor neither performs his contract nor does he tender performance, or where the
performance is defective, there is a breach of contract. The breach of contract may be (i) actual; or
(ii) anticipatory. The actual breach may take place either at the time the performance is due, or when
actually performing the contract. Anticipatory breach means a breach before the time for the
performance has arrived. This may also take place in two ways – by the promisor doing an act which
makes the performance of his promise impossible or by the promisor in some other way showing his
intention not to perform it.

Anticipatory Breach of Contract

Breach of contract may occur, before the time for performance is due. This may happen where one
of the parties definitely renounces the contract and shows his intention not to perform it or does
some act which makes performance impossible. The other party, on such a breach being committed,
has a right of action for damages.

He may either sue for breach of contract immediately after repudiation or wait till the actual date
when performance is due and then sue for breach. If the promisee adopts the latter course, i.e.,
waits till the date when performance is due, he keeps the contract alive for the benefit of the
promisor as well as for his own. He remains liable under it and enables the promisor not only to
complete the contract in spite of previous repudiation, but also to avail himself of any excuse for
non- performance which may have come into existence before the time fixed for performance.

REMEDIES FOR BREACH

Where a contract is broken, the injured party has several courses of action open to him. The
appropriate remedy in any case will depend upon the subject-matter of the contract and the nature
of the breach.

(i) Remedies for Breach of Contract In case of breach of contract, the injured party may:

(a) Rescind the contract and refuse further performance of the contract;

(b) Sue for damages;

(c) Sue for specific performance;

(d) Sue for an injunction to restrain the breach of a negative term; and

(e) Sue on quantum meruit

(a )Rescission of contract When a party to a contract has broken the contract, the other party may
treat the contract as rescinded and he is absolved from all his obligations under the contract.

(b) Damages for Breach of Contract

Under Section 73 of the Indian Contract Act, when a contract has been broken, a party who suffers
by such breach is entitled to receive, from the party who has broken the contract, compensation for
any loss or damage, caused to him thereby, which naturally arose in the usual course of things from
such breach or which the parties knew, when they made the contract to be likely to result from the
breach of it.

(c) Specific Performance

It means the actual carrying out by the parties of their contract, and in proper cases the Court will
insist upon the parties carrying out this agreement. Where a party fails to perform the contract, the
Court may, at its discretion, order the defendant to carry out his undertaking according to the terms
of the contract. A decree for specific performance may be granted in addition to or instead of
damages.

(d) Injunction

An injunction, is an order of a Court restraining a person from doing a particular act. It is a mode of
securing the specific performance of a negative term of the contract, (i.e., where he is doing
something which he promises not to do), the Court may in its discretion issue an order to the
defendant restraining him from doing what he promised not to do. Injunction may be prohibitory or
mandatory. I

V. Special Contract

The Indian Contract Act, 1872 recognizes five special types of contracts:

1. Contract of Indemnity:

 Definition: A contract by which one person (the indemnifier) promises to compensate

another person (the indemnified) for any loss or damage that the indemnified may suffer.

Key Features:

 There are typically two parties involved: the indemnifier and the indemnified.

 The indemnifier promises to compensate the indemnified for any loss or damage arising
from a specific act or event.

 The contract of indemnity can be express or implied.

2. Contract of Guarantee:

Definition: A contract by which one person (the surety) promises to pay another
person (the creditor) a debt or perform an obligation on default by a third person (the
principal debtor)

Key Features:

 There are typically three parties involved: the creditor, the principal debtor, and the
surety.
 The surety promises to pay the creditor if the principal debtor fails to do so.
 The contract of guarantee can be express or implied.

3. Contract of Bailment:

 Definition: A contract by which one person (the bailor) delivers goods to another
person (the bailee) for a specific purpose, with the understanding that the goods will
be returned to the bailor after the purpose is fulfilled,

 Key Features:
 o There are typically two parties involved: the bailor and the bailee.
o The bailor transfers possession of goods to the bailee for a specific purpose.
o The bailee is obligated to return the goods to the bailor after the purpose is
fulfilled.

4. Contract of Pledge:

 Definition: A contract by which one person (the pledgor) delivers goods to another
person (the pledgee) as security for a debt or other obligation.

Key Features:

 There are typically two parties involved: the pledgor and the pledgee.
 The pledgor transfers possession of goods to the pledgee as security for a debt or
other obligation.
 The pledgee has the right to sell the goods to recover the debt if the pledgor fails to
repay the debt.

5. Contract of Agency:

Definition: A contract by which one person (the principal) authorizes another person
(the agent) to act on their behalf.

Key Features:

 There are typically two parties involved: the principal and the agent.
 The principal authorizes the agent to act on their behalf.
 The agent is bound to act in the best interests of the principal.