Indian Contract Act 2

7/31/2019 Indian Contract Act 2

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INDIAN CONTRACT ACT (1872)

Contract Meaning, characteristics and kinds

2(h) An agreement enforceable by law is a contract.

Contract = An agreement + Enforceability of anagreement

Agreement 2(e) Every promise and every set of

promises forming the consideration for each other is an

agreement.

Promise 2(b) - A proposal when accepted , becomes a

promise.

Agreement= offer (or proposal) + acceptance of offer (or

proposal)

Enforceability = Creation of some legal obligations

CLASSIFICATION OF CONTRACTS

Creation

Execution

Enforceability

On the basis of Creation:-

a) Express Contract made by words spoken or written.

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b) Implied Contract - inferred from the conduct of a person or

the

circumstances of the particular case.

On the basis of execution:-

a) Executed Contract - where both the parties to the contract

have fulfilled their respective obligations under the

contract.

b) Executory Contract - where both the parties have still to

perform their respective obligations.

c) Partly Executed +Partly Executed Contract - where one of

the parties to the contract has fulfilled his obligations.

On the basis of enforceability:-

a) Valid Contract- Satisfies all the conditions prescribed by

law.

b) Void Contract 2(j)- A contract which ceases to be

enforceable by law becomes void when it ceases to be

enforceable

c) Voidable Contract 2(i)- A voidable contract is one which

can be set aside or repudiated or avoided at the option of

the aggrieved party.

d) Illegal Agreement- Object of which is unlawful are always

void-ab-initio.

e) Void Agreement 2 (g)- An agreement not enforceable by

law is said to be void. (Void-ab-initio: agreement with

minor or a person of unsound mind.

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f) Unenforceable Contract- A contract which is actually valid

but cannot be enforced because of some technical defect

(not in writing, under stamped).

ESSENTIALS OF A VALID CONTRACT

According to sec 10,All agreements are contracts if they are

made by the free consent of all the parties competent to

contract, for a lawful consideration and with a legal objective

and are not hereby expressly declared to be void.

1) Proper Offer and Acceptance- Must be at least 2 parties-one making the offer and the other accepting it. Such offer

and acceptance must be valid.

2) Intention to create legal relationship.

3) Free consent- Sec 14., consent is said to be free when it is

not caused by-

a) Coercion

b) Undue influence

c) Fraud

d) Misrepresentation

e) Mistake

4) Capacity of Parties- Sec 11, every person is competent tocontract who is of the age and who is of sound mind and is

not qualified from contradicting by any law to which he is

subject.

5) Lawful Consideration- Sec 23, the consideration is

considered lawful unless it is forbidden by law or is fraudulent

or involves or implies injury to the person or property of

another or is immoral or is opposed to public policy.

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6) Lawful Objective- Sec 23, the object is considered lawful

unless its forbidden by law or is fraudulent or involves or

implies injury to the person or property of another or is immoral

or is opposed to public policy.

7) Agreement not expressly declared void- Sec 24 to 30

Eg.:- Agreement in restraint of marriage, agreement in restraint

of legal proceedings, agreements in restraint of trade,

agreement by way of wager have been declared void.

8) Certainty of Meaning- terms of agreement must be certainand unambiguous.

9) Possibility of Performance- sec 56, an agreement to do an

impossible act is void.

10) Legal Formalities- Agreement must comply with the

necessary formalities as to writing, registration, stamping, etc.

SEC 2 (a)

Offer-A person is said to have made the proposal when he

signifies to another his willingness to do or to abstain from

doing anything with a view to obtaining the assent of that offer

to such act or abstinence.

A person making the proposal- Offerror, Promisor ,

proposer

A person to whom the proposal is made- Offerree,

promisee

How to make an Offer

Express Offer- made by words spoken or written

Implied Offer- made otherwise than in words

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To whom an Offer is made

Specific Offer- made to a definite person or particulargroup of persons

General Offer- made to the world at large or public in

general

Legal Rules for a Valid Offer

a) Intention to create a legal relationship

b) Certain and unambiguous terms

c) Different from a mere declaration of intention

d) Different from an invitation to offer

e) Communication

f) No term the non-compliance of which amounts to

acceptance

g) Communication of special terms or Standard Form

Contract

Meaning of Cross Offer- Two offers which are in allrespects made by two parties to each other, in ignorance of

each others offer are known as Cross Offer.

Standing Offer An offer of a continuing nature is known asStanding Offer.

ACCEPTANCE Sec 2(b) :- A proposal is said to beaccepted when the person to whom the proposal is made

signifies his assent there to. A proposal when accepted

becomes a Promise.

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Who can accept?

a) In case of general offer- Only by the definite person or thatparticular group of persons to whom it has been made and

none else.

b) In case of general offer- By any person having knowledge

of the offer by fulfilling the terms of the offer.

How to make Acceptance?

a) Express Acceptance- made by words spoken or writtenb) Implied Acceptance- made otherwise than in words

CONDITIONS OF A VALID CONTRACT:-

a) Absolute and Unqualified- Acceptance without any

reservation, variation or condition.

b) Manner-

I. If the proposal does not prescribe the manner in

which it is to be accepted- usual and reasonable

manner.

II. If the proposal prescribes the manner in which it is to

be made in the prescribed manner.

c) Communication- Acceptance must be signified(i.e.

indicated or declared)

d) By whom- By the offerree or by a person who has

authority to accept.

e) To whom- to the offerer himself

f) Time limit- within the prescribed (if any) or within a

reasonable time

(if no time is prescribed). Reasonable time depends upon

the facts and circumstances of the case.

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g) Before lapse of offer- acceptance must be given before the

offer lapses or withdrawal of the offer.

COMMUNICATION OF OFFER AND ACCEPTANCE:-

a) Communication of Offer- offer is complete when it

comes to the knowledge of the person to when it is made.

If by post, when the letter reaches the offerree.

b) Communication of acceptance-I. As against the proposer- when its put in course of

transmission to him, so to be out of the power of the

acceptor.

II. As against the acceptor- when it comes to the

knowledge of the proposer.(actually received)

REVOCATION(withdrawal) OF OFFER AND ACCEPTANCE:-

Time limit within which offer can be revoked (sec 5)- Any

time before the communication of its acceptance is

complete as against the proposer, but not afterwards.

Time limit within which acceptance can be revoked (sec

5)- Any time before the communication of the acceptance

is complete as against the acceptor, but not afterwards.

LAPSE OF AN OFFER:-

a) By revocation

b) By lapse of time- prescribed time or reasonable time

c) By death or insanity of the offeror or offerree

d) By failure to accept condition precedent

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e) By counter offer

f) By not accepting it in the prescribed mode or usual mode

g) By rejection of offer by offerree

h) By subsequent illegality or destruction of subject matter of

the offer-before its acceptance.

CAPACITY OF PARTIES

Sec(11)- every person is competent to contract who is of the

age of majority according to the law to which he is subject andis of sound mind and is not disqualified from contracting by any

law to which he is subject.

3 TEST- AGE, SOUNDNESS, DISQUALIFICATION

POSITION OF AGREEMENTS WITH A MINOR- Sec(3) of the

Indian Majority Act ,1875, a person is deemed to have

attained majority as under.

a) Where a guardian of a minors person or property is

appointed under the Guardian and Wards Act,1890.

On completion of 21 years

b) Where minors property has passed under the

superintendence of the Court of Wards. On completion

of 21 years

c) In other cases. On completion on 18 years

POSITIONS OF AGREEMENTS BY A MINOR

1) Validity- agreement with a minor is void-ab-initio.

2) No Estoppel- A minor is not estopped from setting up

the plea of minority. He may be plead infancy to escape

from being liable.

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3) In case of fraudulent representation of age by minor-

Inducing the other party to enter into a contract, the

court may reward compensation to the other party.

4) Ratification on attaining the age of majority- An

agreement with a minor cannot be ratified even after he

attains majority. A void agreement cannot be made

valid by subsequent ratification

5) Validity of minors agreement jointly with a major

person- The agreement made by minor jointly with a

major person are void vis--vis the minor but can be

enforced against the major person who has jointly

promised to perform.

6) Minor as a partner- a minor cannot become a partner in

a partnership firm, but with the consent of all the

partners for the time being be admitted to the benefits

of partnership. In other words, he can share the profits

without incurring any personal liability.

7) Minor as an agent- A minor can act as can agent and

bind his principal by his acts without incurring any

personal liability.

8) Minor as a shareholder or member of a company- A

minor can become a shareholder or member of a

company if-

a) The shares are fully paid up

b) The AOA do not prohibit so

9) Minor as an insolvent- A minor cannot be declared

insolvent.

10) Contract for the benefit of a minor- A minor can be a

promisee. He may be a promisee but not Promisor on a

PN or a drawer but not drawee on a B/E.

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11) Contract by minors guardian- The contracts entered

into on behalf of a minor by his guardian or manager of

his estate can be enforced by or against the minor if the

contract-

a) Is within the scope of the authority of guardian or

manager.

b) Is for the benefit of the minor. The guardian cannot

enter a valid contract for purchase of the immovableproperty for his/her service.

12)Contract for supplies of necessaries- A person who has

supplied the necessaries to the minor or to those who

are dependent on him is entitled to be reimbursed from

the property of such minor.

13)Minors liability is tort- A minor can be held liable in tort

(civil wrong). But if in the course of doing what he isentitled to do under the contract he is found guilty of

negligence, he cannot be liable on tort if he is not liable

on the contract.

POSITION OF PERSONS OF UNSOUND MIND

Sec(12) A person is said to be of sound mind for the purpose of

making a contract ,if at the time when he makes it, is capable-

a) To understand the terms of the contract

b) To form a rational judgment as to its effect upon his

interests.

POSITION OF A PERSON WHO IS USUALLY OF UNSOUND

MIND BUT OCCASIONALLY OF SOUND MIND- may make a

contract when he is of sound mind.(lunatic and lucid)

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POSITIONS OF AGREEMENTS WITH PERSONS OFUNSOUND MIND

1) Lunatic(temporarily unsound)-

a) While he is of unsound mind- he cant enter into any

contract

b) While he is of sound mind- he can enter into valid

contract2) Idiot (permanently of unsound mind)- he cannot enter into

any contract.

3) Drunken person- he cannot enter while such drunkenness

last.

PERSONS DISQUALIFIED BY LAW

1) Alien enemies

2) Foreign sovereigns and ambassadors- they can enter into

a contract and enforce these contracts in our courts but

they cannot be sued in our courts without the sanction of

the central government. Unless they choose to submit

themselves to the jurisdiction of our courts.

3) Convicts- a person is called a convict during his period of

sentence.

4) Insolvents-

a) Cannot enter into contracts relating to his property.

b) Cannot sue.

c) Cannot be sued.

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CONSIDERATION(something in return/quid pro

quo)A valuable consideration in the sense of the law, may consist

either in some right, interest, profit or benefit accruing to one

party or some forbearance, determinant, loss, or responsibility

given, suffered or undertaken by the other.

It must result in a benefit to the promisor and a detriment or

loss to the promise or a detriment to both.

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, or promises to do or abstain doing

something, such act or abstinence or promise is called a

consideration from the promise.

Essential Elements-

a) Move at the desire of the promisorb) Move from any person- Immaterial who furnishes the

consideration(Chinnaya vs Ramayya)

c) May be past or present or future

d) It must be of some value

e) It must be real and not illusory

f) Something other than the promisors existing obligation

g) lawful

STRANGER TO A CONTRACT -

Though a stranger to consideration can sue because the

consideration can be furnished or supplied by any person

whether he is the promisee or not, but a stranger to a contract

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III. It is made on account of love and affection

IV. It is between parties standing in a near relation toeach other.

b) Promise to compensate- if

I. It is a promise to compensate( wholly or in part)

II. The person who is to be compensated has already done

something voluntarily or has done something which the

promisor was legally bound to do.c) Promise to pay Time Barred Debt-

I. Is made in writing.

II. It is signed by the debtor or his agent

III. It relates to a debt which could not be enforced by a

creditor because of limitation.

d) Completed gifts- the gifts actually made by a donor and

accepted by the donee are valid even without

consideration.

e) Agency- no consideration is necessary to create an

agency.

FREE CONSENT- Sec 13 two or more persons are saidto consent when they agree upon the same thing in the

same sense. consensus-ad-idem

No consent at all, agreement is void ab-initio.

Meaning of Free Consent- Sec 14, Consent is said to be

free when it is not caused by

a) Coercion

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Effect of Threat to commit suicide- A suicide and athreat to commit suicide are not punishable but an

attempt to commit suicide is punishable under the IPC.

Threat to commit suicide amounts to coercion.

Effects of coercion-

a) Option of aggrieved party to avoid the contract- voidableat his option

b) Obligation of aggrieved party to restore benefit- after

rescinding have to return the benefit

c) Obligation of the other party to repay or return it.

Burden or Onus of proof- The burden of proving thatconsent was obtained by coercion, and the aggrieved

party would not have entered into contract had coercion

been employed, lies on the party intending to avoid the

contract.

UNDUE INFLUENCE - Means dominating the will of the

other person to obtain an unfair advantage over the other.

Sec 16(1), a contract is said to be induced by undue

influence-

a) Where the relations subsisting between the parties are

such that one of them is in a position to dominate the will

of the other

b) The dominant uses that position to obtain an unfair

advantage over the other.

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Presumption of domination of will:

a) Where he holds a seal or appointment authority over theother- master and servant, parent and child, ITO and

assessee.

b) Where he stands in a judiciary relation to the other-

Trustee and beneficiary, spiritual advisor(guru) and his

disciples, guardian and ward.

c) Where he makes a contact with a person whose mental

capacity is temporarily or permanently affected by reasonof age, illness or mental or bodily stress- Medical

attendant and patient.

No Presumption of Domination of Will-

a) Husband and Wife

b) Landlord and Tenant

c) Creditor and Debtor

Effect of Undue Influence- The agreement is a

contract voidable at the option of the party whose

consent was so caused.

Discretion of court- Any such contract may be set

aside either absolutely, or, if the party who was entitled

to avoid it has received any benefit there under , upon

such terms and conditions as the court may seem just.

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d) Any such act or omission as the law specially

declares to be fraudulent, eg- under Cos Act and

Insolvency Acts, certain kind of transfer have been

declared to be fraudulent.

e) Any other act fitted to deceive. It covers those

acts which deceive but are not covered under any

other clause.

Essential Elements of Fraud

a) By a party to a contract

b) False representation- with the knowledge of the

falsehood

c) Representation as to fact

d) Suffered loss

Effects of Fraud

a) The party whose consent was caused by fraud

can rescind(cancel) the contract but he cannot do so

in the following cases-

I. Where silence amounts to fraud, the aggrievedparty cannot rescind the contract if he had the

means of discovering the truth with ordinary

diligence.

II. Where the party gave the consent in ignorance

of fraud.

III. Where the party after becoming aware of the

fraud takes a benefit under the contract.

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IV. Where an innocent 3rd party before the contract

is rescinded acquires for consideration some

interest in the property passing under the

contract.

V. Where the parties cannot be restored to their

original position.

b) The party whose consent was caused by fraud.

May, if he thinks fit, insist that the position in whichhe would and that he shall be put in the position in

which he would have been if the representation made

had been true.

c) The party whose consent was caused by fraud,

can claim damages if he suffers some loss.

Silence as to fraud

General rule- mere silence as to facts likely to affect the

willingness of a person to enter into a contract is not fraud.

Exceptions to the General Rule- Where the circumstances of

the case are such that, regard being had to them, it is the duty

of the person keeping silence to speak.

i. Where parties stand in judiciary relationship like parent-

child, trustee- beneficiary.

ii. Where the silence itself is equivalent to speech.

iii. Half-truth is worse than a blatant lie.

MISREPRESENTATION -SEC(18)- Means a falserepresentation of fact made innocently or non-disclosure

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MISTAKE- Is said to have occurred where the partiesintending to do one thing by error do something else.

1. Mistake of law-

a) Mistake of Indian law- not voidable

b) Mistake of foreign law- mistake of fact- void contract

2. Mistake of fact- bilateral or unilateral

a) Bilateral Mistake- Sec(20), where both the parties to

an agreement are under a mistake as to matter of fact

essential to the agreement, the agreement is void.

Conditions-

i. Both the parties must be under a mistake.

ii. Mistake must be of fact but not of law.

iii. Mistake must relate to an essential fact.

Bilateral Mistake as to the subject matter- Void

agreement

i. Mistake as to the existence of subject matter.

ii. Mistake as to the quantity of subject matter.

iii. Mistake as to the price of subject matter.

iv. Mistake as to the identity of subject matter.

v. Mistake as to the title of subject matter.

Bilateral mistake as to the possibility of performance- voidagreement

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b) Unilateral mistake- means where only one party tothe agreement is under a mistake. Sec 22, A contract is

not voidable merely because it was caused by one of

the parties to it being under a mistake as to matter of

fact.

Exceptions- The agreement is void where a unilateral

mistake relates to the identity of the person contractedwith or as to the nature of the contract.

Effect of mistake-

a) In case of bilateral mistake as to essential fact- the

agreement is void.

b) In case of unilateral mistake-

i. As to the identity of the person contracted with-

void agreement

ii. As to the nature of contract- void agreement

iii. As to the other matter- not void.

c) Obligation of aggrieved party- restores any benefit

received by him.

d) Obligation of other party- must repay or return money

or anything delivered by mistake.

LEGALITY OF OBJECT AND CONSIDERATION, AND

AGREEMENTS OPPOSED

TO PUBLIC POLICY:

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WAGERING AGREEMENTS (SEC 30):

An agreement between two persons under which money

or moneys worth is payable, by one person to another on

the happening or non-happening of a future uncertain

event is called wagering event. Such agreements are

chance oriented and therefore, completely uncertain.

ESSENTIAL OF A WAGERING AGREEMENT:

a) Promise to pay money or moneys worth.

b) Uncertain event.

c) Mutual chances of gain or loss.

d) Neither party and hence a wagering to have control

over the event.

e) No other interest in the event.

E.g. of Wagering Agreements:

a) An agreement to settle the difference between thecontract price and market price of certain goods or

shares on a particular day.

b) A lottery but not Government approved lottery.

c) An agreement to buy a lottery ticket.

d) A crossword puzzle in which prizes depend upon

correspondence of the competitors solution with a

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previously prepared solution kept with the editor of

newspaper is a lottery agreement.

EFFECTS OF WAGERING AGREEMENT (SEC 30):

a) Agreements by way of wager are void in India.

b) Agreements by way of wager have been declared illegal

in the states of Maharashtra and Gujarat.

c) No suit can be filed to recover the amount won by anywager.

d) Transaction which are collateral to wagering

agreements are not void in India except in the states of

Maharashtra and Gujarat.

e) Transactions which are collateral to wagering

agreements are illegal in the states of Maharashtra and

Gujarat.

Agreements contingent on Impossible Event (Sec 36) are

void whether the impossibility of the event is known or not

to the parties to the agreement at the time when it is

made.

Agreement to do Impossible Acts (Sec 56) is void.

Restitution (Sec 64 and 65)- means return or

restoration of benefit.

CASE PROVISION

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a) When a person atwhose option the party

rescinding it.(sec 64)

- The party rescinding avoidable contract must

restore the benefit to

the person from whom

he has

b) When an agreement is

discovered to be void

or the contract

becomes void.

- The person who has

received any benefit or

advantage under such

contract must restore it

or compensate for it to

the person from whom

he has received it.

MEANING AND ESSENTIAL FEATURES OF A

CONTIGENT CONTRACT(SEC31):

A Contingent Contract is a contract to do or not to do

some event, collateral to such contract, does or does not

happen. Insurance contracts provide the best examples of

contingent contract.

Essential features of a contingent contract-

a) Dependence on a future event

b) Collateral event

c) Uncertain event.

Rules regarding Contingent Contracts (Sec 32-- 36)

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1) Contracts contingent upon the happening of an

uncertain event- such contracts cannot be enforced by

law unless and until that event has happened. If the

event cannot becomes impossible, such contract

becomes void.

2) Contract contingent upon the non-happening of a

certain future event- an be enforced when the

happening of that event becomes impossible and

before.

3) Contracts contingent upon the future conduct of a living

person- shall be considered impossible if such person

does anything by which it becomes impossible to

perform the contract without any definite time.

4) Contracts contingent upon the happening of an

uncertain specified event within a fixed time- becomes

void if before the expiry of fixed time-

a) Such event does not happen

b) Such event becomes impossible.

5) Contracts contingent upon the non-happening of an

uncertain specified event within a fixed time- can be

enforced by law if before the expiry of time:

a) Such event does not happen

b) It becomes certain that such event will not happen.

6) Agreements contingent upon impossible events: such

agreements are void whether the impossibility of the

event is known or not to the parties to the agreement at

the time when it is made.

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Contracts Wagering Contingent

1) Reciprocalpromises

Consists ofreciprocal

promises

May or may notconsist of

reciprocal

promises.

2) Void/valid Void Valid

3) Main/collateral

future event

Essential Collateral

4) Nature Always acontingent

contract

May not be of awagering nature

5) interest of

parties

Have no other

interest in the

subject matter of

the agreement

except winningor loosing of

wagering

amount.

May have other

interest as well.

PERFORMANCE OF CONTRACT- Parties either perform

or offer to perform their respective promises.

Types:

a) Actual performance- Where a promisor has made an

offer of performance to the promisee and the offer has

been accepted by the promisee, it is called actual

performance.

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b) Attempted performance- Where a promisor has made

an offer of performance to the promisee and the offer

has not been accepted by the promisee.

Persons who can demand performance:

a) Promisee

b) Legal representative

c) Third party

d) Joint promisees

Persons who must perform:

a) Promisor

b) Promisors agent

c) Legal representative

d) Third party

e) Joint promisors

Documents

Indian Contract Act 2