Indian Contract Act 1872
||It has been suggested that Indian contract law be merged into this article. (Discuss) Proposed since April 2013.|
|Indian Contract Act, 1872|
|Indian Contract Act 1872 is the main source of law regulating contracts in India.|
|Citation||Act No. 9 of 1872|
|Enacted by||Imperial Legislative Council|
|Date enacted||25 April 1872|
|Date commenced||01 September 1872|
The law relating to contracts in India is contained in Indian Contract Act, 1872. The Act was passed by British India and is based on the principles of English Common Law. It is applicable to all the states of India except the state of Jammu and Kashmir. It 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. Hence this legislation, Indian Contract Act of 1872, being of skeletal nature, deals with the enforcement of these rights and duties on the parties in India.
It was enacted mainly with a view to ensure reasonable fulfillment of expectation created by the promises of the parties and also enforcement of obligations prescribed by an agreement between the parties.The Third Law commission of British India formed in 1861 under the stewardship of chairman Sir John Romilly, with initial members as Sir Edward Ryan, R. Lowe, J.M. Macleod, Sir W. Erle (succeeded by Sir. W.M. James) and Justice Wills (succeeded by J. Henderson), had presented the report on contract law for India as Draft Contract Law (1866). The Draft Law was enacted as The Act 9 of 1872 on 25 April 1872 and the Indian Contract Act, 1872 came into force with effect from 1 September 1872.
Before the enactment of the Indian Contract Act, 1872, there was no codified law governing contracts in India. In the Presidency Towns of Madras, Bombay and Calcutta law relating to contract was dealt with the Charter granted in 1726 by King George I to the East India Company. Thereafter in 1781, in the Presidency Towns, Act of Settlement passed by the British Government came into force. Act of Settlement required the Supreme Court of India that questions of inheritance and succession and all matters of contract and dealing between party and party should be determined in case of Hindu as per Hindu law and in case of Muslim as per Muslim law and when parties to a suit belonged to different persuasions, then the law of the defendant was to apply. In outside Presidency Towns matters with regard to contract was mainly dealt with through English Contract Laws; the principle of justice, equity and good conscience was followed.
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 129
- Special Contracts- Indemnity, Guarantee, Bailment & Pledge- Sections 125 to 238
- Contracts relating to Partnership- Sections 239 to 266
Indian Contract Act embodied the simple and elementary rules relating to Sale of goods and Partnership. The developments of modern business world found the 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 may be 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 such as
(1)Contract of Indemnity and Guarantee (2)Contract of Bailment and Pledge (3)Contract of Agency
1. Offer(i.e. Proposal) [section 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 person either to such act or abstinence, he is said to make a proposal.
2. Acceptance 2(b):- When the person to whom the proposal is made, signifies his assent there to, the proposal is said to be accepted.
3. Promise 2(b) :- A Proposal when accepted becomes a promise. In simple words, when an offer is accepted it becomes promise.
4. Promisor and promisee 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.
5. Consideration 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. 6. Price paid by the one party for the promise of the other Technical word meaning QUID-PRO-QUO i.e. something in return.
7. Agreement 2(e) :- Every promise and set of promises forming the consideration for each other. In short, agreement = offer + acceptance.
8. Contract 2(h) :- An agreement enforceable by Law is a contract. 9. Void agreement 2(g):- An agreement not enforceable by law is void.
10. 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.
11. Void contract :- A contract which ceases to be enforceable by Law becomes void when it ceases to be enforceable.
Essential Elements of a Valid Contract
According to Section 10, "All agreements are contracts, if they are made by the free consent of the parties, capacity of parties to contract, for a lawful consideration with a lawful object, and not hereby expressly to be void."
1. Proper offer and proper acceptance There must be an agreement based on a lawful offer made by person to another and lawful acceptance of that offer by the letter. Sections 3 to 9 of the Contract Act, 1872 lay down the rules for making valid acceptance.
2. Lawful consideration An agreement to form a valid contract should 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 should be real and lawful and not fictional.
3. Capacity of parties to Contract In order to make a valid contract the parties to it must be competent to be contracted. According to section 11 of the Contract Act, a person is considered to be competent to contract if he satisfies the following criterion:
- The person has reached the age of majority.
- The person is of sound mind.
- The person is not disqualified from contracting by any law.
4. Free Consent To constitute a valid contract there must be free and genuine consent of the parties to the contract. It should not be obtained by misrepresentation, fraud, coercion, undue influence or mistake.
5. Lawful Object and Agreement The object of the agreement must not be illegal or unlawful.
6. Agreement not declared void or illegal Agreements which have been expressly declared void or illegal by law are not enforceable at law; hence they do not constitute a valid contract.
7. Intention To Create Legal Relationships When the two parties enter into an agreement, there must be intention to create a legal relationship between them. If there is no such intention on the part of the parties. There is no contract between them. Agreements of a social or domestic nature do not contemplate legal relationship;as such they are not contracts.
8. Certainty, Possibility Of Performance
9. Legal Formalities
10. By surety
Types of Contracts
On the basis of validity:
1. Valid contract: An agreement which has all the essential elements of a contract is called a valid contract. A valid contract can be enforced by law.
2. Void contract[Section 2(g)]: A void contract is a contract which ceases to be enforceable by law. A contract when originally entered into may be valid and binding on the parties. It may subsequently become void. – There are many judgments which have stated that where any crime has been converted into a "Source of Profit" or if any act to be done under any contract is opposed to "Public Policy" under any contract—than that contract itself cannot be enforced under the law-
3. Voidable contract[Section 2(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 other or others, is a voidable contract. If the essential element of free consent is missing in a contract, the law confers right on the aggrieved party either to reject the contract or to accept it. However, the contract continues to be good and enforceable unless it is repudiated by the aggrieved party.
4. Illegal contract: A contract is illegal if it is forbidden by law; or is of such nature that, if permitted, would defeat the provisions of any law or is fraudulent; or involves or implies injury to a person or property of another, or court regards it as immoral or opposed to public policy. These agreements are punishable by law. These are void-ab-initio.
“All illegal agreements are void agreements but all void agreements are not illegal.”
5. Unenforceable contract: Where a contract is good in substance but because of some technical defect cannot be enforced by law is called unenforceable contract. These contracts are neither void nor voidable.
On the basis of formation:
1. Express contract: Where the terms of the contract are expressly agreed upon in words (written or spoken) at the time of formation, the contract is said to be express contract.
2. Implied contract: An implied contract is one which is inferred from the acts or conduct of the parties or from the circumstances of the cases. Where a proposal or acceptance is made otherwise than in words, promise is said to be implied.
3. Quasi contract: A quasi contract is created by law. Thus, quasi contracts are strictly not contracts as there is no intention of parties to enter into a contract. It is legal obligation which is imposed on a party who is required to perform it. A quasi contract is based on the principle that a person shall not be allowed to enrich himself at the expense of another. examples
- claim for necessaries supplied to person incapable of contracting or on his account
- Reimbursement of person paying money due to another, in payment of which he is interested
- obligation of person enjoying benefit of non gratuitous act
- Responsibility of finder of goods
- Liability of person to whom money is paid or thing delivered
On the basis of performance:
1. Executed contract: An executed contract is one in which both the parties have performed their respective obligation.
2. Executory contract: An executory contract is one where one or both the parties to the contract have still to perform their obligations in future. Thus, a contract which is partially performed or wholly unperformed is termed as executory contract.
3. Unilateral contract: A unilateral contract is one in which only one party has to perform his obligation at the time of the formation of the contract, the other party having fulfilled his obligation at the time of the contract or before the contract comes into existence.
4. Bilateral contract: A bilateral contract is one in which the obligation on both the parties to the contract is outstanding at the time of the formation of the contract. Bilateral contracts are also known as contracts with executory consideration.
Proposal is defined under section 2(a) of the Indian contract Act, 1872 as "when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtain the assent of that other to such act or abstinence, he is said to make a proposal/offer". Thus, for a valid offer,the party making it must express his willingness to do or not to do something. But mere expression of willingness does not constitute an offer. The rules regarding the offer are The offer must show an obvious intention on the part of the offeror. For example "if "A" jokingly offers "B" his scooter for Rs.10/- and "B" knowingly that "A" is not serious, says "I accept "A"s proposal". This does not constitute an offer. Secondly, the terms of offer must be definite, unambiguous, not loose and vague. For example "A" says to "B". "I will sell you a car" "A" owns three different cars. The offer is not defenite. Third thing regarding offer is, mere declaration of intention and announcement is not an offer. A declaration by a person that he intends to do something, gives no right of action to another. Such a declaration only means that an offer will be made or invited in future and not an offer is made now. An advertisement for a concern for auction sale does not amount to an offer to hold such concern for auction sale. For example an auctioneer advertised in a news paper that a sale of office furniture would be held. A broker came from a distant place to attend the auction, but all the furniture was withdrawn. The broker thereupon sued the auctioner for his loss of time and expenses. It was held that, a declaration of intention to do something did not create a binding contract with those acted upon it and hence the broker could not recover damages. An offer should be made to obtain the assent of the other. The offer should be communicated to the offeree. Unless an offer is communicated to the offeree by the offerror or his duly agent, there can be no acceptance. The offer must be made with a view to obtain the assent of the other party addressed and not merely with a view to disclose the intention to make an offer. The offer should not contain a term that, the non compliance of which would amount to acceptance. For example, "A" writes to "B", "i will sell you my horse for Rs.10,000/- and if you do not reply I shall assume you have accepted the offer". There is no contract if "B" does not reply. However if "B" is in possession of "A"s horse and he continues possession thereafter, "B"s silence and his continued use amounts to valid acceptance. A statement of price is not an offer. A mere statement of price is not an offer to sell. For example three telegrams were exchanged between "A" and "B". communication by "B" to "A"- " will you sell your car?". Communication by "A" to "B". "The price of the car is one lakh rupees". Communication from "B" to "A"- "I agree to to buy the car". These 3 communications does not make a valid offer.
Classification of Offer
1. General Offer: Which is made to public in general.
2. Special Offer: Which is made to a definite person.
3. Cross Offer: Exchange of identical offer in ignorance of each other.
4. Counter Offer: Modification and Variation of Original offer.
5. Standing, Open or Continuing Offer: Which is open for a specific period of time. The offer must be distinguished from an invitation to offer. Invitation to offer "An invitation to offer" is only a circulation of an invitation to make an offer, it is an attempt to induce offers and precedes a definite offer. Acceptance of an invitation to an offer does not result in formation of a contract and only an offer emerges in the process of negotiation. A statement made by a person who does not intend to bound by it but, intends to further act, is an invitation to offer.
According to Section 2(b), "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted."
1. Acceptance must be absolute and unqualified. If the parties are not in ad idem on all matters concerning the offer and acceptance, there is no valid contract. For example "A" says to "B" "I offer to sell my car fror Rs.50,000/-. "B" replies "I will purchase it for Rs.45,000/-". This is not acceptance and hence it amounts to a counter offer.
2. It should be Communicated to the offeror. To conclude a contract between parties, the acceptance must be communicated in some prescribed form. A mere mental determination on the part of offeree to accept an offer does not amount to valid acceptance.
3. Acceptance must be in the mode prescribed. If the acceptance is not according to the mode prescribed or some usual and reasonable mode(where no mode is prescribed) the offeror may intimate to the offeree within a reasonable time tha,t acceptance is not according to the mode prescribed and may insist that the offer be accepted in the prescribed mode only. If he does not inform the offeree, he is deemed to have accepted the offer. For example "A" makes an offer to "B" says to "B" that "if you accept the offer, reply by voice. "B" sends reply by post. It will be a valid acceptance, unless "A" informs "B" that the acceptance is not according to the prescribed mode.
4. Acceptance must be given within a reasonable time before the offer lapses. If any time limit is specified, the acceptance must be given within the time, if no time limit is specified it must be given within a reasonable time.
5. It cannot precede an offer. If the acceptance precedes an offer it is not a valid acceptance and does not result in contract. For example in a company shares were allotted to a person who had not applied for them. Subsequently when he applied for shares, he was un aware of the previous allotment . The allotment of share previous to the application is not valid.
6. Acceptance by the way of conduct.
7. Mere silence is no acceptance. Silence does not per-se amounts to communication- Bank of India Ltd. Vs. Rustom Cowasjee- AIR 1955 Bom. 419 at P. 430; 57 Bom. L.R. 850- Mere silence cannot amount to any assent. It does not even amount to any representation on which any plea of estoppel may be founded, unless there is a duty to make some statement or to do some act free and offer er must be consent
8.Acceptance must be unambiguous and definite.
According to Section 2(d), Consideration is defined as: "When at the desire of the promisor, the promisee has done or abstained from doing, or does or abstains from doing, or promises to do or abstain something, such an act or abstinence or promise is called consideration for the promise. "Consideration" means to do something in return.
In short, Consideration means quid pro quo i.e. something in return.
An agreement must be supported by a lawful consideration on both sides. Essentials of valid considerations are
- It must move at the desire of the promisor. An act constituting consideration must have been done at the desire or request of the promiser. If it is done at the instance of a third party or without the desire of the promisor, it will not be good considsration. For example "A" saves "B"'s goods from fire without being ask him to do so. "A" cannot demand payment for his service.
- Consideration may move from the promisee or any other person. Under Indian law, consideration may be from the promisee of any other person i.e., even a stranger. This means that as long as there is consideration for the promisee, it is immaterial, who has furnished it.
- Consideration must be an act, abstinence or forebearance or a returned promise.
- Consideration may be past, present or future. Past consideration is not consideration according to English law. However it consideration as per Indian law. Example of past consideration is, "A" renders some service to "B" at latter's desire. After a month "B" promises to compensate "A" for service rendered to him earlier. When consideration is given simultaneously with promise, it is said to be present consideration .. For example "A" receives Rs.50/- in return for which he promises to deliver certain goods to "B". The money "A" receives is the present consideration. When consideration to one party to other is to pass subsequently to the maker of the contract, is said to be future consideration. For example. "A" promises to deliver certain goods to "B" after a week. "B" promises to pay the price after a fortnight, such consideration is future.
- Consideration must be real. Consideration must be real, competent and having some value in the eyes of law. For example "A" promises to put life to "B"'s dead wife, if "B" pay him Rs.1000/-. "A"'s promise is physically impossible of performance hence there is no real consideration.
- Consideration must be something which the promiser is not already bound to do. A promise to do something what one is already bound to do, either by law, is not a good consideration., since it adds nothing to the previous existing legal consideration.
- Consideration need not be adequate. Consideration need not be necessarily be equal to value to something given. So long as consideration exists, the courts are not concerned as to adequacy, provided it is for some value.
The consideration or object of an agreement is lawful, unless and until it is:
- forbidden by law: If the object or the consideration of an agreement is for doing an act forbidden by law, such agreement are void. for example,"A" promises "B" to obtain an employment in public service and "B" promises to pay Rs one lakh to "A". The agreement is void as the procuring government job through unlawful means is prohibited.
- If it involves injury to a person or property of another: For example, "A" borrowed rs.100/- from"B" and executed a bond to work for "B" without pay for a period of 2 years. In case of default, "A" owes to pay the principal sum at once and huge amount of interest. This contract was held void as it involved injury to the person.
- If courts regards it as immoral:An agreement in which consideration ir object of which is immoral is void. For example, An agreement between husband and wife for future separation is void.
- Is of such nature that, if permitted, it would defeat the provisions of any law:
- is fraudulent, or involves or implies injury to the person or property of another, or
- Is opposed to public policy. An agreement which tends to be injurious to the public or against the public good is void. For example, agreements of trading with foreign enemy, agreement to commit crime, agreements which interfere with the administration of justice, agreements which interfere with the course of justice, stifling prosecution, maintenance and champerty.
- Agreements in restrained of legal proceedings: This deals with two category. One is, agreements restraining enforcement of rights and the other deals with agreements curtailing period of limitation.
- trafficking in public offices and titles:agreements for sale or transfer of public offices and title or for procurement of a public recognition like padma vibhushanor padma sree etc. for monetary consideration is unlawful, being opposed to public policy.
- Agreements restricting personal liberty: agreements which unduly restricts the personal liberty of parties to it are void as being oppposed by public policy.
- Marriage brokerage contact:Agreements to procure marriages for rewards are void under the ground that marriage ought to proceed with free and voluntary decisions of parties.
- Agreements interfering marital duties: Any agreement which interfere with performance of marital duty is void being opposed to public policy. An agreement between husband and wife that the wife will never leave her parental house.
- consideration may take in any form-money,goods, services, a promise to marry, a promise to forbear etc.
Contract Opposed to Public Policy can be Repudiated by the Court of law even if that contract is beneficial for all of the parties to the contract- What considerations and objects are lawful and what not-Newar Marble Industries Pvt. Ltd. Vs. Rajasthan State Electricity Board, Jaipur, 1993 Cr. L.J. 1191 at 1197, 1198 [Raj.]- Agreement of which object or consideration was opposed to public policy, unlawful and void- – What better and what more can be an admission of the fact that the consideration or object of the compounding agreement was abstention by the board from criminally prosecuting the petitioner-company from offense under Section 39 of the act and that the Board has converted the crime into a source of profit or benefit to itself. This consideration or object is clearly opposed to public policy and hence the compounding agreement is unlawful and void under Section 23 of the Act. It is unenforceable as against the Petitioner-Company.
Competent to contract
Section 11 of The Indian Contract Act specifies that every person is competent to contract provided:
1. He should not be a minor i.e. an individual who has not attained the age of majority i.e. 18 years in normal case and 21 years if guardian is appointed by the Court.
2. He should be of sound mind while making a contract. A person who is usually of unsound mind, but occasionally of sound mind, can make a contract when he is of sound mind. Similarly if a person is usually of sound mind, but occasionally of unsound mind, may not make a valid contract when he is of unsound mind.
3. He is not a person who has been personally disqualified by law to which he is subject.
According to Section 14, " two or more persons are said to be consented when they agree upon the same thing in the same sense (Consensus-ad-idem).
A consent is said to be free when it is not caused by coercion or undue influence or fraud or misrepresentation or mistake.
Elements Vitiating free Consent
1. Coercion (Section 15): "Coercion" is the committing, or threatening to commit, any act forbidden by the Indian Penal Code under(45,1860), 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. For example, "A" threatens to shoot "B"if he doesn't release him from a debt which he owes to "B". "B" releases "A" under threat. Since the release has been brought about by coercion, such release is not valid.
2. Undue influence (Section 16): "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, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in the position to dominate the will of the other."
- (Section 16(2)) States that "A person is deemed to be in a position to dominate the will of another;
- Where he holds a real or apparent authority over the other. For example, an employer may be deemed to be having authority over his employee. an income tax authority over to the asessee.
- Where he stands in a fiduciary relationship to other, For example, the relationship of Solicitor with his client, spiritual advisor and devotee.
- Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by the reason of age, illness or mental or bodily distress"
3. Fraud (Section 17): "Fraud" means and includes any act or concealment of material fact or misrepresentation made knowingly by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto of his agent, or to induce him to enter into the contract. Mere silence is not fraud. a contracting party is not obliged to disclose each and everything to the other party. There are two exceptions where even mere silence may be fraud, one is where there is a duty to speak, then keeping silence is fraud. or when silence is in itself equivalent to speech, such silence is fraud.
4. Misrepresentation (Section 18): " 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".
5. Mistake of fact (Section 20): "Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void". A party cannot be allowed to get any relief on the ground that he had done some particular act in ignorance of law.Mistake may be bilateral mistake where both parties to an agreement are under mistake as to the matter of fact.The mistake must relate to a matter of fact essential to the agreement.
In law, the relationship that exists when one person or party (the principal) engages another (the agent) to act for him, e.g. to do his work, to sell his goods, to manage his business. The law of agency thus governs the legal relationship in which the agent deals with a third party on behalf of the principal. The competent agent is legally capable of acting for this principal vis-à-vis the third party. Hence, the process of concluding a contract through an agent involves a twofold relationship. On the one hand, the law of agency is concerned with the external business relations of an economic unit and with the powers of the various representatives to affect the legal position of the principal. On the other hand, it rules the internal relationship between principal and agent as well, thereby imposing certain duties on the representative (diligence, accounting, good faith, etc.).
Under section 201 to 210 an agency may come to an end in a variety of ways:
- (i) By the principal revoking the agency – However, principal cannot revoke an agency coupled with interest to the prejudice of such interest. Such Agency is coupled with interest. An agency is coupled with interest when the agent himself has an interest in the subject-matter of the agency, e.g., where the goods are consigned by an upcountry constituent to a commission agent for sale, with poor to recoup himself from the sale proceeds, the advances made by him to the principal against the security of the goods; in such a case, the principal cannot revoke the agent’s authority till the goods are actually sold, nor is the agency terminated by death or insanity. (Illustrations to section 201)
- (ii) By the agent renouncing the business of agency;
- (iii) By the business of agency being completed;
- (iv) By the principal being adjudicated insolvent (Section 201 of The Indian Contract Act. 1872)
The principal also cannot revoke the agent’s authority after it has been partly exercised, so as to bind the principal (Section 204), though he can always do so, before such authority has been so exercised (Sec 203).
Further, as per section 205, if the agency is for a fixed period, the principal cannot terminate the agency before the time expired, except for sufficient cause. If he does, he is liable to compensate the agent for the loss caused to him thereby. The same rules apply where the agent, renounces an agency for a fixed period. Notice in this connection that want of skill continuous disobedience of lawful orders, and rude or insulting behavior has been held to be sufficient cause for dismissal of an agent. Further, reasonable notice has to be given by one party to the other; otherwise, damage resulting from want of such notice, will have to be paid (Section 206). As per section 207, the revocation or renunciation of an agency may be made expressly or impliedly by conduct. The termination does not take effect as regards the agent, till it becomes known to him and as regards third party, till the termination is known to them (Section 208).
When an agent’s authority is terminated, it operates as a termination of subagent also. (Section 210).
- Pandia – Principles of Mercantile Law, 8th edition, by Ramkrishna R.Vyas.
- http://svtuition.com/law-of-contract-1872/ Simple Explanation of the Provisions of Indian Contract Act 1872
- Full text of the 1872 Act on CommonLii [broken]
- Full text of the 1872 Act on taxmann.net [broken]
- Full text of the 1872 Act on LiiOfIndia
- Indian Contract act Full text http://districtcourtallahabad.up.nic.in/articles/ICAct.pdf