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Indian Contract Act, 1872

What is the Indian Contract Act 1872?

The Indian Contract Act envisages the way we enter into a contract. The rules and regulations of contracting are covered in the Indian Contract Act and it is an important area of law. It prescribes the law relating to contracts in India. The Act was passed by British India and is based on the principles of English Common Law.

The Act is not exhaustive. It does not deal with all the branches of the law of contract. There are separate Acts that deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc.

According to Section 2 (h) of the Indian Contract Act: ‘An agreement enforceable by law is a contract.’ A contract, therefore, is an agreement the object of which is to create a legal obligation, i.e., a duty enforceable by law.

From the above definition, we find that a contract essentially consists of two elements:

  • Agreement
  • Legal obligation

What is an Agreement?

According to Section 2(e), ‘Every promise and every set of promises, forming the consideration for each other, is an agreement. Thus it is clear from this definition that a ‘promise’ is an agreement.

Promise: As per section 2(b) which defines the term: ‘When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.’

An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent or gives his acceptance. In short, an agreement is the sum total of ‘offer’ and ‘acceptance’.

What is a Legal Obligation?

As stated above, an agreement to become a contract must give rise to a legal obligation, i.e., a duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law, it is not a contract. Thus an agreement is a wider term than a contract.


Essential Elements of Valid Contract

The 9 essential elements of a valid contract are as follows:

Offer and Acceptance

There must be a ‘lawful offer’ and a ‘lawful acceptance of the offer, thus resulting in an agreement. The adjective ‘lawful’ implies that the offer and acceptance must satisfy the requirements of the Contract Act in relation.

Intention to Create Legal Relations

There must be an intention among the parties of the contract that the agreement should be attached to legal consequences and create legal obligations. Agreements of a social or domestic nature do not contemplate legal relations, and as such, they do not give rise to a contract.

For Example Agreements between husband and wife lack the intention to create a legal relationship and thus do not result in contracts.

Lawful Consideration

The third essential element of a valid contract is the presence of ‘consideration’. Consideration has been defined as the price paid by one party for the promise of the other.

An agreement is legally enforceable only when each of the parties to it gives something and gets something. The something given or obtained is the price for the promise and is called ‘consideration’.

Capacity of Parties

The parties to an agreement must be competent to contract, meaning the members of the party who agreed to enter a contract must be eligible to understand its terms and conditions, otherwise, it cannot be enforced by a court of law. As per section 11, In order to be competent to contract the parties must be of the age of majority and of sound mind and must not be disqualified from contracting by any law to which they are subject.

Free Consent

Free consent of all the parties to an agreement is another essential element of a valid contract. ‘Consent’ means that the parties must have agreed upon the same thing in the same sense as per Section 13.

As per Section 14, There is the absence of ‘free consent’ if the agreement is induced by:

  • Coercion
  • undue influence
  • fraud
  • misrepresentation
  • mistake.

Lawful Object

For the formation of a valid contract, it is also necessary that the parties to an agreement must agree on a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply injury to the person or property of another according to Section 23. If the object is unlawful for one or the other of the reasons mentioned above the agreement is void.

Certainty

Section 29 of the Contract Act provides that ‘Agreements, the meaning of which is not certain or capable of being made certain, are void. In order to give rise to a valid contract, the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced.

Possibility of Performance

Another essential feature of a valid contract is that it must be capable of performing. Section 56 lays down that ‘An agreement to do an act impossible in itself is void. If the act is impossible in itself, physically or legally, the agreement cannot be enforced by law.

For Example; A agrees with B to discover treasure by magic. The agreement is not enforceable.

Not Expressly Declared Void

The agreement must not have been expressly declared to be void under the Act. Sections 24–30 specify certain types of agreements that have been expressly declared to be void.

For example, an agreement in restraint of marriage, an agreement in restraint of trade, and an agreement by way of wager has been expressly declared void under Sections 26, 27, and 30 respectively.


Types of Contracts

The types of Contracts classify on the following basis:

Classification of Contracts On the Basis of Enforceability

  1. Valid Contract
  2. Voidable Contract
  3. Void Contract
  4. Unenforceable Contract

Valid Contract

A valid contract is an agreement enforceable by law. An agreement becomes enforceable by law when all the essential elements of a valid contract are present.

Voidable Contract

As per 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 the other or others, is a voidable contract’. Thus, a voidable contract is one that is enforceable by law at the option of one of the parties. Until it is avoided or rescinded by the party entitled to do so by exercising his option on that behalf, it is a valid contract.

Void Contract

Accordingly, the term ‘void contract’ implies a useless contract that has no legal effect at all. Such a contract is a nullity, as there has been no contract at all.

Unenforceable Contract

An unenforceable contract is one that is valid in itself but is not capable of being enforced in a court of law because of some technical defect such as the absence of writing, registration, requisite stamp, etc., or time-barred by the law of limitation. For example, an oral arbitration agreement is unenforceable because the law requires an arbitration agreement to be in writing.

Classification of Contracts on the Basis of Formation

Express Contract

When both the offer and the acceptance constituting an agreement are enforceable by law and are made in words spoken or written, it is an express contract.

Implied Contract

Where both the offer and acceptance constituting an agreement enforceable by law are made other than in words, i.e., by acts and conduct of the parties, it is an implied contract.

For example Where A, a coolie in uniform, takes luggage of B to be carried out of the railway station without being asked by B, and B allows him to do so; then the law implies that B agrees to pay for the services of A, and this is an implied contract.

Constructive or Quasi Contract

The term ‘constructive or quasi-contract’ is a misnomer. The cases grouped under this type of contract have little or no affinity with a contract. Such a contract does not arise by virtue of any agreement, express or implied, between the parties but the law infers or recognizes a contract under certain special circumstances.

For example, The obligation of the finder of lost goods to return them to the rightful owner or the liability of a person to whom money is paid by mistake to repay, cannot be said to arise out of a contract even in its remotest sense, as there is neither offer and acceptance nor consent, but these are covered under quasi- contracts as per Sections 71 and 72.

Classification of Contracts on the Basis of the Performance

  1. Executed Contract
  2. Executory Contract

Executed Contract

A contract is said to be executed when both the parties to a contract have completely performed their share of obligations and nothing remains to be done by either party under the contract.

Executory Contract

A contract is said to be executory when either both the parties to a contract have still to perform their share of obligations in toto, or there remains something to be done under the contract on both sides.


Remedies for Breach of Contract Under Indian Contract Act

Breach of contract, as explained below, may be of two kinds:

Anticipatory Breach

An anticipatory breach of contract is a breach of contract occurring before the time fixed for performance has arrived. It may take place in two ways:

  • Expressly by words spoken or written: Here, a party to the contract communicates to the other party, before the due date of performance, his intention not to perform it.

    For example, A contracts with B to supply 100 bags of rice for ` 60,000 on 1st March. On 15th February, A informs B that he will not be able to supply the rice. There is an express rejection of the contract.

  • Impliedly by the conduct of one of the parties: Here a party by his own voluntary act disables himself from performing the contract.

    For example, A agrees to marry B but before the agreed date of marriage, she marries C. There occurs an anticipatory breach of contract brought about by the conduct of one of the parties.

Actual Breach

An actual breach may also discharge a contract. It occurs when a party fails to perform his obligation upon the date fixed for performance by the contract, for example, where on the appointed day the seller does not deliver the goods or the buyer refuses to accept the delivery. It is important to note that there can be no actual breach of contract by reason of non-performance so long as the time for performance has not yet arrived. An actual breach entitles the party not in default to elect to treat the contract as discharged and to sue the party at fault for damages for breach of contract.

Remedies Against the Guilty Party

Whenever there is a breach of a contract, the injured party becomes entitled to any one or more of the following remedies against the guilty party:

Rescission of the Contract

When there is a breach of contract by one party, the other party may rescind the contract and need not perform his part of obligations under the contract and may sit quietly at home if he decides not to take any legal action against the guilty party.

But in case the aggrieved party intends to sue the guilty party for damages for breach of contract, he has to file a suit for rescission of the contract. When the court grants rescission, the aggrieved party is freed from all his obligations under the contract; and becomes entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract as per Section 75.

Suit for Damages

Damages are monetary compensation allowed to the injured party for the loss or injury suffered by him as a result of the breach of contract. The fundamental principle underlying damages is not punishment but compensation. By awarding damages the court aims to put the injured party into the position in which he would have been, had there been performance and not breach, and not to punish the defaulter party.

As a general rule, ‘compensation must be commensurate with the injury or loss sustained, arising naturally from the breach.’ ‘If an actual loss is not proved, no damages will be awarded.’

Suit for Specific Performance

Specific performance means the actual carrying out of the contract as agreed. Under certain circumstances, an aggrieved party may file a suit for specific performance, i.e., for a decree by the court directing the defendant to actually perform the promise that he has made.

Suit Upon Quantum Meruit

The third remedy for a breach of contract available to an injured party against the guilty party is to file a suit upon quantum meruit. The phrase quantum meruit literally means ‘as much as is earned’ or ‘in proportion to the work done.’ A right to sue upon quantum meruit usually arises where after part performance of the contract by one party, there is a breach of contract or the contract is discovered void or becomes void.

Suit for an Injunction

‘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 the negative terms of the contract. To put it differently, where a party is in breach of the negative terms of the contract. (i.e., where he is doing something which he promised not to do), the court may, by issuing an injunction restrain him from doing, what he promised not to do.


FAQs

What is contract?

A ‘contract’ is an agreement, the object of which is to create a legal obligation, i.e., a duty enforceable by law.

What are the types of contracts?

Types of contracts:
1. Valid Contract
2. Voidable Contract
3. Void Contract
5. Unenforceable Contract
6. Express Contract
7. Implied Contract
8. Quasi Contract
9. Executed Contract
10. Executory Contract

What’s the meaning of all contracts being agreements but all agreements are not contracts?

Only those agreements are contracts that are enforceable by law. Thus all contracts are agreements but all agreements are not contracts.

As per section 10, all agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared by the Act to be void, and, where necessary, satisfy the requirements of any law as to writing or attestation or registration.

What is executed contract?

When both parties to a contract have completely performed their share of obligations and nothing remains to be done by either party under the contract, it is known as an executed contract.


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