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Indian Contract Act 1872

Unit I

Objective of the Act

The objective of the Contract Act is to ensure that the rights and obligations arising out of a contract are honoured and that legal remedies are made available to an aggrieved party against the party failing to honour his part of agreement. The Indian Contract Act makes it obligatory that this is done and compels the defaulters to honour their commitments.

Extent and Commencement

It extends to the whole of India except the State of Jammu and Kashmir It came into force on the first day of September, 1872. The sale of Goods was repealed from this Indian Contract Act in 1930. Contracts relating to partnership were repealed in 1932.

Present Contract Act

Basic Principles of Contract (Sections 1 to 75) Indemnity and Guarantee (Sections 124 to 147) Bailment (Sections 148 to 181) Agency (Sections 182 to 238)

When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of the other to such act or abstinence, he said to make a proposal.

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. The person making the proposal is called the Promisor and the person accepting the proposal is called the Promisee.

When at the desire of the promisor, the promise or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.

Every promise and every set of promises, forming the consideration for each other is an agreement. An agreement not enforceable by law is said to be void.

An agreement enforceable by law is a contract.

Steps involved in the Contract

Proposal and its communication Acceptance of proposal and its communication Agreement by mutual promises Contract Performance of Contract

Essential requirements of a valid contract

Offer and its acceptance Free consent of both parties Mutual and lawful consideration for agreement It should be enforceable by law. Hence, intention should be to create legal relationship. Agreements of social or domestic nature are not contracts Parties should be competent to contract Object should be lawful Certainty and possibility of performance Contract should not have been declared as void under Contract Act or any other law


May be express or implied May be positive or negative Must intend to create legal relationship Terms of offer must be certain May be made to a specific person or class of persons or to any one in the world at large Must be communicated to the offeree Must be made with a view to obtain the assent May be conditional

Termination of Offer
By notice of revocation By lapse of time By failure of the acceptor to fulfil a condition precedent to acceptance By failure to accept according to the mode prescribed By death or insanity of the offeror By rejection

Essentials of a valid acceptance

Acceptance must be absolute and unconditional Acceptance by usual mode as desired by the offeror Acceptance cannot precede the offer Acceptance may be express or implied Acceptance must be given within a reasonable time Acceptance must be by an ascertained person (offeree)

Essentials of a valid acceptance

Offer cannot be accepted after it was rejected unless it is renewed Silence does not imply acceptance Acceptance must be made before the lapse or revocation of the offer Acceptance of offer means acceptance of all terms attached to the offer

Legal rules regarding Consideration

Consideration is required both for formation and discharge of an agreement or contract Consideration may be past, present and future Consideration may be either positive or negative Consideration must be done at the desire of the promisor Consideration may be furnished by the promisee or any other person

Legal rules regarding Consideration

Consideration must be lawful Consideration must be real and not illusory Consideration need not be adequate Consideration must not be the performance of existing duties Consideration must be of some value in the eyes of law

Contractual Capacity
Every person is competent to contract who is of the age of the majority according to the law to which he is subject and who is of a sound mind, and is not disqualified from contracting by any law to which he is subject.

Contractual Capacity
Mental Deficiency
Sound Mind (he is capable of understanding it and of forming a rational judgment as to its effects upon his interests)
Mental Incompetents Idiots Lunatics and insane persons

Minor (< 18 years) Drunkenness

Legal Disability (Alien Enemy, Insolvent, Imprisonment)

Free Consent
Agree upon the same thing in the same sense.

Object and Public Policy

Not be forbidden by law Should not defeat provisions of any law Not be fraudulent Should not injure a person / property Should not be immoral Should not be opposed to public policy

Void and Voidable Contract

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 A contract which ceases to be enforceable by law becomes a void contract.

Types of Contract On the basis of Validity

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. 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 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.

Types of Contract On the basis of Validity

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. 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.

Types of Contract On the basis of Formation

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. 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. 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.

Types of Contract On the basis of Performance

Executed contract: An executed contract is one in which both the parties have performed their respective obligation. 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.

Types of Contract On the basis of Performance

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. 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.

Section 37, Para 1, of the Contract Act lays down 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 of any other law. The offer to perform the contract is called Tender. Offer to perform or Tender may be called attempted performance. A tender, to be legally valid, must fulfill the following conditions.

A tender, to be legally valid, must fulfill the following conditions

It must be unconditional A tender money, must be in legal tender money, not by any foreign money, or by promissory note or cheque. The tender must be made at a proper time and place The person to whom a tender is made must be given a reasonable opportunity of ascertaining that the person by whom it is made is able and willing there and then, to do the whole of what he is bound by his promise to do.

A tender, to be legally valid, must fulfill the following conditions

If the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver. When there are several promisees, an offer, to any one of them is a valid tender Must be in proper form Must be willing and ready to fulfill the obligations

Performance made by whom?

Personal Performance : In cases involving personal skill, taste, or credit, the promisor must himself perform the contract. Performance by Representative : In all other cases the Promisor or his representatives may employ a competent person to perform it. Performance by a third person : When a promise accepts performance of the promisee from a third person, he cannot afterwards enforce it against the promisor

Performance made by whom?

Death of Promisor
Contracts involving personal skill or volition, come to an end when the Promisor dies. His heirs or legal representatives are not bound to perform such contract In cases not involving personal skill or volition, the legal representatives of a deceased promisor are bound to perform the contract. Liability of the legal representatives is limited to the assets obtained from the deceased.

Persons entitled to demand performance

Promisee Legal Representative Third Party (Eg. Trust : A & B enter into a contract in favor of C; C can demand performance) Joint promisees

Time for Performance

When no time is specified : Reasonable time When time is specified (it has to be followed) On application for performance by promisee

Place for Performance

This applies to Delivery of Goods Payment of Money

Performance of Reciprocal Promises

Mutual and Dependent Mutual and Independent Mutual and Concurrent Order of Performance (who has to do when) : Fixed by contract

Contracts that need not be performed

When a new contract is substituted A person rescinds it (who has the option of voidable) Promisee neglects or refuses to afford the promisor circumstance for performance Impossibility or Illegality If one person has right to rescind a contract

Discharge of Contract by a New Agreement

Of old contract by new contract Of a party to the contract by a new one

Alteration (change in terms of contract Rescission (by mutual consent/nonperformance/voidable) Waiver (abandonment of a right which a person is entitled to)

Discharge of Contract by a New Agreement

Remission (promisee may give up a part of his claim at his own will)
Whole / in part Extend the time of performance Accept any other satisfaction than performance

Merger (superior right and inferior right coincide and meet in one and the same person) eg. Person buys the land which he has taken for lease before.

Discharge by Operation of law

Insolvency Merger Death Lapse of Time Material alteration / Unauthorized alteration

Discharge of contract by impossibility

Destruction of object necessary for performance Change of law Personal incapacity Non-existence or non-occurrence of an event necessary for performance Outbreak of war

If a party breaks his obligations which the contract imposes; contract is no longer binding on the other person Actual Breach of Contract
At the time when the performance is due
One party fails or refuses to perform his obligation

During the performance of the contract

Express Repudiation (by word or act refuses to continue to perform his obligation) Implied Repudiation (makes by his own act the complete performance of the contract impossible)

Anticipatory Breach of Contract (done before the time for performance arrives)
By Renunciation (Express Repudiation) By creating some Impossibility (Implied Repudiation)

Remedies in case of Breach

Suit for damages (dealt by Indian Contract Act) Dealt by Specific Relief Act, 1963
Bring an action for specific performance Suit for Injunction Claim for quantum meruit Restitution Suit for cancellation or rescission

Remedies for Breach of Contract

Suit for Damages (loss or damage suffered by breach of contract) Kinds
Ordinary or General Damages (damages which arise on a breach; parties know it at the time of entering into contract; eg. Difference in contract price and market price) Special Damages (breach of contract under some special circumstances)

Remedies for Breach of Contract

Exemplary Damages (shows the Courts strong disapproval of the conduct of the defendant in committing the wrong; eg. Refusal to honor a cheque in spite of having funds) Nominal Damages (breach involved is of technical nature, so some nominal damages (1 rupee) may be awarded) Remote Damages (not to be given for any remote and indirect loss or damage sustained by reason of the breach)

Remedies for Breach of Contract

Rules regarding determination of amount of damages
Restoration of parties to a position where they would have been if the contract had been performed and not where they would have been if they never made the contract

Damages are recoverable in 2 cases

When they arise naturally in the usual course of things from such breach. Loss or damage which the parties knew, when they made the contract is likely to result from the breach of it.

Suit for Injunction

Preventive relief This is an order of the court restraining the wrong doer from doing or continuing the wrongful act complained of. Usually granted to enforce negative stipulations in cases where damages are not adequate relief.

Suit for Quantum Meruit

Quantum Meruit means as much as is earned. Right to Quantum Meruit : Right to claim the compensation for the work already done.