Contents -
1. Introduction, Definition and Application of the Act, (Section 1) of Indian Contract Act, 1872.
2. Introduction, Meaning, Definition, Elements and Various Types of Contract.
3. Essential Elements of Valid Contract.
4. Agreement Declared Void (Void Agreements).
Indian Contract Act, 1872 -
- Introduction -
The Indian law relating to contract is embodied in the Indian Contract Act 1872. The Indian Contract Act was enacted in 1872 and it came into force on September 1, 1872. The Indian Contract Act 1872, is based mainly on English common law which is a large extent made up of juridical precedents. It is the primary source of law regulating contracts in Indian law, as subsequently amended. It determines the circumstances in which promise made by the parties to a contract shall be legally binding on them. In the beginning, the act contained 266 sections.
The Indian Contract Act, 1872 as on the date contains the following provisions :
1. Certain special kinds of contract, which are as follows :
a) Indemnity and Guarantee (Section 124-147)
b) Agency (Section 182-238)
c) Bailment and Pledge (Section 148-181)
2. General principles of the law of contracts and quasi-contracts (Section 1-75)
However in the year 1930, its provisions relating to the 'sale of goods' and in the year 1932, the provision relating to 'partnership' where replied from this act on the promulgation of separate acts for the same.
Application of the Act (Section 1) -
The Indian Contract Act 1872, Section (1-75) came into force on 1st September, 1872. It is not a complete and exhaustive law on all type of contracts. It does not deal with all the branches of the law of contract. There are separate act which deal with contacts relating to negotiable instrument, transfer of property, sale of goods, partnership etc. Again the act does not affect any usage or custom of trade.
- Definitions -
1. 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 to such act or abslinence he is said to make a proposal.
2. Promise (Section 2(b)) -
When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal accepted becomes a promise.
3. Promisee/Offeree (Section 2(c)) -
The person who makes the proposal/offer is called an offeor/promisor and the person to whom offer/proposal is made is called the offeree/promisee.
4. Consideration for the Promise (Section 2(d)) -
When at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstain from doing or promises to do or to abstain from doing something, such act or abstinence or promise is called as consideration for the promise.
5. Agreement (Section 2(e)) -
Every promise and every set of promises , forming consideration for each other.
6. Reciprocal Promises (Section 2(f)) -
Promises which form the consideration or part of the consideration for each other are called reciprocal promises.
7. Void Agreement (Section 2(g)) -
An agreement not enforceable by law is void.
8. Contract (Section 2(h)) -
A contract as an agreement enforceable by law.
9. Voidable Contract (Section 2(i)) -
An agreement which is enforceable by law at the option of one and more of the parties there to, but not at the option of the other or others is a voidable contract.
10. Void Contract (Section 2(j)) -
A contract which cases to be enforceable by law.
- Law of Contract -
Introduction -
The law of contract is the basis upon which the super structure of all business is built. It affects every person in one way or the other as all of us enter into some kind of contract almost every day most of the time we do so without realising what we are doing from the view point of law. All contracts are based on agreements which are either express or implied.
In business transactions, normally first promises are made followed by performance. If parties were free to go back on their promises without incurring any liability it would be impossible to carry on any trade industry or commerce.
The law of contract was made lying down rule for performance and discharge of a contract and the remedies available to the aggrieved party in case of branch of contract.
For example, a person seldom realised that when he gives cloth for dry cleaning or when he buys milk, bread or biscuits or when goes to the auditorium to see a movie, he is entering into a contract.
- Meaning and Definition of Contract -
The word contract is derived from a Latin word "Contractum" meaning drawing together. A contract is exchange of promises. It is formed by two or more persons. It is initiated by one party by offering something to the other party. If the other party accept the offer in full then it become an agreement. When such agreement fulfills the conditions of section 10 of the Indian Contract Act, it becomes the contact.
According to Salmond -
"A contract is an agreement creating and defining obligations between the parties."
According to Pollock -
"Every agreement and promise enforceable by law is a contract."
According to Sir William Anson -
"A contract is a legally binding agreement between two or more persons by which rights are acquired by one or more to acts or forbearences on the part of the others."
- Elements of Contract -
From the several definitions, the contract is essensially consists of two elements :
1. Agreement -
The parties to the contract must agree to enter into the contract. Legally the agreement consists of one parties offer to enter into the contract and the other parties acceptance of the terms of the offer.
Thus, it means that an agreement is an accepted proposal. In order therefore to form an agreement, there must be a proposal or offer by one party and its acceptance by the other, to sum up :
Agreement = offer + Acceptance
2. Enforceability by Law -
An agreement is said to be enforceable by law if it creates some legal obligations. In other words the parties to an agreement must be bound to perform their promises and in case of default by either of them must intend to sue, e.g. in case of social or domestic agreement, the usual presumptions is that the parties do not intend to create legal relations. The subject matter of the contract should not be against the law against public policy.
For example, a contract to commit a crime old not be legally enforceable. Contracts that call for the violation of usually laws would also not be legally enforceable. An example of a contract that would be unenforceable because it is against public policy is a contract that unreasonably restrains trade.
- Types of Contract -
A) On the basis of Enforceability -
On the basis of enforceability various contracts are as follows :
1. Valid Contract -
An agreement is a valid contract if it fulfill all the essential requirements of the contract given under section 10.
For example :
a) X offers to marry Y. accept X offer this is valid contract.
b) A home owner (who is over the age of 18 and of sound mind) signed a contract with the appliance store to buy a refrigerator. The home owner pays for the refrigerator and the appliance store present the refrigerator for the home owner to take home.
2. Void Contract -
It is a contract without any legal effect and cannot be enforced in a court of law. Where both parties to an agreement are under a mistake of fact when the consideration or object of an agreement is unlawful. An agreement made without consideration etc. are instance of void contract.
For example :
a) A contracts to take Indigo for B to a foreign port. A government afterwards declared war against the country in which the Port is situated. The contract becomes void when war is declared.
b) A and B contract to marry each other before the time fixed for marriage. A goes mad, the contract becomes void.
3. Void Agreement -
Section 2(g) says, that an agreement not enforceable by law is void.
For example : Ram lends 1,00,000 to Shyam, a minor for the mortgage of his house. The mortgage agreement is void ab initio due to minority of shyam.
4. Voidable Contract -
Agreement becomes voidable if the consent of one party had not been free. Voidable contract become void only when it is declared to be so by an aggrieved party. If agrieved party is voidable contract caused by fraud suffered any loss he has the right to claim compensation from other party.
For example : A contract brought about as a result of coercion, undue influence, fraud or mispresentation would be voidable at the opinion of a person whose consent was caused by any one of these factors.
5. Illegal Contract -
It is a contract which is Forbidden by law. Illegal contract if permitted will default the provisions of any law it fraudulent. It may involve or imply injury to a person or property of another or court regard it as immoral or opposed to public policy. The court will not only enforce such a contract but also other connected contracts. All illegal contracts void but all void agreements are contracts are not necessarily illegal.
Every agreement of which the object and consideration is unlawful is not only void as between immediate parties but also retain the collateral transactions with illegality. In Bombay the wegering agreement have been declared unlawful by status.
For example :
a) A, B and C enters into agreement for the division among them of gains acquiring or to be acquired by them by fraud the agreement is illegal.
b) Contract to commit crime, contract that is inmoral or opposed to public policy are illegal in nature.
6. Unenforceable Contract -
Where a contract is good in substance but because of some technical defect, it cannot be enforced by law it is called as unenforceable contract. These contracts are neither void or voidable. Such contracts are good in substance. But due to non fulfillment of prescribed legal formalities this cannot be claimed in the court. As soon as the technical reason is looked into a rectified such contracts may be allowed to be enforced.
For example : insurance policy without proper stamp duty cannot be produced as evidence of a contract in the court.
Unenforceable contract are fully valid contracts, but the parties cannot enforce them through the courts.
For example : an oral agreement for abritration is unenforceable because the law requires that and arbitration agreement must be in writing. If the oral agreement for arbitration is reduced to writing, it will become enforceable.
B) On the basis of Formation -
On the basis of formation various contract are as follows :
1. Express Contract -
Generally the contract are made in this form. This contract results from express agreements. Express agreement is formed by making of and giving acceptance in the words spoken or in writing.
According to Section 9 of Indian Contract Act :
"In so far as the proposal and acceptance of any promise is made in words, the promise is said to be express. An express promise leads to the formation of Express contract."
For example :
a) X write a letter to, Y "I offer to sell my car for 1 lakh to you". Y send a letter to X "I am ready to buy your car for 1 lakh" it is an Express contract made in writing.
b) X says to, Y "will you buy my car for 1 lakh ?". Y says to X "I am ready to buy your car for 1 lakh" it is an Express contract made orally.
2. Implied Contract -
Where the offer and acceptance are made not by use of words but by contract only and are there for implied from the circumstances. The agreement is an implied agreement. Either, the entire agreement may be implied or only a few terms of the agreement may be implied.
For example : If a person enters a bus there is implied promise that he will pay the bus fare.
3. Quasi Contract -
The term Quasi contract would literally mean Semi 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.
C) On the Basis of Performance -
On the basis of performance, various contracts are as follows :
1. Executive Contract -
An executed contract is one in which both the parties have performed their respective obligation. The consideration in a given contract could be an act or forbearance. When the act is done or executed or the forbearance is brought on record then the contract is an executed contract.
For example : A makes an agreement for buying 100 cotton bales from B rupees 5000 per bale. B delivers these cotton bales to A and in return of it A makes payment to B. This contract becomes executed one.
2. Executory Contract -
An executory contract is one where one or both the parties to the contract have still to perform their obligation in future. Thus, a contract which is partially performs or wholly unperformed is term as executory contract. Here the consideration is reciprocal promise obligation. Such consideration is to be performed in future only, and therefore these contacts are described as executory contract.
For example : A makes an agreement for buying a car from car dealer. A has made payment. The car has been delivered to him but ownership of that car is yet to be transferred to him. The contract remains executory.
D) On thr basis of Obligation -
On the basis of obligation, various contracts are as follows:
1. Unilateral Contract -
A unilateral contract is a one-sided contract in which only one party has to perform his promise obligation to do or forbear.
For example : A make payment for bus fare for his journey from Jaipur to Kota. He has performed his promise. It is now for a transport company to perform the promise.
2. Bilateral Contract -
Where the obligation or promise in a contract with outstanding on the part of both the parties, it is known as bilateral contract.
- Essential Elements of Valid Contract -
A valid contract is enforceable by law. Lack of any element prescribed under section 10 would change the legal status of the contract and it may not be permitted to be enforced. Following elements are essential for formation of a valid contract :
1. Agreement (offer and acceptance) -
To constitutes a contract there must be an agreement and for an agreement there must be a lawful offer and a lawful acceptance of the offer. The adjective lawful implies that the offer and acceptance must satisfy the requirements of the contract act in relation thereto.
2. Lawful 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 get something. The something given obtain is the price for the promise and is called consideration.
3. Intention to Create Legal Relations -
There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. Agreements of a social and domestic nature do not contemplate legal relations and as such they do not give rise to a contract.
4. Capacity of Parties -
The parties to an agreement must be competent to contract otherwise it cannot be enforced by a court of law. Section 11 of the Indian Contract Act specifies that every person is competent to contract provided :
a) Is of the age of majority according to the law to which he is subject.
b) Is not disqualified from contacting by any law to which he is subject.
c) Who is of sound mind.
In other words the following persons are not competent to contract :
a) Minor
b) A person of unsound mind
c) A person disqualified from contracting by any law to which he is subject.
5. Lawful Object -
For the formation of a valid contract it is also necessary that the parties to an agreement must agree for 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 section 23. If the object is unlawful for one or the other of the reasons mentioned above the agreement is void.
6. Free and Genuine Consent (Section 14) -
Free consent of all the parties to an agreement is another essential elements of a valid contract. Consent means that the parties must have agreed upon the same thing in the same sense section 13. There is absence of free consent if the agreement is introduced by :
a) Coercion (Section 15)
b) Undue influence (Section 16)
c) Fraud (Section 17)
d) Misrepresentation (Section 18)
e) Mistake (Section 20, 21 and 22)
7. Writing and Registration-
According to the Indian contract act, a contract may be oral or in writing. But in certain special cases it lays down that the agreement to be valid must be in writing or / and registered. Similarly certain other acts also require writing or/and registration to make the agreement enforceable by law which must be observed. Thus :
a) An agreement for sale of immovable property must be in writing and registered under the transfer of property act, 1882 before they can be legally enforced.
b) An arbitration agreement must be in writing as per the arbitration and conciliation act, 1996.
8. 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". In order to give rise to a valid contract agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement for otherwise it cannot be enforced.
9. Agreement not Declared Void or Lawful Agreement -
Agreement must not be one which the law declares to be either illegal or void. A void agreement is one which is without any legal effect. Illegal agreement is an agreement expressly or impliedly prohibited by law.
10. Possibility of Performance or Doctrine of Frustration -
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 in enforced at law. The doctrine of frustration applies when after a contract has been entered into some supervening event occurs that makes performance of the contract redically different from what the parties had contemplated when they enteref into the contract
- Agreement Declared Void (void agreements) -
Void means having no legal value and agreement means agreement, promise or contract made with somebody, so void agreement means an agreement that has no legal value.
According to Section 2(g) of the Indian Contract Act :
"An agreement not enforceable by law is void".
The act as specified various factor due to which an agreement may be considered as void agreement. Ones of these factor is unlawfulness of object and consideration of the contract, i.e. illegality of the contract which makes it void. An agreement which was legal and enforceable when it was entered in to, may subsequently become void due to impossibility of performance, change of law or other person. When it becomes void the agreement ceases to have legal effect. A void agreement has no legal effect. An agreement which does not satisfy the essential elements of contract is void. Void contract confers no right on any person and creates no obligation.
For example : An agreement made by a minor, agreement without consideration, certain agreement against public policy etc.
Expressly Declared Void Agreement -
There are certain agreements, which are expressly declared to be void. They are as follows.
1. Agreement by a Minor or a Person of Unsound Mind (Section 11) -
An agreement entered into by a person of unsound mind is treated on the same footing as that of minors and therefore an agreement by a person of unsound mind is absolutely void and inoperative as against him but he can derive benefit under it.
2. Agreement made under a Bilateral Mistake of Fact Material to the Agreement (Section 20) -
Where the parties to an agreement misunderstood each other and are at cross purposes, there is a bilateral mistake.
3. Agreement of which the Consideration or Object is Unlawful (Section 23) -
The consideration or object of an agreement is lawful unless, it is forbidden by law, or is of such a nature that if permitted, it would defect the provisions of any law, or is fraudulent or involves or implies injury to the person or property of another or the court regard it as immoral or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
4. Agreement of which the Consideration or Object is Unlawful in part and the Illegal part cannot be separated from the legal part (Section 24) -
Agreements void if consideration and object unlawful in part. If there are several object but there is a single consideration, the agreement is void if any one of the object is unlawful. Similarly, if there is a single object but there are several considerations, the agreement is void if any one of the consideration is unlawful.
5. Agreement made without Consideration (Section 25) -
Section 25 declared that an agreement without consideration is void, unless it is in writing and registered or it is a promise to compensate for something done or is a promise to pay a debts barred by limitation. This is of course, subject to a few exceptions which have already been considered along with consideration.
6. Agreement in Restraint of Marriage (Section 26) -
Every individual enjoys the freedom to marry. According to the act, "Every agreement in resident of the marriage of any person, other than a minor is void". It is the policy of law to discourage agreements which restain freedom of marriage. The restraint may be general or partial. Where a party is restrained from marrying at all or for marrying for a fixed period or from marrying a particular person or class of persons the agreement is void. A promise to marry a particular person does not imply any restrain of marriage and is a valid contract.
7. Agreement in Restrain of Trade (Section 27) -
The constitution of Indian guarantees the freedom of trade and commerce to every citizen. According to the act "Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void". There are some exceptions to this rule like sale of goodwill, partners agreement, trade combinations or negative stipulations in service agreements there in some reasonable restrictions on trade are permitted in law.
8. Agreement in Restraint of Legal Proceedings (Section 28) -
Every agreement by which any party there to restricted absolutely from enforcing his rights under or in respect of any contract by the usual legal proceedings in the ordinary tribunals or which limits the time within which he made thus enforce his rights is void to that extent.
9. Agreement the Meaning of which is Uncertain (Section 29) -
Agreements the meaning of which is not certain or capable of being made certain are void.
10. Agreements by Way of Wager / Wagering Agreements (Section 30) -
The word 'wager' means betting or gambling. A wagering agreement is an agreement between two person under which money or money's worth is payable by one person to another on the happening or non happening of a future certain events. Agreements by way of wager are void and no suit shall be brought for recovering anything alleged to be won on wager or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made. However certain prizes for horse racing.
11. Agreement Contingent to Impossible Events (Section 36) -
Contingent agreement to do or not to do anything, if an impossible event happens 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.
12. Agreements to do Impossible Acts (Section 56) -
An agreement to do an act impossible in itself is void. A contract to do an act which, after the contract is made, becomes impossible or by reasons of some events. Which the promisor could not prevent, unlawful becomes void when the at becomes impossible or unlawful.
13. Reciprocal Promises (Section 57) -
Where person reciprocally promise firstly, to do certain things which are legal and secondly, under specific circumstances to do a certain other things which are illegal, the first set of promise is a contract, but the second is a void agreement.
14. Alternative Promise, One Branch being Illegal (Section 58) -
In the case of a alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced.