indian contract act

Amity Business School
MBA, Semester 1
Legal Aspects of Business
Ms. Shinu Vig

Indian Contract Act, 1872
The Act defines a contract as “an agreement enforceable
by law.”
Agreement:
An agreement is a promise or a set of promises, whereby
a person makes an offer to another and it is accepted by
the person to whom it is made.

Agreements which are not contracts:
a) Agreements relating to social matters.
a) Domestic arrangements between
husband and wife.

Kinds of contracts:
a) According to mode of formation:
• Express contracts (oral or written)
• Implied contracts
a) According to validity:
• Valid contracts
• Void contracts
• Voidable contracts
• Void agreements

Section 10 of the Act provides that “all agreements are
contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a
lawful object, and are not expressly declared to be void.”
Essential elements of a valid contract:
• Offer
• Acceptance
• Lawful consideration
• Lawful object
• Free consent
• Competent parties

Offer:
An offer means a proposal. It is made with a view to
obtaining the assent of the other party to the proposed act
or abstinence.
Types of offer:
a)Express offer (written on oral) or Implied offer
b)General offer or specific offer

Essentials of a Valid Offer:
• An offer must be clear and definite.
• Offer must be made with a view to obtain acceptance
thereto
• Offer must be made with the intention of creating legal
relationship
• Offer must be communicated to the offeree.

Acceptance:
When the person to whom the offer is made signifies his
assent thereto, the offer is said to be accepted.
Essentials of valid acceptance:
• It must be absolute and unqualified.
• It must be communicated to the offeror. It may be express
or implied.
• It must be made in the mode prescribed, if any.
• It must be made within the time specified, if any.
• Mere silence of offeree is not acceptance.

Revocation of Offer:
• By the offeror at any time before acceptance.
• By death or insanity of the offeror before acceptance.
• By death or insanity of the offeree before acceptance.
• By rejection.
• By not accepting in the mode prescribed.
• By counter-offer by the offeree.
Revocation of acceptance:
Acceptance can be revoked before the communication of
the acceptance is complete.

Consideration:
Consideration is what a promisor demands as the price for
his promise.
Essentials of Consideration:
• It can move from promisee or any other person.
• It need not be in terms of money only.
• It need not be adequate.
• It must be real and not vague.
• It must be lawful.

Lawful Object:
Object or consideration of an agreement is unlawful if it is:
• forbidden by law; or
• it is of such nature that if permitted it would defeat the
provisions of law; or
• is fraudulent; or
• involves or implies injury to the person or property of
another; or
• the Court regards it as immoral or opposed to public
policy.
Agreements with unlawful consideration or object are
void.

Capacity to Contract:
Every person is competent to contract if he/ she
i) is of the age of majority
ii) is of sound mind
iii) is not disqualified from contracting by any law to which
he is subject.

Free Consent:
The parties should mean the same thing in the same sense
and agree voluntarily.
Consent is not free when it is caused by:
i.Coercion
ii.Undue influence
iii.Misrepresentation
iv.Fraud
v.Mistake

Coercion:
i.The committing or threatening to commit any act
forbidden by the Indian Penal Code or
ii.The unlawful detaining or threatening to detain any
property to the prejudice of any person whatever with the
intention to cause any person to enter into any agreement.
Consequences of coercion:
Agreement caused by coercion is voidable at the option of
the party whose consent has been so obtained.

Undue influence:
A contract is said to be induced by undue influence where
the relation between the parties are such that one of the
parties is in a position to dominate the will of the other and
uses that position to obtain unfair advantage over the
other.
Examples: Master and servant; Solicitor and client; Doctor
and patient….etc.
Consequences of Undue Influence:
Agreement caused by undue influence is voidable at the
option of the party whose consent has been so obtained.

Fraud:
Fraud is an untrue statement made knowingly or without
belief in its truth or recklessly, carelessly, whether it be true
or false with the intent to deceive.
Consequences of Fraud:
The party aggrieved has following remedies-
i. Can avoid the contract
ii.Can demand performance of the contract
iii.Can sue for damages

Misrepresentation:
Misrepresentation means a false representation of fact
made innocently or non-disclosure of a material without
any intention to deceive the other party.
Consequences of Misrepresentation:
The party aggrieved has following remedies-
i.Can avoid the contract
ii.Can demand performance of the contract

Mistake:
Mistake is an erroneous belief on the part of parties to the
contract concerning something pertaining to the contract.
Effect of mistake:
Mistake renders the contract void. To be operative so as to
render the contract void, the mistake must be:
i. of fact and not of law or opinion;
ii. the fact must be essential to agreement and
iii. must be on part of both the parties.

Agreements declared void:
Agreements against public policy- Some of the agreements
which are against public policy have been declared to be
void by law. These are:
•Trading with enemy
•Agreements for sale of public offices and titles
•Agreements in restraint of marriage
•Agreements in restraint of parental rights
•Agreements in restraint of legal proceedings
•Agreements in restraint of trade

Performance of Contracts:
The parties to the contract must either perform or offer to
perform their respective promises unless such performance
is dispensed with or excused under the Indian Contract Act
or any other law.
Who must perform:
i. The promisor himself
ii. If not specified, then agent of promisor can perform
iii. In case of death of promisor, his legal representatives must
perform
iv. In case of contracts involving personal skill, promisor himself
should perform.

Tender of Performance :
If promisor performs his side of the contract and the
performance is rejected, the promisor is discharged from
further liability and may sue for the breach of contract, if he
so wishes.
To be valid, a tender must fulfill following conditions:
i. It must be unconditional
ii. It must be made at a proper place and time.
iii. If it relates to delivery of goods, the promisee
must have a reasonable opportunity to check
the goods.

Discharge of Contracts:
A contract is said to be discharged or terminated when the
rights and obligations arising out of a contract are
extinguished.
Modes of discharge of contracts:
• Performance or tender
• Mutual consent or agreement (by novation, rescission,
alteration etc.)
• Lapse of time
• Operation of law
• Impossibility of performance
• Breach of contract

Discharge of Contracts by impossibility:
A contract is deemed to have become impossible of
performance and thus void under the following
circumstances:
a. Destruction of the subject matter of the contract.
b. By the death or disablement of the parties.
c. Subsequent illegality.
d. Declaration of war.

Remedies for Breach of Contracts:
When a contract is broken, the injured party has several
courses of action open to him. The injured party may :
i. Rescind the contract and refuse further performance
of contract
ii. Sue for damages (Ordinary/ Special damages)
(Hadley v. Baxendale)
iii. Sue for specific performance
iv. Sue for injunction
v. Sue on quantum meruit

Contingent Contracts:
A contingent contract is a contract to do or not do
something, if some event collateral to such contract, does
or does not happen. For example- contract of indemnity
and guarantee.
Essentials of Contingent Contracts:
i.The performance depends upon happening or non-
happening of some future event.
ii.The event must be uncertain.
iii.The event must be collateral to the contract

Contract of INDEMNITY
A contract by which one party promises to save the other
from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person, is called
a ‘contract of indemnity’.
Parties to the contract of indemnity:
i. Indemnifier- One who promises to make good the loss.
ii. Indemnity-holder- One whose loss is to be made good.

Contract of GUARANTEE:
A contract of guarantee is a contract to perform a promise or
discharge the liability of a third person in case of his default.
Parties to the contract of Guarantee:
•Principal Debtor: The person for whom guarantee is given.
•Creditor: The person to whom guarantee is given.
•Surety: The person who gives the guarantee.

Kinds of Guarantee :
i. Specific guarantee
ii. Continuing guarantee
Revocation of continuing guarantee:
• By notice of revocation by the surety.
• By the death of the surety.
• By discharge of the principal debtor.

Contract of BAILMENT:
Bailment is a transaction whereby one person delivers goods
to another person for some purpose, upon a contract that
they are, when the purpose is accomplished, to be returned
or otherwise disposed of according to the directions of the
person delivering them.
Parties to contract of bailment:
•Bailor: The person who delivers the goods.
•Bailee: The person to whom goods are delivered.

Duties of a bailee:
• To take reasonable care of the goods.
• Not to use the goods in unauthorised manner.
• To keep the goods bailed to him separate from his own
goods.
• Not to set up an adverse title to the goods.
• To return the goods without demand on the expiry of the
time fixed or when purpose is accomplished.
• The bailee must return to the bailor any increase, accretion
or profits which have accrued from the goods bailed.
Duties of a bailor:
• To disclose all the known faults in the goods.
• To pay any extraordinary expenses incurred by the bailee.
•

Contract of PLEDGE:
Pledge or pawn is a contract whereby an article is deposited
with a lender of money or promisee, as security for the
repayment of a loan or performance of a promise.
Parties to contract of pledge:
•Pledgor: The depositor is called the pledgor.
•Pledgee: The person to whom it is deposited is called the
pledgee.

Rights of a Pledgee:
• To retain the goods pledged.
• To claim reimbursement of extra-ordinary expenses
• To sue pledgor
• To sell the goods.
Duties of a Pledgee:
• To take reasonable care of the goods
• To return the goods
• To return accretion to the goods
• Not to make unauthorized use of goods
• Not to mix goods pledged with his own goods

Contract of AGENCY:
Agent :
An agent is a person employed to do any act or to
represent another (his principal) in dealings with third
persons.
Principal:
The person for whom act is done by agent or who is
represented in dealings with third persons by an agent, is
called the principal.

Creation of Agency:
i. By express authority
i. By implied authority:
• By estoppel
• By holding out
• By necessity
iii. By ratification
iii. By operation of law

Classification of Agents:
i. On the basis of extent of authority:
• General Agents
• Special Agents
ii. On the basis of nature of work:
• Mercantile Agents
-Broker, Factor, Auctioneer, Commission Agent,
Del-credere Agent
• Non Mercantile Agents
Bankers and Partners

Extent of Authority of Agents:
• In normal circumstances-
Depends upon the terms expressed on his appointment or
may be implied by the circumstances of the case.
• In case of emergency-
He can do all such things which may be necessary to
protect the principal from loss in an emergency and which
he would do to protect his own property under similar
circumstances.

Duties of Agents:
1. To act according to directions or custom of trade.
2. To act with reasonable care and skill.
3. To render account.
4. To communicate with principal and to obtain his
instruction.
5. To disclose all material information.
6. Not to disclose confidential information entrusted to him.
7. Not to allow his personal interest to conflict with his duty.
8. Not to make secret profit.
9. To pay sum received for principal.
10.Not to delegate his authority.

Rights of Agents:
1. Right to receive remuneration.
2. Right of lien on the goods or property.
3. Right to be indemnified against all charges, expenses,
liabilities properly incurred in the course of agency.

Termination of Contract of Agency:
• By performance of the contract.
• By mutual agreement.
• By revocation of authority by the principal.
• By renunciation of his authority by the agent.
• By expiration of the period fixed for the agency.
• By death/ becoming of unsound mind of principal or
agent.
• By insolvency of the principal.

indian contract act

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