Indian Contract Act, 1872

Introduction of Contract

a. Meaning, Nature and Scope of Contract

• Governing Law: Contract law in India is primarily governed by the Indian Contract Act, 1872 (ICA), which ensures predictability and enforceability in agreements. The Act came into force on September 1, 1872.
• Definition: A Contract is defined under Section 2(h) of the ICA, 1872, as “an agreement enforceable by law”.
• Agreement: Every promise and every set of promises, forming the consideration for each other, is an Agreement (Sec. 2(e)). All contracts are agreements, but all agreements are not contracts.
• Scope: Contract law generally relates to rights in personam (private rights between two private individuals).
• Essentials of a Valid Contract (Sec. 10): To be enforceable, an agreement must satisfy elements like: Offer and Acceptance, Lawful Consideration and Object, Free Consent, Capacity to Contract, Certainty of Meaning, Possibility of Performance, and the intention to create a legal relationship.
• Consensus ad idem: A fundamental principle meaning the “meeting of the minds”; parties must agree about the subject matter in the same sense and at the same time.

b. Offer/ Proposal: Definition, Communication, Revocation, General/ Specific Offer

• Definition (Sec. 2(a)): A Proposal or Offer is made when one person signifies to another their willingness to do or abstain from doing anything, intending to obtain the other’s assent.
• Rules: An offer must be clear, definite, and communicated to the offeree. Communication can be express (oral/written) or implied by conduct.
• General Offer: Addressed to the world at large and accepted by any person who fulfills the conditions laid down in the offer.
  • Case Law (Acceptance by Performance): Carlill vs. Carbolic Smoke Ball Co. (1893): The advertisement of a reward (£100) was a general offer. The court held that the offer was accepted by the claimant’s performance of the conditions (using the smoke ball as directed), and formal notification of acceptance was not required.
• Specific Offer: Made to a particular person or group and can only be accepted by that specific person.
• Knowledge of Offer: The offeree must have knowledge of the offer to accept it.
  • Case Law (Knowledge Essential): Lalman Shukla vs. Gauri Datt (1913): The plaintiff, a servant, found the lost nephew without knowledge of the advertised reward. The court ruled that without knowledge and consent in relation to the proposal, his performance did not constitute acceptance, and he was not entitled to the reward.
• Revocation: An offer lapses if the offeree makes a counter offer or rejects it. Revocation must be communicated to the offeree before they dispatch the acceptance.

c. Invitation to Treat

• An invitation to treat (or invitation to make an offer) is merely a preliminary statement of terms on which a party might be willing to involve in further discussion; it is not an offer capable of immediate acceptance.
• Examples: Auctioneer’s request for bids, the display of priced goods in a shop window, or a shopkeeper’s catalogue.
• Case Law (Mere Statement of Price): Harvey vs. Facey (1893): Facey’s telegram stating the lowest price for land was held to be a mere statement of price, constituting only an invitation to offer, not an explicit offer capable of acceptance.
• Case Law (Display of Goods): Pharmaceutical Society of Great Britain vs. Boots Cash Chemist (1953): Displaying goods in a self-service shop is an invitation to offer. The customer makes the offer by presenting the item at the cash desk, and the shopkeeper has the discretion to accept or reject it.
• Case Law (Statement of Intention): Harris v. Nickerson (1873): An announcement of a coming auction sale is a mere statement of intention; a person attending could not sue for breach if the auction was cancelled.

d. Acceptance: Definition, Communication, Revocation

• Definition (Sec. 2(b)): Acceptance occurs when the offeree signifies his assent to the proposal, converting it into a promise.
• Rules: Acceptance must be unqualified and absolute and must correspond with all the terms of the offer.
• Counter Offer: A counter offer operates as a rejection of the original offer and causes it to lapse.
• Communication: Acceptance must be communicated to the offeror; mere mental acceptance is not enough.
  • Case Law (Silence is Not Acceptance): Felthouse vs. Bindley (1862): It was established that an offeror cannot impose silence as the mode of acceptance; silence cannot be regarded as acceptance.
  • Case Law (Communication by Authorized Person): Powell vs. Lee (1908): The court held that for a valid acceptance, it must be communicated and carried out by a person acting in an authorized capacity. Since the plaintiff was informed by an unauthorized board member, no contract was formed.
  • Case Law (Instantaneous Communication): Bhagwandas Goverdhandas Kedia vs. M/S. Girdharilal Parshottamdas And Co. (1966): The Supreme Court held that in a telephonic conversation, the contract is completed when the offeror receives (hears) the acceptance.
• Revocation: An acceptance binds the acceptor only when it reaches the offeror. The acceptor can revoke the acceptance before or at the same time the acceptance letter reaches the offeror.

e. Effect of Void, Voidable, Valid, Illegal, Unlawful Agreements

• Valid Contract: An agreement enforceable by law, meeting all essential requirements.
• Void Agreement (Sec. 2(g)): An agreement that is not legally enforceable. It is void ab initio (void from the beginning). Example: Agreement without consideration.
• Void Contract (Sec. 2(j)): A contract that was valid when entered into but ceases to be enforceable later. Example: A contract becomes void due to subsequent impossibility (like a singer getting throat cancer).
• Voidable Contract (Sec. 2(i)): Enforceable at the option of the aggrieved party because consent was vitiated by coercion, undue influence, fraud, misrepresentation, or mistake.
  • Example: If a person is threatened to sell his car, the contract is voidable due to absence of free consent.
• Illegal/Unlawful Agreement: An agreement where the consideration or object is forbidden by law, immoral, or opposed to public policy. These agreements are void. Parties to an unlawful agreement cannot obtain any help from a Court of law.

Formation of Contract

a. Tenders / Auctions

• Auctions (Invitation to Offer): An auctioneer’s request for bids, or the announcement of a coming auction sale, is an invitation to treat.
  • The bid made by the participant is the actual offer.
  • Case Law: Harris v. Nickerson (1873) established that advertisements for auction sales are mere statements of intention.
• Tenders (Standing/Continuing/Open Offer): This refers to an offer made to the public and kept open for acceptance for a certain time. An offer to supply goods as and when required means that each successive order given creates a separate contract.

b. Standard Form of Contract

• The concept of the Standard Form of Contract is recognized in modern commercial law. These contracts often feature pre-drafted terms where one party has limited negotiation ability.

c. Online Contracts

• Electronic contracts (E-Contracts) must possess all the necessary ingredients of a traditional contract (offer, acceptance, etc.).
• The Information Technology Act, 2000 addresses peculiar issues related to the formation and authentication of electronic contracts.

Consideration and Capacity

a. Consideration- Definition, Kinds, Essentials, Privity of Contract

• Definition (Sec. 2(d)): Consideration is identified as quid pro quo (“something in return”). It is defined as an act, abstinence, or promise, done at the desire of the promisor, by the promisee or any other person. It must be legal, real, and neither immoral nor prohibited by law.
• Kinds: Consideration may be Executory (Future), Executed (Present), or Past. Indian law recognizes all three kinds, unlike English law.
• Essentials:
  • Must move at the desire of the promisor.
    • Case Law (Promisor’s Desire): Durga Prasad vs. Baldeo And Others (1880): The promise to pay commission was not legally binding because the actions taken by the plaintiff (construction of the market) were done at the instance of a third party (the Collector), and not at the desire of the defendants. Thus, there was no valid consideration.
  • Gratuitous Promise Exception: A gratuitous promise to subscribe to a charity can be enforced if the promisee incurs detriment (an obligation to pay a contractor) acting on the faith of the promise.
    • Case Law (Detriment Incurred): Kedarnath Bhattacharji vs. Gorie Mahomed (1886): The defendant was held bound to pay his subscription amount because, based on the promise, the plaintiff entered into a lawful contract with a contractor and started construction work, which constituted sufficient consideration.
• Privity of Contract: The doctrine states that only a person who is a party to a contract can sue on it.
  • English Law Principle: A stranger to the contract cannot sue for want of privity of contract, nor can they enforce a contract if they did not provide consideration.
    • Case Law: Dunlop Pneumatic Tyre Co Ltd. vs. Selfridge & Co (1915): Dunlop could not recover damages from Selfridge because Dunlop was not a party to the contract between Dew & Co. and Selfridge, and provided no consideration.
    • Case Law: Tweddle v. Atkinson (1861): A husband could not sue the executors of his father-in-law on a contract between their respective fathers because the husband was not a party to the agreement.
  • Indian Exception (Privity of Consideration): India does not apply the rule of privity of consideration. Section 2(d) permits consideration to move from “the promisee or any other person”.
    • Case Law: Chinnaya Rau vs. Ramayya (1882): The Madras High Court held that the consideration furnished by the mother (a third party) for the property transfer to her daughter was sufficient consideration to enforce the daughter’s promise to pay an annuity to the mother’s brother (the plaintiff).
• When Consideration is Not Necessary (Sec. 25): Agreements are valid without consideration if they are: (1) In writing and registered, made out of natural love and affection between near relatives; (2) A promise to compensate a person who voluntarily did something for the promisor; or (3) A written promise to pay a time-barred debt.

b. Capacity to Enter into a Contract

• Competency (Sec. 11): All persons are competent to contract except those who are minors, persons of unsound mind, or persons disqualified by any law.
• Unsound Mind (Sec. 12): A person must be capable of understanding the contract and forming a rational judgment as to its effect on their interests. Agreements by persons of unsound mind are void.
• Persons Disqualified by Law: Includes alien enemies, foreign sovereigns, and corporations acting ultra vires.

c. Minor’s Position

• A minor is a person who has not completed the age of 18 years (or 21 if under the guardianship of a Court of Wards).

d. Nature / Effect of Minor’s Agreements

• Void ab initio: A minor’s contract is absolutely void in law and cannot be enforced against them.
  • Case Law: Mohori Bibee vs. Dharmodas Ghose (1903): The Privy Council established that a minor lacks the capacity to contract, rendering the agreement (a mortgage deed) void. The minor could not be compelled to repay the loan.
• No Ratification: Since the contract is void ab initio, it cannot be ratified upon the minor attaining the age of majority.
• Estoppel and Restitution: A minor can always plead minority (Estoppel is inapplicable). Courts may order the return of property still in the minor’s possession on equitable grounds, but generally cannot compel repayment of money as that would enforce a void contract.
  • Case Law (Restitution of Money): Leslie Ltd vs. Sheill (1914): The English Court of Appeal explained that the Doctrine of Equitable Restitution applies only to traceable goods or property in the minor’s possession, but not typically to money, to avoid enforcing the void agreement.
• Liability for Necessaries (Sec. 68): The minor is not personally liable, but their estate is liable to reimburse a reasonable price for necessaries supplied to them or their dependents. Such contracts are considered quasi-contracts.

Validity, Discharge and Performance of Contract

a. Free Consent

• Definition (Sec. 14): Consent is free when it is not caused by coercion, undue influence, fraud, misrepresentation, or mistake.
• Effect: If consent is not free, the contract is voidable at the option of the aggrieved party.

b. Coercion, Undue Influence, Misrepresentation, Fraud, Mistake

• Coercion (Sec. 15): Committing or threatening to commit “any act forbidden by the Indian Penal Code” or unlawfully detaining property, with the intention of causing a person to enter into an agreement.
  • Proposed Amendment: The Indian Contract (Amendment) Bill, 2024, seeks to substitute the words “any act forbidden by the Indian Penal Code” with the phrase “any act, the committing of which or threatening to commit which is punishable by any law for the time being in force”, to widen the definition and resolve discrepancies arising from court interpretations.
• Undue Influence (Sec. 16): Occurs where one party is in a position to dominate the will of the other and uses that position to obtain an unfair advantage. This is presumed in fiduciary relations (e.g., guardian/minor, solicitor/client).
  • Case Law: Raghunath Prasad Sahu v. Sarju Prasad Sahu (1924): Held that dominance of will and unfair advantage are essential elements that must be proved for undue influence.
• Fraud (Sec. 17): An untrue statement made knowingly or recklessly with the intent to deceive. The injured party can avoid the contract and claim damages. Mere silence is not fraud unless it is a duty to speak, such as in contracts uberrimae fidei (utmost good faith, like insurance contracts).
• Misrepresentation (Sec. 18): Innocent misrepresentation (believing the statement to be true) allows the party misled to avoid the contract, but usually cannot sue for damages.
• Mistake (Secs. 20, 21, 22): Must be a “vital operative mistake of fact” which is fundamental to the contract.
  • Bilateral Mistake (Sec. 20): If both parties are under a mistake as to a matter of fact essential to the agreement, the agreement is void.
  • Unilateral Mistake: Generally of no effect (contract is valid), unless it concerns a fundamental fact known to the other party.
  • Mistake of Law: Mistake of the law of the land does not render the contract void (ignorantia juris non-excusat), but mistake of foreign law is treated as mistake of fact.
  • Case Law (Mistake of Identity): Phillips vs. Brooks (1919): Held that where the seller intends to contract with the person physically present, the contract is only voidable for fraud, not void for mistake as to identity. The transferee who acquired the goods in good faith got a good title.
  • Case Law (Mistake as to Date): Haji Abdul Rehman Allarakhia vs. The Bombay and Persia Steam Navigation Co. (1892): Where the plaintiff made a unilateral mistake regarding the date of sailing, the Bombay High Court held there could be no rectification (only cancellation possible if it had been bilateral), as it was not a mistake common to both parties.

c. Unlawful Consideration and Object

• Unlawful Object (Sec. 23): The object is unlawful if it is forbidden by law, immoral, fraudulent, or opposed to public policy. Such agreements are illegal and void.
• Agreements Expressly Declared Void (Secs. 24-30):
  • Wagering Agreements (Sec. 30): Betting contracts are void.
  • Restraint of Marriage (Sec. 26): Agreements restricting marriage are void.
  • Restraint of Trade (Sec. 27): Every agreement restraining a lawful profession, trade, or business is void.
    • Valid Restraints: Agreements relating to the sale of goodwill (if reasonable) and negative stipulations in service agreements during the term of employment are exceptions.
    • Case Law (Restraint of Trade): Niranjan Shanker Golikari v. The Century Spinning and Manufacturing Co. Ltd.: The Supreme Court upheld a clause restraining an employee from joining a competitor for five years, finding the restraint necessary for the protection of the company’s interests.

d. Discharge of Contracts

• Discharge: Refers to the termination of the contractual relationship when the object or obligations are fulfilled.
• By Performance: Actual performance (parties fulfill promises) or Attempted Performance/Tender (promisor offers, but promisee refuses).
• By Agreement/Consent (Secs. 62 & 63):
  • Novation (Sec. 62): Substituting an existing contract with a new one.
  • Alteration (Sec. 62): Change in one or more material terms by mutual consent.
    • Case Law: United India Insurance Co. Ltd v. M.K.J. Corporation held that no material alteration can be made by one party without the consent of the other.
  • Rescission (Sec. 62): Cancellation of the contract by agreement.
  • Remission (Sec. 63): Acceptance of a lesser sum or lesser fulfillment of the promise.
  • Waiver: Deliberate abandonment of a right.
• By Lapse of Time: If no legal action is taken within the limitation period prescribed by the Limitation Act, 1963, the contract is discharged and the remedy is barred.
• By Operation of Law: Includes merger, unauthorized material alteration, or insolvency/death of the promisor.

e. Performance, Impossibility of Performance and Frustration

• Initial Impossibility (Sec. 56, para 1): An agreement to do an impossible act is void ab initio.
• Supervening Impossibility (Frustration – Sec. 56, para 2): If a contract becomes impossible or unlawful after its formation due to a change in circumstances, it is discharged and becomes void.
  • Grounds: Destruction of the subject-matter, death/disablement (where personal service is required), or supervening illegality.
  • Case Law (Destruction of Subject Matter): Taylor vs. Caldwell (1863): The destruction of the music hall by fire, without fault of either party, made performance impossible and rendered the contract void.
  • Limits of Frustration: Mere difficulty, commercial impossibility, strikes, or lockouts generally do not discharge the contract.
  • Case Law (Section 56 is Exhaustive): Satyabrata Ghose vs. Mugneeram Bangur & Co., And Another (1953/1954): The Supreme Court held that the doctrine of frustration is governed exclusively by Section 56 in India. The court found that a temporary requisition of land by the government did not take away the entire basis of the contract, and thus the contract was not frustrated.

f. Breach: Anticipatory and Present

• Breach of Contract: Failure to perform a contractual obligation without lawful excuse.
• Actual Breach (Present): Occurs at the time performance is due or during the performance itself. The promisee retains the right to sue for damages.
• Anticipatory Breach: Occurs before the time fixed for performance. The promisor either renounces the contract or makes performance impossible.
  • Remedy: The injured party may either immediately sue for damages (treating the contract as broken) or wait until the due date.
  • Case Law (Immediate Action): Hochster v. De La Tour: The court held that the claimant could sue for damages immediately after the defendant informed him that his services would not be required, without having to wait until the performance date.

Remedies and Quasi Contracts

a. Breach of Contract

• Actual breach leads to certain remedies provided to the party who suffers loss.

b. Remedies: Damages Kind, Quantum Meruit

The injured party is entitled to six types of remedies: Rescission, Suit for Damage, Suit upon Quantum Meruit, Suit for Specific Performance, Suit for Injunction, and Restitution.

1. Rescission of the Contract (Sec. 75): The injured party officially declares the contract invalid, is freed from their obligation, and is entitled to compensation for damages sustained due to non-fulfillment.
2. Suit for Damages (Sec. 73): Monetary compensation awarded to put the injured party in the position they would have been in if the contract had been performed. Compensation is not given for any remote or indirect loss.
   • Rule of Damages (Hadley vs. Baxendale, 1854): Compensation is recoverable for losses: (1) Arising naturally in the usual course of things from the breach (General Damages); OR (2) Those which the parties knew at the time of the contract as likely to result from the breach (Special/Consequential Damages).
   • Case Law (Direct Consequences): Pannalal Jankidas v Mohanlal (1951): The Supreme Court observed that the party in breach must make compensation only in respect of the direct consequences flowing from the breach, not indirect or remote losses.
   • Kinds of Damages:
     • General/Ordinary Damages: Arise naturally from the breach itself.
     • Special/Consequential Damages: Arise due to unusual circumstances and are recoverable only if those circumstances were brought to the knowledge of the defendant at the time of contracting.
     • Exemplary/Vindictive Damages: Awarded to punish the guilty party (not by way of compensation). Exceptions include breach of promise to marry and wrongful dishonour of a customer’s cheque by a banker.
     • Nominal Damages: Small token awards (e.g., a rupee or two) given to establish a right to decree for breach where no actual loss was suffered.
     • Liquidated Damages (Sec. 74): A sum fixed in advance by the parties. Indian Law entitles the injured party to reasonable compensation not exceeding the stipulated amount, whether or not actual loss is proved.
3. Suit upon Quantum Meruit: Means “as much as earned” or reasonable remuneration. This remedy allows a party who performed part of an indivisible contract, but was prevented from completing it by the other party, to sue for the value of the work done.
4. Specific Performance: The court directs the defendant to actually carry out the terms of the contract. This is a discretionary remedy granted only when monetary damages are inadequate or defective.
5. Injunction: An order given by the court restraining a person from doing a particular act. It secures the specific performance of a negative term of the contract.
6. Restitution (Sec. 65): Restoration of advantages received under an agreement discovered to be void or a contract that becomes void, based on the principle that a person should not be allowed to unjustly enrich himself.

c. Quasi Contracts (Relations resembling contracts)

• Nature: Quasi-contracts (Chapter V, Secs. 68-72) are legal constructs imposed by law to ensure justice and prevent unjust enrichment where no formal contract exists.
• Elements: Absence of a formal contract, unjust enrichment, legal obligation imposed by law, and the act must be non-gratuitous.
• Types under ICA:
  1. Necessaries Supplied (Sec. 68): Reimbursement from the property of a minor or person of unsound mind.
  2. Payment by Interested Person (Sec. 69): Reimbursement when a person pays money legally bound to be paid by another.
  3. Non-Gratuitous Act (Sec. 70): Compensation for the benefit received from a lawful, non-gratuitous act.
     • Case Law: State of West Bengal v. M/S. B. K. Mondal (1961): The Supreme Court held the government liable to pay a contractor for construction work done without a formal contract, based on the benefit received under Section 70.
  4. Finder of Lost Goods (Sec. 71): The finder has the responsibility of a bailee; they must preserve the goods and return them to the owner.
  5. Things Delivered by Mistake or Coercion (Sec. 72): The recipient is bound to repay or return money or things received by mistake or under coercion.
     • Case Law: State of Madhya Pradesh vs Bhailal Bhai & Ors (1964): The Supreme Court held that payment of sales tax made under a mistake is covered under Section 72, and the government must repay it.
     • Case Law (Unjust Enrichment Principle): Mahabir Kishore & Ors vs State Of Madhya Pradesh (1989): The Supreme Court laid down that unjust enrichment requires the defendant to be enriched by a benefit, at the expense of the plaintiff, and the retention of the enrichment must be unjust.