Indian Contract Act – It explains the rules for making a valid contract and how to choose the right contract.
Starting with an Offer:
1. Offer or Proposal and Acceptance:
Giver: Offeror (Proposer)
Taker: Offeree (Acceptance) (Proposee) An offer is when a person willingly wants to make a promise and enter into a contract. The offeree decides whether to accept or reject the offer. According to Section 2(a) of the Indian Contract Act, a proposal or offer is made when one person shows their willingness to do or not do something in order to get the agreement of another person.
Rules for Offers:
- The offer should be clear, definite, complete, and final. It must not be vague or incomplete.
- The offer must be communicated to the offeree for them to accept or reject it.
- The communication of the offer can be expressed in words, spoken or written, or implied through actions.
- The communication of the offer can be general (to the public) or specific (to a particular person or group).
2. Lapse of Offer: An offer becomes invalid under certain conditions:
- If it is not accepted within a specific or reasonable time.
- If it is not accepted in the prescribed manner or in a usual and reasonable way if no method is specified.
- If the offeree clearly refuses to accept the offer.
- If either the offeror or offeree dies before acceptance.
- If the acceptor fails to meet the conditions stated in the offer.
- If the offeree makes a counter offer (rejecting the original offer and proposing a new one).
- If the offeree rejects the offer.
Revocation of Offer by Offeror: The offeror can withdraw or revoke the offer at any time before it is accepted.
- The revocation must be communicated to the offeree. If the offeree accepts the offer before being notified of the revocation, a binding contract is created.
- An offer is only valid for a specified time. After that time, it cannot be accepted because it is revoked.
- An offer to keep it open for a specific time is not binding unless there is something given in return (consideration).
Acceptance: If the offeree agrees to the offer, it is accepted. According to Section 2(d), when the person to whom the offer is made agrees to it, the offer is considered accepted. Once accepted, the offer becomes a promise or agreement.
Rules for Acceptance:
- Acceptance can be expressed or implied.
- Acceptance must be done in the prescribed manner if specified.
- Acceptance must be unqualified and absolute.
- If the offeree makes a counter offer, it is considered a rejection of the original offer.
- Acceptance must be communicated to the offeror.
- Mere silence from the offeree does not count as acceptance.
- If the offer requires acceptance through actions, no communication is needed unless specified in the offer.
- Acceptance must be given within a reasonable time and before the offer expires or is revoked.
According to Section 2(e), an agreement is formed when there is a promise or set of promises exchanged as consideration. An agreement requires promises and consideration.
Section 2(h) defines a contract as an agreement that is legally enforceable. A valid contract is an agreement that can be enforced by law. If an agreement cannot be enforced by law, it is not a contract. For a contract to be enforceable, it must have an obligation. A contract is a combination of an agreement and an obligation.
When is a Contract Enforceable? Section 10 of the Indian Contract Act states the essentials of a valid contract.
- Not all agreements can be enforced by law.
- Not every agreement is a contract.
- Every contract is an agreement because it requires both agreement and enforceability.
Types of Rights:
- Right In Rem: A right that applies to the whole world.
- Right Against Personem: A right that applies to a specific person.
Essentials of a Valid Contract (Section 10)
For a valid contract, the following are necessary:
- Offer + Promise + Acceptance + Promise from both parties = Agreement.
- Intention to create a legal relationship.
- Lawful consideration.
- Parties to the contract must be legally capable of contracting (above 18 years old, mentally sound, and not disqualified by law).
- Genuine consent of the parties.
- The object and consideration of the contract must be legal and not against public policy.
- The terms of the contract must be certain.
- The agreement must be capable of being performed.
To form a valid contract, there must be:
- An agreement.
- Lawful consideration.
- A lawful objective.
- Competent parties. Agreements that cannot be enforced by law are void agreements (Section 2(g)). An agreement that is void from the beginning is void ab initio.
Void Contract (Section 2(j)):
A contract that becomes unenforceable by law is void. A contract that was valid before but is no longer enforceable due to changed circumstances. For example, a singer with throat cancer refuses to perform at a concert as agreed upon when the contract was made.
Voidable Contract (Section 2(j)):
A contract that can be enforced by law at the option of one party but not at the option of the other is a voidable contract. The aggrieved or suffering party can choose to continue or cancel the contract. Voidable contracts arise in cases of coercion, undue influence, fraud, or misrepresentation.
An agreement with an unlawful objective and consideration. They are illegal if they are fraudulent, defeat any provision of law, immoral, injurious to a person or property, or against public policy. Agreements that are forbidden by law. All illegal agreements are void agreements (void ab initio).
An executed contract is a fully implemented contract between two or more parties that has been signed and is binding on all parties involved. It is a contract where both parties have completed their obligations.
An executory contract is one in which either one or both parties have not yet fulfilled their obligations. It can be further divided into:
- Unilateral Executory: One party has not fulfilled their obligations yet.
- Bilateral Executory: Both parties have not fulfilled their obligations.
Quasi Contract: A quasi contract is a contract that is imposed by a court order, not by agreement between the parties. It is a contract where obligations are imposed by law.
Consideration means receiving something in return for a contract to be valid. It is a necessary element for a contract to be valid.
Types of Consideration
- Future Consideration: This occurs when something is promised to be done in the future. It can be a promise to do something or refrain from doing something at a later date.
- Present Consideration: This happens when something has already been done in response to a promise. For example, paying cash for a purchase.
- Past Consideration: This refers to something that has already been done before the promise is made.
Rules for Consideration
a) Every contract must have valuable consideration. b) Consideration must be mutual, meaning both parties receive something of value. c) Consideration must be clear, definite, and not vague. d) Consideration does not have to be equal in value (adequate), but it must be lawful. e) Consideration must be more than what the promisee is already obligated to do.
When Consideration is Not Required
- Natural Love and Affection: When a contract is based on love and affection between parties, consideration may not be necessary.
- Compensation for Past Actions: If someone has already done something voluntarily for the other party, or if they did something the other party was legally obligated to do, consideration may not be needed.
- Written Promise to Pay Debt: If there is a written promise to pay a debt that is barred by the law of limitations, consideration may not be required.
- Creation of an Agency: According to Section 185 of the Indian Contract Act, consideration is not needed to establish an agency relationship.
- Gifts: Gifts do not require consideration. They can be given without any expectation of something in return.
Privity of Contract
A third party who is not a party to a contract cannot sue based on that contract. Even if the contract is meant to benefit the third party, they cannot enforce it.
Flaws in Contracts
- Void Agreements: An agreement that is treated as having no effect from the beginning is called a void agreement.
- Voidable Contracts: A contract that can be canceled or avoided by one party is known as a voidable contract. The party at fault may be required to pay damages to the other party.
When a country is at war with India, its citizens become alien enemies. Contracts with alien enemies become unenforceable during wartime and are considered void.
Alien Friends Foreigners whose countries are at peace with India have the same contractual capacity as Indian citizens.
Flaws in Contracts – Contractual Capacity
According to Section 11, anyone who is a natural or artificial person, including individuals, companies, firms, and institutions, can enter into a contract. However, minors, drunkards, those disqualified by law, and alien enemies cannot enter into contracts.
Flaw in Consent
Consent in a contract should be mutual and free. If consent is obtained through coercion, undue influence, misrepresentation, fraud, or mistake, it can affect the validity of the contract.
Fraud occurs when someone knowingly makes a false statement or behaves recklessly to deceive another person in a contract. It makes the contract voidable at the option of the aggrieved party.
Terms of Fraud
- Making false suggestions.
- Actively concealing facts.
- Making promises without the intention to perform.
- Any other act intended to deceive.
- Any fraudulent act or omission.
Silence as Fraud
Mere silence about facts that could affect a person’s willingness to enter into a contract is not considered fraud. However, in certain cases, where there is a duty to speak or silence is equivalent to speech, silence can be considered fraud.
Coercion, as defined in Section 15, involves committing or threatening acts forbidden by the Indian Penal Code or unlawfully detaining or threatening to detain someone’s property to force them into an agreement. A contract formed under coercion is voidable.
Undue influence occurs when one party dominates the will of another due to their relationship, mental harassment, or the exercise of control over the other party. It can make a contract voidable.
Misrepresentation is a false statement that induces someone to enter into a contract. It can be innocent or fraudulent. In case of fraud, damages can be claimed, while compensation is given for innocent misrepresentation.
A mistake occurs when parties unintentionally do something different from what they intended. Mistakes that render a contract void must involve factual errors essential to the agreement and occur on the part of both parties.
Legality of Object
Section 23 states that the consideration or object of an agreement is lawful unless it is forbidden by law, defeats the provisions of law, is fraudulent, involves or implies harm to others, or is immoral or against public policy.
Void and Illegal Agreements
- Not enforceable from the beginning.
- Not all void agreements are illegal.
- Void ab initio (void from the start).
- Actions forbidden by law.
- Every illegal agreement is void.
- Unlawful and not enforceable.
Consequences of Illegal Agreement
- An illegal agreement is entirely void.
- Void from the beginning.
- No action arises from an evil cause.
- Void ab initio.
- Not enforceable from the beginning.
A collateral agreement is a separate contract made in consideration of a party agreeing to enter into the main contract. It contains additional terms related to the same subject matter. The collateral agreement coexists with the main contract.
Agreement Void as Being Opposed to Public Policy
An agreement may be considered void if it goes against public policy by prejudicing the state, abusing justice, or imposing unreasonable and inconvenient restrictions.
Public Policy in Agreements
Agreements that restrict personal choices in marriage or lawful trade are not allowed under the law. The doctrine of public policy, a branch of common law, states that decisions based on public policy can be risky. Public policy should only be considered in exceptional cases when there is clear harm to society. The following agreements are void (not valid) because they go against public policy but are not illegal:
- Agreements that restrict parental rights.
- Agreements that restrict marriage.
- Agreements made with marriage brokers.
- Agreements that restrict personal freedom.
- Agreements that restrict trade.
Wagering agreements are like ordinary betting agreements. They are considered void, meaning they are not legally binding. Wagering refers to making bets where one party wins and the other loses based on an uncertain future event. Wagering is illegal in Gujarat and Maharashtra. In Mumbai, there is a law specifically addressing wagering agreements. If a collateral (something of value given as security) in the agreement is illegal, the whole agreement becomes illegal. However, if the collateral is legal, but the wagering contract itself lacks mutuality (equal obligations for both parties), it becomes void.
Under the Indian Contract Act, certain agreements are considered void, meaning they have no legal effect. These agreements include:
- Agreements made by minors, persons of unsound mind, or those disqualified by a court.
- Agreements made based on a mistake of fact by both parties.
- Agreements with unlawful consideration.
- Agreements where any part of the consideration or object is unlawful.
- Agreements made without consideration, except for three exceptions.
- Agreements that restrict marriage.
- Agreements that restrict trade.
- Agreements that restrict legal proceedings.
- Agreements with uncertain terms.
- Wagering agreements.
- Agreements to enter into future agreements.
- Acts that are impossible to perform.
A contract becomes void when it loses its enforceability. This can happen in several ways:
- If the subject matter of the contract is destroyed.
- If an agreement that was legal at the time becomes illegal afterward.
- If a contingent contract depends on the happening or non-happening of an event.
- If a contract is based on fraud, it becomes voidable (can be canceled) if sued.
A contingent contract is a contract that depends on the occurrence or non-occurrence of a specified event. If the event mentioned in the contract doesn’t happen, the contract becomes void.
A quasi contract is a contract imposed by the law to ensure fairness. It resembles a contract, but it is created to return an object to its rightful owner or prevent someone from unjustly benefiting at another’s expense.
Discharge or Termination of Contracts
A contract is said to be discharged or terminated when the rights and obligations arising from it are no longer valid.
Discharge by Mutual Agreement or Consent
- Novation: When a new contract replaces an existing one.
- Alteration: Changing one or more significant terms of the contract.
- Rescission: Canceling a contract by mutual agreement before performance.
- Remission: Accepting a lesser amount or fulfillment than originally contracted.
- Waiver: Giving up a right under a contract.
Discharge by Lapse of Time
If a contract is not performed within a specified period (called the period of limitation) and the promisee doesn’t take legal action, they lose their right to enforce the contract. The period of limitation is usually three years for most types of rights.
Discharge by Operation of Law
Discharge under this category can occur in the following ways:
- Merger: Incorporating an inferior contract into a superior one.
- Alteration: Making material changes to a contract without the other party’s consent.
- Insolvency: If one party is declared insolvent by the court.
Discharge by Impossibility or Illegality
A contract becomes void if it is impossible to perform or if it becomes illegal or unlawful after being made. There must be a valid reason for the impossibility or illegality of performance.
Breach of Contract
A breach of contract occurs when the promisor fails to perform their contractual obligations or provides defective performance. There are two types of breaches:
- Actual breach: Occurs at the time when performance is due or during the actual performance.
- Anticipatory breach: Occurs before the performance is due, when one party indicates they will not fulfill their obligations.
Remedies for Breach of Contract
If a contract is breached, the innocent party has several options:
- Rescind the contract and refuse further performance.
- Sue for damages.
- Sue for specific performance (forcing the other party to fulfill their obligations).
- Seek an injunction to prevent a breach of a negative term (restricting certain actions).
- Sue for quantum merit (being paid for the value of services rendered).
Contracts of Indemnity and Guarantee
- One party promises to compensate the other for losses caused by their own conduct or the conduct of another person.
- The person providing compensation is called the indemnifier, and the person receiving compensation is the indemnified or indemnity holder.
- Indemnity contracts are a type of contingent contract.
- A contract to perform or discharge the liability of a third person if they fail to fulfill their obligations.
- The person providing the guarantee is the surety, the person for whom the guarantee is given is the principal debtor, and the person receiving the guarantee is the creditor.
Differences between Indemnity and Guarantee
- Involves two parties: indemnifier and indemnified.
- The liability of the indemnifier is primary.
- Depends on a contingency.
- The indemnifier cannot sue a third party.
- Involves three parties: guarantor (surety), debtor, and creditor.
- The liability of the debtor is primary, and the surety’s liability is secondary.
- Relates to an existing debt.
- The surety can hold the principal debtor liable if they fail to pay.
Law of Agency
An agent is a person employed to establish contracts between a principal and third parties. When acting as an agent, a person has the authority of the principal.
Creation of Agency
- Express Agency: A contract of agency can be oral or written, often in the form of a power of attorney that outlines the authority and terms of the agent.
- Implied Agency:
- Agency by Estoppel: When someone is prevented from denying a fact they previously represented.
- Wife as Agent: In cases where a husband and wife live together, the wife is presumed to have authority to make purchases for necessary items according to their standards. However, the husband is not liable if specific conditions are met.
- Agency of Necessity: When a person must incur unauthorized expenses to protect or preserve someone else’s property.
- Agency by Ratification: When someone without authority acts as an agent or exceeds their authority, the principal can choose to ratify the contract, making it binding. Certain conditions must be met for ratification to be valid.
Types of Agents:
- Special Agent: An agent appointed for a specific act or function. They can only perform actions within their given authority, and anything beyond that won’t bind the principal.
- General Agent: An agent appointed to perform various tasks within the authority granted by the principal. They have the power to act on behalf of the principal in all related transactions. In this case, the principal is liable.
A person employed by the original agent and working under their control in the agency’s business. The sub-agent is considered an agent of the original agent and is bound by the same duties. The sub-agent is not directly responsible to the principal, except in cases of fraud or intentional wrongdoing.
Mercantile Agents have authority, as part of their customary business, to sell or consign goods for sale, buy goods, or raise money using goods as security. The following types of mercantile agents exist:
- Factor: A mercantile agent employed to sell goods in their possession or contract to buy goods for the principal. They can sell goods in their own name and receive payment.
- Brokers: Agents whose usual business involves making contracts between parties for the sale and purchase of goods and securities. They receive a commission called brokerage.
- Del Credere Agent: An agent who, in addition to their regular remuneration, guarantees that buyers who purchase goods on credit will make payment.
- Auctioneers: Agents who sell goods through auction, where the highest bidder wins.
- Partner: In a partnership firm, every partner is an agent of the firm and other partners for the purpose of the firm’s business.
- Bankers: When bankers buy and sell securities, collect cheques, dividends, bills, etc., they act as agents of their customers.
Duties of an Agent: An agent has the following duties:
- Acting within the scope of authority and strictly following the principal’s instructions.
- When there are no express instructions, following customs prevalent in the same kind of business.
- Performing work with reasonable skill and diligence, meeting professional standards.
- Disclosing all material information they become aware of.
- Keeping confidential information entrusted by the principal undisclosed.
- Not competing with the principal.
- Maintaining accurate accounts and being prepared to provide them upon reasonable notice.
- Not making secret profits and disclosing any additional profit made. If an agent is found taking secret bribes, the principal has the right to dismiss the agent, recover the amount of the secret profit, and refuse to pay the agent’s remuneration. If a third party is involved, the principal can seek damages.
- An agent must not delegate their authority to a sub-agent, except in specific circumstances where delegation is allowed by the principal, trade custom permits it, it is necessary for proper performance, there is an emergency, the work is purely ministerial, or the principal is aware of the agent’s intention to delegate.
Rights of Agents: An agent is entitled to:
- Receive remuneration.
- Have damages or losses incurred during work compensated by the principal.
- Certain classes of agents have a lien on goods or property to secure their remuneration, expenses, and liabilities incurred.
- As representatives of the principal, agents have the right to be indemnified by the principal for charges, expenses, and liabilities properly incurred during the agency.
Termination of Agency: An agency can be terminated by:
- Fulfillment of the agency contract.
- Agreement between the principal and agent.
- Expiration of the contract’s fixed period.
- Death or insanity of the principal or agent.
- Insolvency of the principal, and in some cases, the agent.
- Dissolution of an incorporated company when the principal or agent is one.
- Destruction of the subject matter.
- Renunciation of authority by the agent.
- Revocation of authority by the principal.
- Not paper-based but in electronic form.
- Provides speed, convenience, and efficiency.
- Transactions and contracts can be completed within seconds.
- The Information Technology Act of 2000 addresses issues specific to electronic contracts.
Necessary Ingredients of an Electronic Contract:
- Lawful consideration.
- Intention to create legal relations.
- Competent parties to the contract.
- Genuine and free consent.
- Lawful object of the contract.
- Certainty and possibility of performance.