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CHAPTER 01 INDIAN CONTRACT ACT 1872


INTRODUCTION
The Law of Contract deals with the law relating to the general principles of contract. It is the most important part of Mercantile Law. It affects every person in one way or the other, as all of us enter into some kind of contract everyday. Since this law was not happily worded, two subse uent legislations namely Indian Sale of !oods "ct # Sections $% to &'( of the Indian Contract "ct &)$' were repealed* and +artnership "ct was also enacted and Sections '(, to '%% of the Contract "ct were also repealed.

What is `Contract`
The term -Contract- is defined in Section '.h/ of the Indian Contract "ct, which reads as under 0An agreement enforceable by law is a contracts.1 The analysis of this definition shows that a contract must have the following two elements2 &. "n agreement, and '. The agreement must be enforceable by law. In other words2 Contract 3 An Agreement 4 Enforceability .by law/ Agreement .Section '.e/ 5very promise and every set of promises forming the consideration for each other is an agreement. Promise .Section '.b// " proposal when accepted becomes a promise. 5very agreement is not a contract. 6hen an agreement creates some legal obligations and is enforceable by law, it is regarded as a contract.

1.1 ESSENTIAL ELEMENTS OF CONTRACT


&. "greement '. Intention to create legal relationship (. 7ree and genuine consent. 8. +arties competent to contract. 9. Lawful consideration. %. Lawful ob:ect. $. "greement not declared void or illegal. ). Certainty of meaning. ,. +ossibility of performance. Ex # 6here ;"; who owns ' cars < and y wishes to sell car ;<; for =s. (>,>>>. ;?;, an ac uaintance of ;"; does not know that; "; owns car ;<; also. @e thinks that; "; owns only car ;y; and is offering to sell the same for the stated price. @e gives his acceptance to buy the same. There is no contract because the contracting parties have not agreed on the same thing at the same time, ;"; offering to sell his car ;<; and ;?; agreeing to buy car or;. There is no consensus-adidem.

CLASSIFICATION OF CONTRACTS 1. Classification according to validity or enforceability. a) Valid b) Voidable c) Void contracts or agreements d) Illegal. e) Unenforceable 2. Classification according to Mode of formation (i) Express contract (ii) Implied contract 3. Classification according to Performance

2 (i) Executed contract (ii) Executory contract.


(iii) Unilateral Contract (iv) ilateral Contract

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OFFER AND ACCEPTANCE ASections (B,C

OFFER
What is `!ffer"#roposal`
" +roposal is defined as Dwhen 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 abstinence, he is said to make a proposal.D ASection '.a/C. "n offer can be made by .a/ any act or .b/ omission of the party proposing by which he intends to communicate such proposal or which has the effect of communicating it to the other .Section (/.

$o% an !ffer is made&

CASE EXAMPLE In Carbolic Smoke Ball Co. 's case, the patentBmedicine company advertised that it would give a reward of E&>> to anyone who contracted influenFa after using the smoke balls of the company for a certain period according to the printed directions. Mrs. Carlill purchased the advertised smoke ball and contracted influenFa in spite of using the smoke ball according to the printed instructions. She claimed the reward of E&>>. The claim was resisted by the company on the ground that offer was not made to her and that in any case she had not com municated her acceptance of the offer. She filed a suit for the recovery of the reward. Held: She could recover the reward as she had accepted the offer by complying with the terms of the offer./

ESSENTIAL REQUIREMENTS OF A VALID OFFER


I. '. &. "n offer must have certain essentials in order to constitute it a valid offer. These are2 The offer must be made with a view to obtain acceptance. The offer must be made with the intention of creating legal relations. [Balfour v. Balfour .&,&,/ ' G.?.9$Il The terms of offer must be definite, unambiguous and certain or capable of being made certain. The terms of the offer must not be loose, vague or ambiguous. 8. "n offer must be distinguished from .a/ a mere declaration of intention or .b/ an invitation to offer or to treat. "n auctioneer, at the time of auction, invites offers from the wouldBbeBbidders. @e is not making a proposal. " display of goods with a price on them in a shop window is construed an invitation to offer and not an offer to sell.

!ffer vis'a'vis Invitation to offer


"n offer must be distinguished from invitation to offer. " prospectus issued by a company for subscription of its shares by the members of the public, is an invitation to offer. The Letter of Hffer issued by a company to its e<isting shareholders is an offer. 9. The offer must be communicated to the offeree. "n offer must be communicated to the offeree before it can be accepted. This is true of specific as sell as general offer. %. The offer must not contain a term the nonBcompliance of which may be assumed to amount to acceptance.

Cross !ffers
6here two parties make identical offers to each other, in ignorance of each other;s offer, the offers are known as crossBoffers and neither of the two can be called an acceptance of the other and, therefore, there is no contract.

TERMINATION OR LAPSE OF AN OFFER


&/ '/ (/ 8/ 9/ "n offer is made with a view to obtain assent thereto. "s soon as the offer is accepted it becomes a con tract. ?ut before it is accepted, it may lapse, or may be revoked. "lso, the offeree may re:ect the offer. In these cases, the offer will come to an end. The offer lapses after stipulated or reasonable time "n offer lapses by the death or insanity of the offeror or the offeree before acceptance. "n offer terminates when re:ected by the offeree. "n offer terminates when revoked by the offeror before acceptance. "n offer terminates by not being accepted in the mode prescribed, or if no mode is prescribed, in some usual and reasonable manner.

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%/ " conditional offer terminates when the condition is not accepted by the offeree. .$/ Counter Hffer

ACCEPTANCE
"cceptance has been defined as D6hen the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted1. The offeree is deemed to have given his acceptance when he gives his assent to the proposal. The assent may be e<press or implied. It is e<press when the acceptance has been signified either in writing, or by word of mouth, or by performance of some re uired act. ExB " enters into a bus for going to his destination and takes a seat. 7rom the very nature, of the circumstance, the law will imply acceptance on the part of ".C In the case of a general offer, it can be accepted by anyone by complying with the terms of the offer.

(cceptance ho% made

ESSENTIALS OF A VALID ACCEPTANCE


&/ "cceptance must be absolute and un ualified. '/ "cceptance must be communicated to the offeror. (/ "cceptance must be according to the mode prescribed. Ex- " sends an offer to ? through post in the usual course. ? should make the acceptance in the Dusual and reasonable mannerD as no mode of acceptance is prescribed. @e may accept the offer by sending a letter, through post, in the ordinary course, within a reasonable time.

COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION


"s mentioned earlier that in order to be a valid offer and acceptance. .i/ the offer must be communicated to the offeree, and .ii/ the acceptance must be communicated to the offeror. The communication of acceptance i comp!ete" .i/ as against t e !ro!oser, when it is put into a course of transmission to him, so as to be out of the power of the acceptor* .ii/ as against t e acce!tor, when it comes to the knowledge of the proposer. Ex" proposes, by letter, to sell a house to ? at a certain price. ? accepts ";s proposal by a letter sent by post. The communication of acceptance is complete2 .i/ as against ", when the letter is posted by ?* .ii/ as against ?, when the letter is received by ". The communication of a #e$ocation %of an offe# o# an acceptance& i comp!ete" .&/ as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it. .'/ as against the person to whom it is made when it comes to his knowledge. ExB " revokes his proposal by telegram. The revocation is complete as against ", when the telegram is dispatched. It is complete as against ?, when ? receives it. Re$ocation of p#opo a! an' acceptance" " proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. ExB " proposes, by a letter sent by post, to sell his house to ?. ? accepts the proposal by a letter sent by post. " may revoke his proposal at any time before or at the moment when ? posts his letter of acceptance, but not afterwards. ? may revoke his acceptance at any time before or at the moment when the letter communi cating it reaches ", but not afterwards.

CAPACITY TO CONTRACT .Sections &>B&'/ WHO ARE NOT COMPETENT TO CONTRACT


The following are considered as incompetent to contract, in the eye of law2 B

(A) LIVING PERSON ()) *inor+ '


.i/ .ii/ .iii/ .iv/ " contract with or by a minor is void and a minor, therefore, cannot, bind himself by a contract. " minor;s agreement cannot be ratified by the minor on his attaining ma:ority. If a minor has received any benefit under a void contract, he cannot be asked to refund the same. " minor cannot be a partner in a partnership firm.

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" minor;s estate is liable to a person who supplies necessaries of life to a minor.

CASE EXAMPLE In &,>( the +rivy Council in the leading case of Mohiri Bibi v. Dharmo as !hose .&,>,(> Ca. 9(,/ held that in India minor;s contracts are absolutely void and not merely voidable. The facts of the case were2 Iharmodas !hose, a minor, entered into a contract for borrowing a sum of =s. '>,>>> out of which the lender paid the minor a sum of =s. ),>>>. The minor e<ecuted mortgage of property in favour of the lender. Subse uently, the minor sued for setting aside the mortgage. The +rivy Council had to ascertain the validity of the mortgage. Jnder Section $ of the Transfer of +roperty "ct, every person competent to contract is competent to mortgage. The +rivy Council decided that Sections &> and && of the Indian Contract "ct make the minor;s contract void. The mortgagee prayed for refund of =s. ),>>> by the minor. The +rivy Council further held that as a minor;s contract is void, any money advanced to a minor cannot be recovered.

(,) *ental Incompetence


" person is said to be of unsound mind for the purpose of making a contract, if at the time when he makes it, he is incapable of understanding it, and of forming a rational :udgement as to its effect upon his interests. " person, who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. Ex- " patient, in a lunatic asylum, who is at intervals, of sound mind* may contract during those intervals. " sane man, who is delirious from fever or who is so drunk that he cannot understand the terms of a contract or form a rational :udgement as to its effect on his interest, cannot contract whilst such delirium or drunkenness lasts. .i/ .ii/ .iii/ "lien 5nemy .+olitical Status/ 7oreign Sovereigns and "mbassadors Company under the Companies "ct or Statutory Corporation by passing Special "ct of +arliament .Corporate status/ .iv/ Insolvent +ersons

(-) Incompetence through .tatus

(B) CORPORATE
6hen under li uidation .under the supervision of the CourtKTribunal/

FREE CONSENT .Sections &>* &(B''/ What is the meaning of `C!/.E/0- (SECTION 13)
6hen two or more persons agree upon the same thing in the same sense, they are said to consent. ExB " agrees to sell his 7iat Car &,)( model for =s. )>,>>>. ? agrees to buy the same. There is a valid contract since " and ? have consented to the same sub:ect matter.

What is meant by `1ree Consent`


Consent is said to be free when it is not caused by Cau e affectin( cont#act Con e)uence &. Coercion Contract voidable '. Jndue influence Contract voidable &. 7raud Contract voidable 8. Misrepresentation Contract voidable 9. Mistake # .i/ of fact .a/ ?ilateral Loid .b/ Jnilateral !enerally not invalid .ii/ of 7act Loid Ex .i/ " railway company refuses to deliver certain goods to the consignee, e<cept upon the pay ment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. @e is entitled to recover so much of the charge as was illegally e<cessive. .ii/ The directors of a Tramway Co. issued a prospectus stating that they had the right to run tramcars with

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steam power instead of with horses as before. In fact, the "ct incorporating the company provided that such power might be used with the sanction of the ?oard of Trade. ?ut, the ?oard of Trade refused to give permission and the company had to be wound up. +, a shareholder sued the directors for dam ages for fraud. The @ouse of Lords held that the directors were not liable in fraud because they honestly believed what they said in the prospectus to be true. [Derry v. Pee" #&)),/ &8 ".C. (($C.

CONSIDERATION ASections '.d/, &>,'(B'9, &8), &)9C 2efinition


Consideration is what a promisor demands as the price for his promise. In simple words, it means ;something in return.; Consideration has been defined as D6hen at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or promises to abstain from doing some thing, such act or abstinence or promise is called a consideration for the promise.D

IMPORTANCE OF CONSIDERATION
" promise without consideration is purely gratuitous and, however sacred and binding in honour it may be, cannot create a legal obligation. " person who makes a promise to do or abstain from doing something usually does so as a return or e uivalent of some loss, damage, or inconvenience that may have been occasioned to the other party in respect of the promise. The benefit so received and the loss, damage or inconvenience so caused is regarded in law as the consideration for the promise.

INDS OF CONSIDERATION
" consideration may be2 &. "#ecuted or Present '. "#ecutory or $uture

LEGALITY OF OBJECT .Sections '(, '8/


"n agreement will not be enforceable if its ob:ect or the consideration is unlawful. "ccording to Section '( of the "ct, the consideration and the ob:ect of an agreement are unlawful in the following cases2 1. '. &. 8. If it is forbidden by law If it is of such a nature that if permitted, it would defeat the provisions of any law. If it is fraudulent. "n agreement with a view to defraud other is void. If it involves or implies in:ury to the person or property of another. If the ob:ect of an agree ment is to in:ure the person or property of another it is void. 9. If the Court regards it as immoral or opposed to public policy. "n agreement, whose ob:ect or consideration is immoral or is opposed to the public policy, is void. ExB " partnership entered into for the purpose of doing business in arrack .local alcoholic drink/ on a licence granted only to one of the partners, is void ab-initio whether the partnership was entered into before the licence was granted or afterwards as it involved a transfer of licence, which is forbidden and penalised by the "kbari "ct and the rules thereunder [$elu Payaychi v. %iva %ooriam, "I= .&,9>/ Mad. ,)$C.

What consideration and ob3ects are unla%ful agreement VOID

VOID and VOIDABLE Agreements (S!c"i#$% 2&'3() Void agreement


&. The following are the additional grounds declaring agreements as void2 B .i/ "greements by person who are not competent to contract. .ii/ "greements under a mutual mistake of fact material to the agreement. .iii/ "greement with unlawful consideration. .iv/ "greement without consideration. .Exce&tion # if such an agreement is in writing and registered or for a past consideration/ .v/ "greement in restraint of marriage. .vi/ "greement in .absolute/ restraint of trade .vii/ "greements in restrain of legal proceedings, .viii/ "greements void for uncertainty ."greements, the meaning of which is not certain, or capable of being

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made certain/ "greements by way of wager .a promise to give money or money;s worth upon the determination or ascertainment of an uncertain event/ "greements against +ublic +olicy "greements to do impossible act. "n agreement, which has been entered into by misrepresentation, fraud, coercion is voidable, at the option of the aggrieved party.

Voidable agreements CONTINGENT CONTRACTS (SECTIONS 31'3&)


" contingent contract is a contract to do or not to do something, if some event, collateral to such contract does or does not happen. Contingent contracts may be enforced when that uncertain future event has happened. If the event becomes impossible, such contracts become void.

When a contingent contract may be enforced ESSENTIAL ELEMENTS OF A CONTIN*ENT CONTACT


&. '. (. 8. 9. %. There must be a valid contract. The performance of the contract must be conditional. The even must be uncertain. The event must be collateral to the contact. The event must be an act of the party. The event should not be the discretion of the promisor.

UASI CONTRACTS +SECTIONS &,' -2.


The term - uasi contract- may be defined as a - contract which resembles that created by a contract.- as a matter of fact, - uasi contract- is not a contract in the strict sense of the term, because there is no real contract in e<istence. Moreover, there is no intention of the parties to enter into a contract. It is an obligation, which the law creates in the absence of any agreement.

CIRCUMSTANCES OF QUASI CONTRACTS


7ollowing are to be deemed MuasiBcontracts. .i/ Claim for Necessaries Supplied to a person incapable of Contracting or on his account. .ii/ =eimbursement of person paying money due by another in payment of which he is interested. Hbligation of a person en:oying benefits of nonBgratuitous act. .iii/ =esponsibility of 7inder of !oods .iv/ Liability of person to whom money is paid, or thing delivered by mistake or under coercion ExB ", who supplies the wife and children of ?, a lunatic, with necessaries suitable to their con ditions in life, is entitled to be reimbursed from ?;s property.

PERFORMANCE OF CONTRACTS +SECTIONS 3-'&-. !ffer to perform or tender of performance


"ccording to Section (), if a valid offerKtender is made and is not accepted by the promisee, the promisor shall not be responsible for nonBperformance nor shall he lose his rights under the contract. " tender or offer of performance to be valid must satisfy the following conditions2 &. It must be unconditional. '. It must be made at proper time and place, and performed in the agreed manner.

WHO MUST PERFORM


Promisor B The promise may be performed by promisor himself, or his agent or by his legal representative. Agent B the promisor may employ a competent person to perform it. %egal &e!resentative - In case of death of the promisor, the Legal representative must perform the promise unless a contrary intention appears from the contract.

CONTRACTS/ WHICH NEED NOT 0E PERFORMED


I. If the parties mutually agree to substitute the original contract by a new one or to rescind or alter it '. If the promisee dispenses with or remits, wholly or in part the performance of the promise made to him or

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e<tends the time for such performance or accepts any satisfaction for it. &. If the person, at whose option the contract is voidable, rescinds it. 8. If the promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise.

DISCHARGE OF CONTRACTS +S!c"i#$% -3'-).


The cases in which a contract is discharged may be classified as follows2 A. By performance or tender B. By mutual consent " contract may terminate by mutual consent in any of the following ways2 B

a4 /ovation (substitution) b4 5ecession (cancellation/ c4 (lteration


C. D. E. By subsequent impossibility By operation of law By breach

REMEDIES FOR BREACH OF CONTRACT (SECTIONS -3'-))


"s soon as either party commits a breach of the contract, the other party becomes entitled to any of the following reliefs2 B a) Recession of the contract b) Damages monetary compensation) c) !pecific performance d) "n#unction e/ 'uantum meruit Ex ' ", a singer contracts with ?, the manager of a theatre, to sing at his theatre for two nights in every week during the ne<t two months, and ? engages to pay her =s. &>> for each nightOs performance. Hn the si<th night, " wilfully absents herself from the theatre and ? in conse uence, rescinds the contract. ? is entitled to claim compensation for the damages for which he has sustained through the nonBfulfilment of the contract.

CONTRACT OF AGENCY +SECTION 1,2 1 23,. Who is an `(gent`


"n agent is defined as a Dperson employed to do any act for another or to represent another in dealings with third personD. In other words, an agent is a person who acts in place of another. The person for whom or on whose behalf he acts is called the +rincipal. "gency is therefore, a relation based upon an e<press or implied agreement whereby one person, the agent, is authorised to act for another, his principal, in transactions with third person. The function of an agent is to bring about contractual relations between the principal and third parties.

WHO CAN EMPLO2 AN A*ENT


"ny person, who is capable to contract may appoint as agent. Thus, a minor or lunatic cannot contract through an agent since they cannot contract themselves personally either.

WHO MA2 0E AN A*ENT


In considering the contract of agency itself .i.e., the relation between principal and agent/, the contractual capacity of the agent becomes important.

HOW A*ENC2 IS CREATED


" contract of agency may be created by in any of the following three ways2 B .&/ 5<press "gency .'/ Implied "gency .(/ "gency by 5stoppel .8/ "gency by @olding Hut .9/ "gency of Necessity .%/ "gency ?y =atification

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DUTIES OF A*ENT
&. (o conduct t e business of agency according to t e !rinci!al)s directions '. ( e agent s ould conduct t e business wit t e s*ill and diligence that is generally possessed by persons engaged in similar business, e<cept where the principal knows that the agent is wanting in skill. 3. (o render !ro!er accounts. 8. (o use all reasonable diligence, in communicating wit is !rinci!al, and in seeking to obtain his instructions. +. ,ot to ma*e any secret !rofits -. ,ot to deal on is own account .. Agent not entitled to remuneration for business misconducted. ). An agent s ould not disclose confidential information supplied to him by the principal [(el Blun ell v. %te&hens .&,'>/ "C. &,9%C. ,. / en an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him.

RI*HTS OF AN A*ENT
1. 2. 1. 1. +. &ig &ig &ig &ig &ig t to remuneration t 0f &etainer t of %ien t of 2ndemnification t to com!ensation for in3ury caused by !rinci!al4s neglect

PRINCIPAL3S DUTIES TO A*ENT


" principal is2 .i/ bound to indemnify the agent against the conse uences of all lawful acts done by such agent in e<ercise of the authority conferred upon him* .ii/ liable to indemnify an agent against the conse uences of an act done in good faith. .iii/ The principal must make compensation to his agent in respect of in:ury caused to such agent by the principal;s neglect or want of skill.

TERMINATION OF A*ENC2
&. ?y revocation by the +rincipal. '. Hn the e<piry of fi<ed period of time. &. Hn the performance of the specific purpose. 8. Insanity or Ieath of the principal or "gent. 9. "n agency shall also terminate in case sub:ect matter is either destroyed or rendered unlawful. %. Insolvency of the +rincipal. Insolvency of the principal, not of the agent, terminates the agency. $. ?y renunciation of agency by the "gent.