CPT Law Concept – Contract Act

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INDIAN CONTRACT ACT, 1872

UNIT- 1:- NATURE OF CONTRACT

 

What is Law?

 

Law means a ‘set of rules’ which governs our behaviours and relating in a civilized society. So

there is no need of Law in a uncivilized society.

 

Why Should One Know Law?

One should know the law to which he is subject because ignorance of law is no excuse.

 

 

Section 1:-

 

Commencement and applicability:-

 

  Short Title

 

Extent and                   commencement
The Indian

contract Act 1872

 

Applicable     to

whole      Indian

except the state

of    Jammu    &

Kashmir

 

First     day     of September 1872(1st Sept. 1872)

 

 

*   Prior to this English law of contract was followed in India.

*   It has XI chapter.

*   Law of contract creates jus in personem and not in jus in rem.

*   The Indian Contract Act consists of the following two parts:

(a)  General principals of the Law of Contract.

(b) Special kinds of contracts.

*   The  general  principals  of  the  Law  of  Contract  are  contained  in  Sections  1  to  75  of  the Indian Contract Act. These principles apply to all kinds of contracts irrespective of their nature.

*   Special contracts are contained in Sections 124 to 238 of the Indian Contract Act. These  special contracts are Indemnity, Guarantee, Bailment, pledge and Agency.

Note: In our discussion on this part of the book, unless otherwise stated, the sections mentioned  are those of the Indian Contract Act, 1872.

 

 

Contracts as Defined by Eminent Jurists

1. “Every agreement and promise enforceable at law is a contract.” – Pollock

2. “A Contract is an agreement between two or more persons which is intended to be

enforceable at law and is contracted by the acceptance by one party of an offer made to  him by the other party to do or abstain from doing some act.” – Halsbury

3. “A contract is an agreement creating and defining obligation between the parties” –

Salmond

 

 

1.      DEFINITIONS (Sec 2)

 

1.       Offer(i.e.   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  person  either  to  such  act  or  abstinence,  he  is  said  to  make  a  proposal.

EXAMPLE

 

 

2. Acceptance  2(b):-  When  the  person  to  whom  the  proposal  is  made,  signifies  his

assent there to , the proposal is said to be accepted.

EXAMPLE

 

 

 

 

3. Promise  2(b)  :-  A  Proposal  when  accepted  becomes  a  promise.  In  simple  words,

when an offer is accepted it becomes promise.

EXAMPLE

 

 

 

 

4. Promisor and promise 2(c) :- When the proposal is accepted, the person making the

proposal  is  called  as  promisor  and  the  person  accepting  the  proposal  is  called  as

promisee.

EXAMPLE

 

 

 

 

5. Consideration 2(d):- When at the desire of the promisor, the promisee or any other

person has done or abstained from doing something or does or abstains from doing

something   or   promises   to   do   or   abstain   from   doing   something,   such   act   or

abstinence or promise is called a consideration for the promise.

™   Price paid by the one party for the promise of the other Technical word meaning QUID-

PRO-QUO i.e. something in return.

EXAMPLE

 

 

 

6. Agreement 2(e) :- Every promise and set of promises forming the consideration for  each other. In short, agreement = proposal or offer + acceptance.

EXAMPLE

A offers to sell his car to B for `50,000. B agrees to it. Here there are 2 parties, A (offeror) and B (acceptor). The offer to sell car for `50,000 is a definite offer. This agreement gives to an obligation on part of A to deliver the car to B and on part of B to pay the price.

 

 

 

7.   Contract 2(h) :- An agreement enforceable by Law is a contract.

 

Agreement is  a  wider  term  than  contract  where  as  all  contracts  are  agreements.  Al agreements are not contracts.

 

All Contracts are Agreements, but all Agreements are not Contracts

 

The various agreements may be classified into two categories:

 

Agreement not enforceable by law

 

Any essential of

a valid contract

is not available.

Agreement enforceable by law

 

All essentials of

a valid contract

are available

Conclusion:

Thus we see that an agreement may be or may not be enforceable by law, and so all agreement

are not contract. Only those agreements are contracts, which are enforceable by law, In short.

 

Contracts = Agreement + Enforceability by Law

Hence, we can conclude “All contracts are agreement, but all agreements are not contracts.”

 

EXAMPLE

·         In the morning we go to a milk booth, buy milk and pay for it. It is an agreement whereby we pay or agree to pay the vendor on delivery of milk. Non-delivery of milk or non-payment of price to the vendor may amount to breach of contract, for which remedy can be sought. It has all the elements of a valid agreement/contract.

 

·         After sometime we hire a car to go to our work place, we pay or agree to pay the car hire charges for using the service of car. This is also an agreement/contract between the car service provider and us.

 

·          On reaching the office an invitation for attending the family function of an office colleague is received which we accept. Again this is also another type of agreement though social in nature not resulting into a contract.

 

8.   Void agreement 2(g):- An agreement not enforceable by law is void.

EXAMPLE

 

 

 

9.   Voidable contract 2(i):- An agreement is a voidable contract if it is enforceable by Law

at the option of one or more of the parties there to (i.e. the aggrieved party), and it is

not enforceable by Law at the option of the other or others.

EXAMPLE

 

 

10.    Void  contract  :-  A  contract  which  ceases  to  be  enforceable  by  Law  becomes  void  when it ceases to be enforceable.

EXAMPLE

 

 

 

– Sec.10.

2.  ESSENTIALS OF A VALID CONTRACT

 

“All agreements are contracts, if they are made –

by free consent of the parties, competent to contract,

for a lawful consideration and

with a lawful object, and

not hereby expressly declared to be void.”

 

 

 

 

 

2.       LEGAL RULES/ ESSENTIAL ELEMENTS REGARDING CONTRACT

1.      Proper offer and proper acceptance with intention to create legal relationship.

 

A and B agree to go to a movie on coming Sunday. A does not turn in resulting in loss of B’s time B cannot claim any damages from B since the agreement to watch a movie is a domestic agreement which does not result in a contract.

 

·         In case of social agreement there is no intention to create legal relationship and  there the is no contract (Balfour v. Balfour)

·         In  case  of  commercial  agreements,  the  law  presume  that  the  parties  had  the intention to create legal relations.

[an agreement of a purely domestic or social nature is not a contract ]

 

Example 1: A husband promising his wife to buy her a ‘necklace’ on occasion of her birthday is not a contract. This is so, because parties never intended to create legal relationship and breach of this promise is not enforceable in any court of law.

 

Example 2: Mr. X promised to pay his wife a household allowance of `5,000 per month. Later the parties separated and the husband failed to pay the amount. Wife sued for monthly household allowance. Held not to be an agreement culminating into a contract enforceable. [Balfour V Balfour (1919)2KB 571]

Example 3: K promised to pay ` 30 to his wife every month. Later, K failed to pay the amount. The wife filed a suit against the husband to recover the amount. The Court held that she could not recover as the promise was not made with an intention to create any legal relationship.

 

2.      Lawful  consideration 

 

consideration  must  not  be  unlawful,  immoral  or  opposed  to

the public policy.

 

For example, a consideration to murder somebody would not be a lawful consideration

3.      Capacity The  parties  to  a  contract  must  have  capacity  (legal  ability)  to  make  valid

contract.

 

1.      Section  11:-  of  the  Indian  contract  Act  specify  that  every  person  is  competent  to contract provided.

·         Is of the age of majority according to the Law which he is subject, and  Who is of sound mind and  Is not disqualified from contracting by any law to which he is subject.

EXAMPLE

 

 

 

·         Person of unsound mind can enter into a contract during his lucid interval.

 

EXAMPLE

 

 

 

 

·          An alien enemy, foreign sovereigns and accredited representative of a foreign state. Insolvents and convicts are not competent to contract.

 

EXAMPLE

 

 

 

 

4.      Free  consent  consent  of  the  parties  must  be  genuine  consent  means  agreed  upon

samething in the same sense i.e. there should be consensus – ad – idem. A consent is  said   to   be   free   when   it   is   not   caused   by   coercion,   undue   influence,   fraud,  misrepresentation or mistake.

 

Example 1 :  X asked Y to sell his car worth ` 2 lakh to him for ` 20,000 otherwise he will expose his illicit relationship. Y signed the agreement in favour of X selling his car to him for ` 20,000. This is not a valid contract as the consent of Y is not free.

 

Example 2 : X claimed that his horse is of Arabian racing breed. Y believing on his statement agreed to purchase his horse for ` 5 lakh. However, later the horse was found to be not of Arabian Racing breeds. This is also not a valid contract as the consent of Y was obtained through misrepresentation of fact

 

5.      Lawful object Ø  The object of agreement should be lawful and legal.

Ø  Two persons cannot enter into an agreement to do a criminal act.

Ø  Consideration or object of an agreement is unlawful if it is

·         forbidden by law; or

·         is  of  such  nature  that,  if  permitted,  would  defeat  the  provisions  of  any law; or

·         is fraudulent; or

·         Involves or implies, injury to person or property of another; or

·         Court regards it as immoral, or opposed to public policy

 

Example 1 :  X promises to help Y in smuggling of goods if Y pays him ` 5,100. This is not a valid agreement as the object is unlawful.

 

Example 2 :  X promises to pay Y ` 51,000 if Y promise to never get married during the life of X. This is also not a valid contract as the object is opposed to public policy.

 

6.      Possibility of performance ·         The terms of the agreement should be capable of performance.

·         An agreements to do act, impossible in itself cannot be enforced.

 

EXAMPLE A agrees to B to discover treasure by magic. The agreement is void because of the act in itself is impossible to be performed from the very beginning.

 

7. The terms of the agreements are certain or are capable of being made certain [29]

 

The terms of agreement must be certain and capable of performance. The meaning of the agreement must be certain or capable of being made certain otherwise the agreement will not be enforceable by law.

 

 For example, D agrees to sell C’ garments. The type, quality, value etc. are not discussed. The agreement cannot be enforced as terms are uncertain. Similarly, if A promises B to bring rainfall through magic. Such agreement cannot be enforced.

 

Example: G has two cars – Maruti and Fiat. He agrees to sell one of his cars to H for ` 20,000. It is not clear as to which of the cars G has agreed to sell. G might be thinking to sell the Maruti car while H might be thinking to purchase the Fiat car. The offer is not definite.

8. Not declared Void

 

·         The agreement should be such that it should be capable or being enforced by law.

·         Certain agreements have been expressly declared illegal or void by the law under various sections of the Contract Act, like agreement in restraint of marriage, trade or legal proceedings, wagering agreement etc.

Example 1 : A knowing that B has committed Bank robbery obtain a promise from B for transferring his flat worth ` 5 lakh to A for ` 2 lakh. This agreement is void and illegal.

 

Example 2 :  A promise to pay B ` 11,000 if B secures him employment in the public service. The agreement is void because of illegality of objects

9. Necessary legal formalities ·         A contract may be oral or in writing.

·         Where  a  particular  type  of  contract  is  required  by  law  to  be  in  writing  and registered,  it  must  comply  with  necessary  formalities  as  to  writing,  registration and attestation.

·         If legal formalities are not carried out then the contract is not enforceable by law.

 

EXAMPLE

 

 

Where it requires an agreement to make a gift for natural love and affection, there it must be in writing and registered, to be valid.

 

 

  1. TYPES OF CONTRACT

Types of Contracts on the basis of

 

 

Validity Formation Performation
Valid Contract Express Contract Executed Contract
Void Contract Implied Contract Executory Contract
Voidable Contract Quasi Contract Unilateral Contract
Illegal Agreement   Bilateral Contract

 Unenforceable Agreement

 

A.ON THE BASIS OF VALIDITY
1. VALID CONTRACT A contract which contains all the essential elements.
2. VOID CONTRACT [SEC. 2(j)] A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
EXAMPLE
A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before the supply is effected, the fire caught in the factory and everything was destroyed.

Here the contract becomes void.

 

3.VOIDABLE CONTRACT 

[SEC. 2(i)]

An agreement, which is enforceable by law at the option of one more of the parties, but not at the option of the other (s) is a voidable contract.
EXAMPLE- A promise to sell his farm to B for ` 5.0 lakh. B was not prepared for this but A by force compelled B to sign the agreement. Here the consent of B was obtained by coercion or fraud. The contract is voidable at the option of B.

A contract brought about as a result of Coercion, Undue influence, Fraud or misrepresentation would be voidable at the option of the person whose consent was caused by any one of these factors.

Basis of difference Void Contract Voidable Contract
Definition Contract ceases to be enforceable by law. Contract is enforceable at the option of the aggrieved party.
Nature Contract becomes void either because of sudden and unexpected events or of law changes, before the performance becomes due. Contract becomes voidable when it is caused by coercion, undue influence, fraud and misrepresentation.
Rights Does not provide any legal remedy for the parties to the contract. The aggrieved gets a right to rescind the contract and to declare it void otherwise it remains valid.
4. UNENFORCEABLE CONTRACT An unenforceable contract is one which is actually valid but cannot be enforced by law due to some technical defects. i.e  under stamping, absence of writing, barred by limitation.
EXAMPLE
 
5. ILLEGAL CONTRACT A contract which is forbidden by law.
For example: – Contract to commit crime. Contract that is immoral or opposed to public policy are illegal in nature. Similarly, R agrees with S, to purchase brown sugar is an illegal agreement.

to commit crime.

Basis of difference Void agreement Illegal agreement  
Scope A void agreement is not necessarily illegal. An illegal agreement is always void.  
Nature Not forbidden under law. Are forbidden under law.  
Punishment Parties are not liable for any Parties to illegal agreements are punishment under the law.  
Collateral agreement It’s not necessary that agreements collateral to void agreements may also be void. It may be valid also. Agreements collateral to illegal agreements are always void. liable for punishment.
Effects Void agreement is not void-ab-initio but may subsequently become void. All illegal agreements are void from the very beginning.  

 

 

B.CLASSIFICATION ON THE BASIS OF CREATION/FORMATION
1. EXPRESS CONTRACT                 A contract which is created either by word spoken or written.
For example: – (i) If ‘A’ of Agra offers to sell his car for Rs. 150000 to ‘B’ of Delhi by a letter and ‘B’ accepts the offer by writing a letter. Thus the contract between ‘A’ and ‘B’ is said to be an express contract.

(ii) P says to Q, “Will you purchase my car for ` 17,000?” It is an oral offer.

(iii) P, through a letter asks Q to buy his car for ` 17,000. It is a written offer.

(iv) A tells B on telephone that he offers to sell his house for ` 2 lacs and B in reply informs A that he accepts the offer, this is an express contract.

 

2.IMPLIED

CONTRACT

The contract which is created otherwise than by words spoken or written. i.e. these contracts are:-

Eg. A delivers by mistake goods at B’s warehouse instead of at C’s place. Here there is an obligation on the part of B to return the goods to A, though they never intended to enter into a contract.

  Tacit   Contract A contract which is inferred from the conduct of the parties is said to be tacit contract.
For example: – (i) When we enter into a bus without asking any question from bus conductor, we enter into implied contract.

(ii) Obtaining cash through automatic teller machine, sale by fall of hammer at an auction sale.

 

3.Quasi Contracts These are the contracts, which are created neither by word spoken, nor written, nor by the conducts of the parties, but these are created by the law.
For example: – If ‘A’ leaves his goods at ‘B’’s shop by mistake, then it is ‘B’’s duty to return the goods or to compensate the price.

In fact, these contracts depends upon the principle that nobody will be allowed to become rich at the expense of the others. This principle is known as doctrine of unjust enrichment.

 

Example: Obligation of finder of lost goods to return them to the true owner or liability of person to whom money is paid under mistake to repay it back cannot be said to arise out of a contract even in its remotest sense, as there is neither offer and acceptance nor consent.

These are said to be quasi-contracts.

 

4. E-CONTRACT An e-contract is one, which is entered into between two parties via internet.

 

C.CLASSIFICATION ON THE BASIS OF PERFORMANCE
1. Executed        Contract An executed contract is a contract in which both the parties have performed their obligation. This is a contract which has been completed.
EXAMPLE When a grocer sells a sugar on cash payment it is an executed contract because both the parties have done what they were to do under the contract.
2. Executory          Contract An Executory contract is the contract which is to be performed in future.
EXAMPLE Where G agrees to take the tuition of H, a pre-engineering student, from the next month and H in consideration promises to pay G ` 1,000 per month, the contract is executory because it is yet to be carried out.

 

3. Unilateral       Contract Where obligation is pending on the part of one of the parties.
EXAMPLE M advertises of payment of a reward of ` 500 to anyone who finds his missing boy and brings him.As soon as B traces the boy, there comes into existence an executed contract because B has performed his share of obligation and it remains for M to pay the amount of reward to B. This type of executed contracts are also called unilateral contract.
4.  Bilateral          Contract A Bilateral Contract is a contract in which obligation is pending on the part of both of the parties.
EXAMPLE Where A promises to sell his plot to B for ` 1 lacs cash down, but B pays only 25,000 as earnest money and promises to pay the balance on next Sunday. On the other hand A gives the possession of plot to B and promises to execute a sale deed on the receipt of the whole amount. The contract between the A and B is executory because there remains something to be done on both sides. Executory contracts are also known as Bilateral contracts.

 

D.ENGLISH LAW CLASSIFICATION
1. Simple Contracts A simple contract is the contract that is not formal. These can be made orally or in writing and must be supported by consideration.
2. Formal Contracts A formal contract is one which is entered into the prescribed form. These contracts may be sub-divided as follows:
a. Contract of Record (i)     Judgment of Court:- It is an obligation imposed by the court upon one or more persons in favour of the other/s.

 

(ii)   Recognizance:-It is a written acknowledgement of a debt due to state. It is met in connection with criminal proceedings.

 

b. Contract under Seal It is a contract which derives its binding force from its form alone. It is also known as deed or specialty contract.

 

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