INDIAN CONTRACT ACT, 1872

Study Note – 1
INDIAN CONTRACT ACT, 1872
This study note includes
• Indian Contract Act,1872-Concepts and Definitions
• Communication,Acceptance and Revocation of Proposals
• Contracts,Voidable Contracts and Void Agreements
• Free Consent
• Considerations
• Void Agreements
• Contingent Contracts
• The Performance of Contracts
• Time and Place for Performance
• Performance of Reciprocal Promises
• Appropriation of Payments
• Indemnity and Guarantee
• Bailment
• Bailment of Pledges
• Contracts of Agency
1.1. Indian Contract Act, 1872-Concepts and Definitions
INTRODUCTION
The word CONTRACT is common to all of us and virtually no business transactions can take
place without any contracts. The Indian Contract Act, 1872, deals with various types of contracts
entered into by various people and defines the extremely important aspects of business
transactions relating to contracts. In business dealings offers for sale are made and accepted,
consideration is agreed, and conditions of sale are specified. Disputes arise when an offer or
acceptance is violated, consideration is unpaid, and conditions of transactions are violated.
EXTENT AND COMMENCEMENT
The Indian Contract Act, 1872 extends to the whole of India except the State of Jammu and
Kashmir; and it shall come into force on the first day of September, 1872.
ENACTMENTS REPEALED
The Indian Contract Act, 1872 does not affect nor does expressly repeal any provisions of any
Statute, Act or Regulation and also does not expressly repeal any usage or custom of trade,
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nor any incident of any contract, not inconsistent with the provisions of this Act.
BASIC CONCEPTS
(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 to such act or abstinence, he is
said to make a proposal;
(b) When the person to whom the proposal is made signifies his assent thereto, the proposal
is said to be accepted. A proposal, when accepted, becomes a promise;
(c) The person making the proposal is called the “promisor”, and the person accepting the
proposal is called the “promisee”;
(d) When, 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 to abstain from doing,
something, such act or abstinence or promise is called a consideration for the promise;
(e) Every promise and every set of promises, forming the consideration for each other, is an
agreement;
(f) Promises which form the consideration or part of the consideration for each other are
called reciprocal promises;
(g) An agreement not enforceable by law is said to be void;
(h) An agreement enforceable by law is a contract;
(i) An agreement which is enforceable by law at the option of one or more of the parties
thereto, but not at the option of the other or others, is a voidable contract;
(j) A contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable.
1.2. COMMUNICATION, ACCEPTANCE AND REVOCATION OF
PROPOSALS
INTRODUCTION
The communication of proposals, the acceptance of proposals, and the revocation of proposals
and acceptances, respectively, are deemed to be made by any act or omission of the party
proposing, accepting or revoking, by which he intends to communicate such proposal,
acceptance or revocation, or which has the effect of communicating it.
COMMUNICATION WHEN COMPLETE
The communication of a proposal is complete when it comes to the knowledge of the person to
whom it is made.
THE COMMUNICATION OF AN ACCEPTANCE IS COMPLETE
As against the proposer, when it is put in a course of transmission to him, so as to be out of the
power of the acceptor;
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As against the acceptor, when it comes to the knowledge of the proposer.
THE COMMUNICATION OF A REVOCATION IS COMPLETE
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.
ILLUSTRATIONS
(a) A proposes, by letter, to sell a house to B at a certain price.
The communication of the proposal is complete when B receives the letter.
(b) B accepts A’s proposal by a letter sent by post.
The communication of the acceptance is complete—
as against A, when the letter is posted; as against B, when the letter is received by A.
(c) A revokes his proposal by telegram.
The revocation is complete as against A when the telegram is despatched. It is complete as
against B when B receives it.
Brevokes his acceptance by telegram. B’s revocation is complete as against B when the
telegram is dispatched, and as against A when it reaches him.
REVOCATION OF PROPOSALS AND ACCEPTANCES
A proposal may be revoked at any time before the communication of its acceptance is complete
as against the proposer, but not afterwards.
An acceptance may be revoked at any time before the communication of the acceptance, is
complete as against the acceptor, but not afterwards.
ILLUSTRATIONS
A proposes, by a letter sent by post, to sell his house to B.
B accepts the proposal by a letter sent by post.
A may revoke his proposal at any time before or at the moment when B posts his letter of
acceptance, but not afterwards.
B may revoke his acceptance at any time before or at the moment when the letter communicating
it reaches A, but not afterwards.
REVOCATION HOW MADE
A proposal is revoked—
(1) By the communication of notice of revocation by the proposer to the other party;
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(2) By the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so
prescribed, by the lapse of a reasonable time, without communication of the acceptance;
(3) By the failure of the acceptor to fulfill a condition precedent to acceptance; or
(4) By the death or insanity of the proposer, if the fact of the death or insanity comes to the
knowledge of the acceptor before acceptance.
ACCEPTANCE MUST BE ABSOLUTE
In order to convert a proposal into a promise, the acceptance must—
(1) Be absolute and unqualified;
(2) Be expressed in some usual and reasonable manner, unless the proposal prescribes the
manner in which it is to be accepted. If the proposal prescribes a manner in which it is to
be accepted, and the acceptance is not made in such a manner, the proposer may, within a
reasonable time after the acceptance is communicated to him, insist that his proposal shall
be accepted” in the prescribed manner, and not otherwise; but if he fails to do so, he
accepts the acceptance.
ACCEPTANCE BY PERFORMING CONDITIONS, OR RECEIVING CONSIDERATION
Performance of the conditions of a proposal, or the acceptance of any consideration for a
reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.
PROMISES, EXPRESS OR IMPLIED
Insofar as the proposal or acceptance of any promise is made in words, the promise is said to
be express. Insofar as such proposal or acceptance is made otherwise than in words, the promise
is said to be implied.
1.3. CONTRACTS, VOIDABLE CONTRACTS AND VOID AGREEMENTS
WHAT AGREEMENTS ARE CONTRACTS?
All agreements are contracts if they are made by the free consent of parties competent to contract,
for a lawful consideration and with a lawful object, and are not hereby expressly declared to be
void.
Nothing herein contained shall effect any law in force in India and not hereby expressly repealed,
by which any contract is required to be made in writing or in the presence of witnesses, or any
law relating to the registration of documents.
WHO ARE COMPETENT TO CONTRACT?
Every person is competent to contract who is of the age of majority according to the law to
which he is subject, and who is of sound mind, and is not disqualified from contracting by any
law to which he is subject.
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WHAT IS A SOUND MIND FOR THE PURPOSES OF CONTRACTING?
A person is said to be of sound mind for the purposes of making a contract if, at the time when
he makes it, he is capable of understanding it and of forming a rational judgment as to its effect
upon his interests.
A person who is usually of unsound mind, but occasionally of sound mind, may make a contract
when he is of sound mind.
A person who is usually of sound mind, but occasionally of unsound mind, may not make a
contract when he is of unsound mind.
Illustrations
(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract during
those intervals.
(b) A 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 judgment as to its effect on his interests, cannot
contract whilst such delirium or drunken-ness lasts.
1.4. FREE CONSENT
INTRODUCTION
One of the essential elements of a valid contract is that there should be free consent of the
concerned parties to the contract. Two or more persons are said to consent when they agree
upon the same thing in the same sense.
FREE CONSENT
Consent is said to be free when it is not caused by—
(1) coercion, or
(2) undue influence, or
(3) fraud, or
(4) misrepresentation, or
(5) mistake,
Consent is said to be so caused when it would not have been given but for the existence of such
coercion, undue influence, fraud, misrepresentation or mistake.
(1) COERCION
“Coercion” is the committing or threatening to commit, any act forbidden by the Indian Penal
Code (45 of 1860), or the unlawful detaining, or threatening to detain, any property, to the
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prejudice of any person whatever, with the intention of causing any person to enter into an
agreement.
Explanation: It is immaterial whether the Indian Penal Code (45 of 1860) is or is not in force in
the place where the coercion is employed.
Illustrations
A, on board an English ship on the high seas, causes B to enter into an agreement by an act
amounting to criminal intimidation under the Indian Penal Code (45 of 1860).
A afterwards sues B for breach of contract at Calcutta.
A has employed coercion, although his act is not an offence by the law of England, and although
section 506 of the Indian Penal Code (45 of 1860) was not in force at the time when, or at the
place where the act was done.
(2) UNDUE INFLUENCE
(1) A contract is said to be induced by “undue influence” where the relations subsisting
between the parties are such that one of the parties is in a position to dominate the will of
the other and uses that position to obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the forgoing principle, a person is
deemed to be in a position to dominate the will of another—
(a) Where he holds a real or apparent authority over the other, or where he stands in a
fiduciary relation to the other; or
(b) Where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
(3) Where a person, who is in a position to dominate the will of another, enters into a contract
with him, and the transaction appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that such contract was not induced by undue
influence shall lie upon the person in a position to dominate the will of the other.
Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence
Act, 1872 (1 of 1872).
Illustrations
(a) A, having advanced money to his son, B, during his minority, upon B’s coming of age
obtains, by misuse of parental influence, a bond from B for a greater amount than the sum
due in respect of the advance. A employs undue influence.
(b) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his medical
attendant, to agree to pay B an unreasonable sum for his professional services. B employs
undue influence.
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(c) A, being in debt to B, the moneylender of his village, contracts a fresh loan on terms which
appear to be unconscionable. It lies on B to prove that the contract was not induced by
undue influence.
(d) A applies to a banker for a loan at a time when there is stringency in the money market.
The banker declines to make the loan except at an unusually high rate of interest. A accepts
the loan on these terms. This is a transaction in the ordinary course of business, and the
contract is not induced by undue influence.
(3) FRAUD
“Fraud” means and includes any of the following acts committed by a party to a contract, or
with his connivance, or by his agent, with intent to deceive another party thereto or his agent,
or to induce him to enter into the contract:—
(1) The suggestion, as a fact, of that which is not true by one who does not believe it to be true;
(2) The active concealment of a fact by one having knowledge or belief of the fact;
(3) A promise made without any intention of performing it;
(4) Any other act fitted to deceive;
(5) Any such act or omission as the law specially declares to be fraudulent.
Explanation : Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that, regard being had to
them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself,
equivalent to speech.
Illustrations
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about
the horse’s unsoundness. This is not fraud in A.
(b) B is A’s daughter and has just come of age. Here, the relation between the parties would
make it A’s duty to tell B if the horse is unsound.
(c) B says to A - “If you do not deny it, I shall assume that the horse is sound”. A says nothing.
Here, A’s silence is equivalent to speech.
(d) A and B, being traders, enter upon a contract. A has private information of a change in
prices which would affect B’s willingness to proceed with the contract. A is not bound to
inform B.
(4) MISREPRESENTATION
“Misrepresentation” means and includes—
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(1) The positive assertion, in a manner not warranted by the information of the person making
it, of that which is not true, though he believes it to be true;
(2) Any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or any one claiming under him, by misleading another to his prejudice or
to the prejudice of anyone claiming under him ;
(3) Causing, however innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
(5) MISTAKE
Mistake means an erroneous belief about something.
Mistake can be -
(a) Mistake of law, or
(b) Mistake of fact.
(a) MISTAKE OF LAW
When a party enters into a contract, without the knowledge of law in the country, the contract
is affected by such mistake but it is not void. A contract is not voidable because it was caused
by a mistake as to any law in force in India. The reason here is that ignorance of law is not an
excuse at all. However if a party is induced to enter into a contract by the mistake of law then
such a contract is not valid.
Illustration
A and B make a contract grounded on the erroneous belief that a particular debt is barred by
the Indian Law of Limitation; the contract is not voidable.
(b) MISTAKE OF FACT
Where both the parties to an agreement are under a mistake as to a matter of fact essential to
the agreement, the agreement is void.
Explanation : An erroneous opinion as to the value of the thing which forms the subject-matter
of the agreement is not to be deemed a mistake as to a matter of fact.
Illustrations
(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to
Bombay. It turns out that, before the day of the bargain-, the ship conveying the cargo had
been cast away and the goods lost. Neither party was aware of the facts. The agreement is
void.
(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of
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the bargain, though neither party was aware of the fact. The agreement is void.
(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time
of the agreement, but both parties were ignorant of the fact. The agreement is void.
CONTRACT CAUSED BY MISTAKE OF ONE PARTY AS TO MATTER OF FACT
A contract is not voidable merely because it was caused by one of the parties to it being under
a mistake as to a matter of fact.
VOIDABILITY OF AGREEMENTS WITHOUT FREE CONSENT
When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement
is a contract voidable at the option of the party whose consent was so caused.
A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he
thinks fit, insist that the contract shall be performed, and that he shall be put in the position in
which he would have been, if the representations made had been true.
Exception : If such consent was caused by misrepresentation or by silence, fraudulent within
the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent
was so caused had the means of discovering the truth with ordinary diligence.
Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the
party on whom such fraud was practiced, or to whom such misrepresentation was made, does
not render a contract voidable.
Illustrations
(a) A, intending to deceive B, falsely represents that five hundred mounds of indigo are
made annually at A’s factory, and thereby induces B to buy the factory. The contract is
voidable at the option of B.
(b) A, by a misrepresentation, leads B erroneously to believe that five hundred mounds of
indigo are made annually at A’s factory. B examines the accounts of the factory, which
show that only four hundred mounds of indigo have been made. After this B buys the
factory. The contract is not voidable on account of A’s misrepresentation.
(c) A fraudulently informs B that A’s estate is free from encumbrance. B thereupon buys the
estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist
on its being carried out and the mortgage-debt redeemed.
(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does
conceal, the existence of the ore from A. Through A’s ignorance B is enabled to buy the
estate at an undervalue. The contract is voidable at the option of A.
(e) A is entitled to succeed to an estate at the death of B; B dies; C, having received intelligence
of B’s death, prevents the intelligence reaching A, and thus induces A to sell him his
interest in the estate. The sale is voidable at the option of A.
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POWER TO SET ASIDE CONTRACT INDUCED BY UNDUE INFLUENCE.
When consent to an agreement is caused by undue influence, the agreement is a contract voidable
at the option of the party whose consent was so caused.
Any such contract may be set aside either absolutely, or, if the party who was entitled to avoid
it has received any benefit thereunder, upon such terms and conditions as to the Court may
seem just.
Illustrations
(a) A’s son has forged B’s name to a promissory note. B, under threat of prosecuting A’s son,
obtains a bond from A for the amount of the forged note. If B sues on this bond, the Court
may set the bond aside.
(b) A, a moneylender, advances Rs. 100 to B, an agriculturist, and, by undue influence, induces
B to execute a bond for Rs. 200 with interest at 6 per cent per month. The Court may set the
bond aside; ordering B to repay Rs. 100 with such interest as may seem just.
1.5. CONSIDERATIONS
INTRODUCTION
One of the essential elements of a contract is consideration. Consideration means something in
return. For example, if A agrees to sale goods to B for a price of Rs. 20,000/-, the amount is the
consideration for A for parting with the goods.
An agreement without consideration is not enforceable and therefore is void.
In this chapter rules regarding consideration, exceptions to the rule of ‘no consideration no
contract’ and other legal provisions are discussed.
LEGAL RULES REGARDING CONSIDERATIONS
The consideration or object of an agreement is lawful, unless—
It is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of
any law; or is fraudulent; or involves or implies injury to the person or property of another; or
the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every
agreement of which the object or consideration is unlawful, is void.
Illustrations
(a) A agrees to sell his house to B for 10,000 rupees. Here B’s promise to pay the sum of 10,000
rupees is the consideration for A’s promise to sell the house, and A’s promise to sell the
house is the consideration for B’s promise to pay the 10,000 rupees. These are lawful
considerations.
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