INDIAN CONTRACT ACT, 1872

INTRODUCTION

A contract is essentially an agreement that the law recognizes and enforces. An agreement itself
is nothing but a set of promises exchanged between two parties. Once such promises are legally
binding, they form a contract.

According to Section 2(h) of the Indian Contract Act, 1872, a contract is “an agreement
enforceable by law.” This means every agreement is not necessarily a contract—only those
which fulfill the conditions given under Section 10 of the Act can become contracts.

Example: - If A agrees to sell his radio to B, it is a contract because it creates enforceable rights. -
But if A agrees to go with B to watch a movie, it is merely a social agreement, not enforceable by
law.

Agreement Defined: - Section 2(e): “Every promise and every set of promises, forming the
consideration for each other, is an agreement.” - Section 2(b): “When the person to whom a
proposal is made signifies his assent, the proposal becomes a promise.”

Thus, every agreement is based on an offer (proposal) from one party and acceptance by the
other.

ESSENTIALS OF A VALID CONTRACT (Section 10)

1. There must be an agreement – i.e., an offer and acceptance.

2. The parties must be competent to contract.

3. The agreement must be supported by lawful consideration and a lawful object.

4. The consent of the parties must be free (not obtained by coercion, fraud, undue influence, or
misrepresentation).

5. The agreement must not be expressly declared void.

6. There must be an intention to create legal relations.

7. The object must not be unlawful, against public policy, or fraudulent.

8. The agreement should not be vague or uncertain.

9. The agreement must be capable of performance.

10. Though contracts may be oral or written, in certain cases (like gift deeds), writing and
registration are mandatory.

IMPORTANCE OF WRITTEN CONTRACT

 A written contract is a formal agreement between parties reduced to writing and signed, expressing
the terms clearly. While contracts can be oral or implied, a written contract has several advantages:

1. Clarity of Terms

 Writing ensures that all terms and conditions of the agreement are clearly stated.
 Reduces misunderstandings or ambiguity regarding rights and obligations.
 Both parties have a definite reference to the promises made.

2. Evidence of Agreement

 Serves as legal evidence in case of disputes.

 Courts can refer to the written document to determine the obligations of each party.
 Oral contracts are harder to prove and may rely on witnesses or circumstantial evidence.

3. Reduces Chances of Fraud

 Writing prevents parties from later denying the agreement or claiming different terms.
 Protects against misrepresentation or false claims.

4. Defines Rights and Obligations

 Clearly specifies what each party is required to do.

 Helps avoid confusion regarding performance, deadlines, payments, or services.

5. Enforceability

 Written contracts are easier to enforce in a court of law.

 Certain types of contracts, e.g., sale of immovable property, lease over 1 year, must be in
writing under law (Indian Contract Act, Transfer of Property Act).

6. Facilitates Record Keeping

 Acts as a permanent record for reference during the life of the contract.
 Useful for audits, accounting, and business management.

7. Promotes Professionalism and Trust

 Demonstrates seriousness and professionalism in transactions.

 Builds trust as both parties know their rights and obligations are documented.

In Roop Kumar v. Mohan Thedani (2003), the Supreme Court highlighted the value of putting
contracts into writing. Written contracts serve as proof of the parties’ intention and reduce
disputes by making terms clear.

INTENTION TO CREATE LEGAL RELATIONS

Although the Contract Act does not explicitly require an intention to create legal relations,
Indian courts have held it to be essential.
- Banwari Lal v. Sukhdarshan Dayal (1973): Court stressed that intention is necessary. - S.V.R.
Mudaliar v. Rajababu (1955): Even a “gentlemen’s understanding” was treated as binding since
it created clear legal obligations.

KINDS OF CONTRACTS

1. Based on Enforceability - Valid Contract – Enforceable by law. - Void Agreement [Sec. 2(g)] –
Not enforceable by law. - Voidable Contract [Sec. 2(i)] – Enforceable at the option of one party. -
Illegal Agreement – Forbidden by law. - Unenforceable Contract – Valid but not enforceable due
to technical defects.

2. Based on Mode of Creation - Express Contract – Terms stated in words. - Implied Contract –
Terms inferred from conduct. - Quasi-Contract – Obligations imposed by law (Sec. 68–72).

3. Based on Execution - Executed Contract – Both parties have fully performed obligations. -
Executory Contract – Performance still due.

4. Based on Form - Ordinary Contract – Mutually decided terms. - Standard Form Contract – Pre-
drafted terms used in mass transactions.

CONTRACTUAL LIABILITY OF THE STATE

The government, like private individuals, can enter into contracts. Under Articles 298 and 299 of
the Constitution: 1. Contract must be expressed in the name of the President (Union) or
Governor (State). 2. Must be executed on their behalf. 3. Must be signed by a person authorized
to do so.

Failure to comply can make the contract void.

FORMATION OF AN AGREEMENT (OFFER AND ACCEPTANCE)

OFFER (Proposal) – Section 2(a): “When one person signifies to another his willingness to do or
abstain from doing anything, with a view to obtaining the assent of that other, he is said to make
a proposal.”

Essentials of a Valid Offer: 1. Must show willingness with intent to get assent.

2. Must create legal obligations.

3. May be express or implied.

4. Terms must be certain (Sec. 29).

5. Must be communicated (Sec. 4).

Key Cases: - Lalman Shukla v. Gauri Dutt (1913) – No reward if offer not known. - Carlill v.
Carbolic Smoke Ball Co. (1893) – General offers valid on performance. - Tinn v. Hoffman (1873)
– Cross offers ≠ acceptance. - Boots Cash Chemists (1953) – Display = invitation to offer.

ACCEPTANCE (Sec. 2(b))

“When the accepted.”

Essentials 2. Must be prescribed

person to whom the proposal is made signifies his assent, the proposal is said to be

of Valid Acceptance: 1. Must be communicated (except general offers by performance).

communicated to offeror directly.

3. Must be by authorized person.

4. Must followor reasonable mode.

5. Must be absolute and unconditional (Sec. 7).

Modes of Communication: - By post – Complete when posted (against offeror), when received
(against acceptor). - By telephone/telex – Complete when heard. - By internet – Same principle:
effective on acknowledgment.

Important Cases: - Felthouse v. Bindley (1863) – Silence is not acceptance. - Powell v. Lee (1908)
– Must come from authorized source. - Bhagwandas Kedia v. Girdharilal (1966) – Contract
where acceptance is heard.

REVOCATION OF ACCEPTANCE (Sec. 5)

Acceptance may also be revoked before it reaches the proposer. Rule: If the revocation reaches
the proposer before or at the same time as the acceptance, the acceptance is invalid.

Case Law: - Henthorn v. Fraser (1892) – Revocation is effective only when communicated to the
proposer.

CAPACITY TO CONTRACT (Sec. 11)

A person is competent to contract if he/she: 1. Is of the age of majority (18 years in India), 2. Is
of sound mind, and 3. Is not disqualified by law.

1. Minors - A contract with a minor is void ab initio (Mohori Bibee v. Dharmodas Ghose, 1903). -
A minor cannot ratify a contract upon attaining majority. - However, a minor can enforce
contracts made for his benefit.

Other Cases: - Leslie v. Sheill (1914) – Minor not liable in tort if it indirectly enforces a contract. -
Raj Rani v. Prem Adib (1949) – Minor can sue for benefits under a contract.

2. Persons of Unsound Mind - Must be capable of understanding contract and forming rational
judgment (Sec. 12). - Idiots: contracts void. - Lunatics: contracts valid during lucid intervals. -
Drunken persons: void if incapable of understanding.

Case Law: - Imperial Loan Co. v. Stone (1892) – Burden of proof of unsoundness lies on the
person claiming incapacity.

3. Persons Disqualified by Law - Alien enemies, insolvents, convicts, corporations without

authority.

FREE CONSENT (Sec. 13 & 14)

Consent = when two parties agree on the same thing in the same sense. Consent is free when not
caused by: coercion, undue influence, fraud, misrepresentation, or mistake.

1. Coercion (Sec. 15) - Act forbidden by IPC or unlawful detention of property. - Consent under
coercion → voidable.

Cases: - Ranganayakamma v. Alwar Setti (1889) – Widow forced to adopt; voidable. - Chikham
Ammiraju v. Seshamma (1917) – Threat to commit suicide amounts to coercion.

2. Undue Influence (Sec. 16) - When one party dominates another's will and gains unfair
advantage.

Cases: - Mannu Singh v. Umadat Pandey (1890) – Guru induced disciple; undue influence. -
Allcard v. Skinner (1887) – Gifts under religious influence voidable.

3. Fraud (Sec. 17) - Intentional deception: false statement, concealment, false promise, etc.

Cases: - Derry v. Peek (1889) – False statement knowingly = fraud. - Gujarat Bottling Co. v. Coca
Cola (1995) – Suppression of material fact = fraud.

4. Misrepresentation (Sec. 18) - Innocent false statement, believed to be true.

Cases: - Redgrave v. Hurd (1881) – Innocent misrepresentation voidable. - Indian Bank v.

Satyam Fibres (1996) – Misstatement in business dealings vitiates consent.

5. Mistake (Sec. 20–22) - Bilateral mistake of fact → void. - Unilateral mistake of fact → valid,
except identity/nature cases. - Mistake of law → no excuse (except foreign law).

Cases: - Couturier v. Hastie (1856) – Contract void when subject matter perished. - Boulton v.
Jones (1857) – Mistake as to identity can void contract. - State of Maharashtra v. Mayer Hans
George (1965) – Mistake of law no defense.

MISTAKE (Sections 20–22)

1. Mistake of Fact - Bilateral mistake of fact: Where both parties misunderstand a fact essential
to the agreement → contract void (Sec. 20). *Example*: Subject matter not in existence. - Case:
Couturier v. Hastie (1856) – Goods had already perished; agreement void. - Unilateral mistake of
fact: Where only one party is mistaken → contract generally valid, unless mistake relates to
identity or nature of contract. - Case: Boulton v. Jones (1857) – Mistake about identity can void
the contract.

2. Mistake of Law - Mistake of Indian law is no excuse (Sec. 21). - Mistake of foreign law treated
as mistake of fact. - Case: State of Maharashtra v. Mayer Hans George (1965).

UNLAWFUL AGREEMENTS (Sec. 23)

Agreements are unlawful when: 1. Forbidden by law. 2. Defeat provisions of any law. 3.
Fraudulent in nature. 4. Cause injury to person or property. 5. Considered immoral or against
public policy.
Examples of agreements opposed to public policy: - Trading with enemy. - Trafficking in public
offices. - Interference with the course of justice. - Marriage brokerage contracts. - Agreements
restraining parental rights. - Agreements restricting personal freedom.

VOID AGREEMENTS

1. Agreements by incompetent persons – Void (e.g., minor, unsound mind).

2. Agreements under mutual mistake (Sec. 20) – Void.

3. Agreements without consideration– Void, unless covered under exceptions (Sec. 25).

4. Agreements in restraint of marriage – Void (Sec. 26). - Case: Lowe v. Peers (1768).

5. Agreements in restraint of trade – Void (Sec. 27). - Case: Madhub Chander v. Raj Coomar
(1874). - Exception: Sale of goodwill.

6. Agreements in restraint of legal proceedings – Void (Sec. 28).

CONSIDERATION (Sec. 2(d))

Definition: Consideration means something in return – an act, abstinence, or promise given at

the desire of the promisor. It may be past, present, or future.

Essentials: 1. Must move at the desire of the promisor. 2. May move from promisee or any other
person. - Case: Chinnaya v. Ramaya (1882). 3. May be past, present, or future. 4. Must be real and
lawful. 5. Must not be illusory or impossible.

AGREEMENTS WITHOUT CONSIDERATION (Sec. 25)

General Rule: An agreement without consideration is void.

Exceptions (where agreement without consideration is valid): 1. Promise made on account of

natural love and affection (in writing and registered). - Case: Rajlukhy Debi v. Bhootnath (1900).
2. Promise to compensate for past voluntary services. 3. Promise to pay time-barred debt (must
be in writing, signed by debtor). 4. Gifts completed by delivery of possession.

AGREEMENTS IN RESTRAINT OF MARRIAGE (Sec. 26)

Every agreement restraining marriage of a person (other than a minor) is void. - Case: Lowe v.
Peers (1768).

AGREEMENTS IN RESTRAINT OF TRADE (Sec. 27)

General Rule: Every agreement restraining a person from exercising a lawful profession, trade,
or business is void.

Exceptions: - Sale of goodwill: Seller may agree to restrain trade within specified limits, if
reasonable. - Partnership Act exceptions (Sec. 11, 36, 54, 55).

Case: Madhub Chander v. Raj Coomar (1874) – Agreement restraining trade is void.
AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS (Sec. 28)

Agreements restricting a party from enforcing legal rights through usual legal proceedings are
void.

Examples: - Agreements restricting right to sue. - Agreements limiting time within which to
enforce rights (less than statutory period).

Case: Food Corporation of India v. New India Assurance (1994) – Clause limiting legal action to
12 months held void.

CONTINGENT CONTRACTS (Sec. 31–36)

Meaning

A contingent contract is one where the performance depends on the happening or non-happening of
a future uncertain event, which is collateral (incidental) to the contract.

 Insurance, guarantee, and indemnity contracts are examples of contingent contracts.

 Difference from ordinary contracts:
o In ordinary contracts, there is an immediate obligation, though performance may be in
future.
o In contingent contracts, the very obligation itself arises only if the contingency
happens.

Example:
“If A agrees to deliver goods to B if the ship carrying them arrives safely” → contingent contract.
But “A agrees to deliver goods to B after receiving them from the mills” → not contingent, since
performance is postponed, not conditional.

Case Law:

 Bashir Ahmed v. Govt. of A.P. (1970) – Advance paid for a book; company project failed.
Held: the contract was not contingent, since payment was not conditional on formation of the
company.

Note: Wagering agreements are also contingent, but Section 30 declares them void.

Rules of Enforcement of Contingent Contracts

1. On happening of an event (Sec. 32)

o Can be enforced only if the event happens.
o Becomes void if the event becomes impossible.
2. On non-happening of an event (Sec. 33)
o Can be enforced only when it becomes certain that the event will not happen.
3. On conduct of a living person (Sec. 34)
o Becomes void if the person acts in such a way that makes the event impossible.
4. On event happening within fixed time (Sec. 35)
o If event does not happen within the time → contract void.
o If contract is contingent on non-happening of event → enforceable when event does
not occur within fixed time.
 5. On impossible event (Sec. 36)
o Contract void, whether or not parties knew of impossibility.

DISCHARGE OF CONTRACT

When obligations under a contract come to an end, the contract is said to be discharged. This may
happen in several ways:

 When both parties perform their promises, the contract ends.

 Sec. 37: Each party must perform unless performance is excused.

Tender of Performance (Sec. 38)

 An offer to perform = valid performance if refused.

 Conditions:
1. Must be unconditional.
2. Must be at proper time and place.
3. If joint promisees exist, offer to one = offer to all.

Who must perform (Sec. 40–41)

 If contract depends on personal skill → promisor himself must perform.

 Otherwise, can be performed by representative/agent.
 If promisee accepts performance by a third party, he cannot later sue the promisor.

Joint Promises (Sec. 42–45)

 Liability of joint promisors is joint & several (Sec. 43).

 On death, representatives must perform unless contract is personal.
 A promisor paying more than his share can claim contribution from others.
 Creditor can release one joint promisor without releasing others (Sec. 44).
 Promise to several persons → must be enforced jointly (Sec. 45).

2. Discharge by Agreement or Consent (Novation, Rescission, Alteration)

 Parties may mutually agree to end, substitute, or alter the contract.

3. Time for Performance (Sec. 46–55)

 If no time fixed → reasonable time.

 If time fixed → must perform at that time.

Time as Essence of Contract (Sec. 55)

 If parties intended time to be essential, failure makes contract voidable at the option of the
promisee.
 Otherwise, it results in compensation, not rescission.

Indicators of “time being essence”:

1. Express agreement to that effect.

 2. Delay would cause loss/injury.
3. Nature of contract requires punctuality (e.g., perishable goods).

2. Impossibility of Performance – Doctrine of Frustration (Sec. 56)

The Doctrine of Frustration excuses parties from further performance of a contract when unforeseen
events, beyond their control, make performance impossible or fundamentally different from what was
originally agreed.

Historical Background

 Under early English common law, a party was bound to perform obligations absolutely, even if
performance became impossible.
 In Paradine v. Jane (1647), the court held that impossibility due to enemy invasion was no
excuse for non-payment of rent.

Indian Law – Section 56, Indian Contract Act, 1872

 Section 56 incorporates the doctrine of frustration: a contract becomes void if performance is

rendered impossible by a supervening event, or if the act becomes unlawful.
 Performance is excused when it is physically impossible or when the foundation of the
contract is destroyed.

Key Cases

1. Taylor v. Caldwell (1863) – A music hall contracted for concerts was destroyed by fire before
performance. Held: parties excused, as the contract was based on the continued existence of
the hall. This case established the modern doctrine of frustration.
2. Krell v. Henry (1903) – A flat rented to view King Edward VII’s coronation procession. The
procession was cancelled. Although the room could still be used, the purpose of the contract
was frustrated. Held: contract discharged as the foundation had failed.
3. Davis Contractors Ltd. v. Fareham UDC (1956) – Performance became far more burdensome
due to shortage of labour/materials. Lord Radcliffe: frustration arises when obligations become
radically different, not merely more difficult or expensive.
4. Satyabrata Ghose v. Mugneeram Bangur & Co. (1954, SC) – The Supreme Court clarified that
frustration is part of Section 56 and applies when performance becomes impossible or
unlawful, or when the object of the contract is destroyed.

Scope of Doctrine

 Applies when:
o Subject matter is destroyed (e.g., fire, perishing of goods)
o Change in law makes performance illegal
o The commercial object of the contract is frustrated
 Does not apply when:
o Performance merely becomes more onerous or costly
o The frustrating event is caused by the party’s own act

Mulla’s View

 The doctrine of frustration is a narrow exception to the general rule of absolute contracts.
  Its purpose is to prevent injustice by releasing parties from performance when circumstances
fundamentally change.
 Since frustration automatically discharges the contract, courts apply it sparingly.

Applications of Doctrine of Frustration

A contract may be frustrated if it becomes impossible to perform, if its purpose is frustrated, or if

performance becomes illegal. The doctrine is applicable to several grounds:

1. Destruction of the subject-matter: Frustration occurs if the specific subject-matter of the

contract ceases to exist.
2. Non-occurrence of a particular event: Performance may remain possible, but if the event
forming the basis of the contract does not occur, the contract’s purpose is destroyed.
3. Death or incapacity: Personal service contracts are frustrated if the promisor dies or becomes
incapable of performing.
4. Change of circumstances: Performance may become impossible in the manner or time
originally contemplated.
5. Legislative or administrative intervention: Law or orders may make performance
impossible or fundamentally alter conditions.
6. Intervention of war: War or warlike conditions may frustrate contractual obligations.

Effect of Doctrine of Frustration

1. Automatic discharge: Frustration brings the contract to an immediate end. Neither party
needs to rescind it.
2. Future obligations discharged: Obligations due after the frustrating event are terminated.
3. Accrued obligations remain: Legal rights or obligations already accrued before the event
remain valid.

Note: "Impossible" under Section 56 does not only mean literal impossibility; impracticability or
futility that destroys the basis of the contract can also invoke frustration.

Force Majeure Clause

 Refers to circumstances beyond control, e.g., natural disasters, war, strikes, machinery
breakdown, etc.
 Protects parties from liability due to events outside their control.
 Dhanrajmal Gobindram v. Shamji Kalidas (AIR 1961 SC 1285): Force majeure includes
acts of God, war, riot, strikes, earthquakes, floods, fire, explosion, and machinery breakdown.

Breach of Contract

 Occurs when a party fails or refuses to perform a contractual obligation, making performance
impossible.
 Types:
1. Actual breach: Non-performance on the due date.
2. Anticipatory breach (Sec. 39): Repudiation before the due date.
Rights of the aggrieved party:

1. Rescind the contract immediately and sue.

2. Continue the contract and wait for performance.

Key Cases:

 Hochster v. De La Tour (1853): Action can be filed before the due date in anticipatory
breach.
 Frost v. Knight (1872): Promise to marry, broken before the date, amounts to anticipatory
breach.

Discharge by Agreement and Novation

Section 62-63: Parties can mutually:

 Substitute a new contract (Novation)

 Alter terms (Alteration)
 Cancel the contract (Rescission)

Remission of Performance (Sec. 63):

 Waive performance wholly or partly

 Extend time for performance
 Accept alternative satisfaction

Key Cases:

 Kapur Chand Godha v. Mir Nawab Himayatali Khan (1963): Acceptance of lesser
compensation discharges full liability.
 Hari Chand Madan Gopal v. State of Punjab (1973): State cannot sue for full payment after
remission

Discharge by Operation of Law

 Lapse of time: Limitation Act, typically 3 years for simple contracts.

 Insolvency: Discharged by insolvency orders.
 Merger: Inferior right merges into superior right.
 Unauthorised material alteration: Makes the contract void.

Quasi Contracts (Sec. 68-72)

 Prevent unjust enrichment (e.g., Fibrosa case).

 Section 68: Liability for necessaries supplied to minors or persons incapable of contracting.
 Section 69: Payment made by an interested person.
 Section 70: Non-gratuitous acts confer a right to be reimbursed if benefit is accepted.
  Section 71: Finder of goods has duties similar to a bailee.
 Section 72: Refunds for money paid by mistake or under coercion.

Remedies for Breach of Contract (Sec. 73-75)

1. Rescission and Damages: Compensation for losses due to breach.

2. Specific Performance & Injunction: Court can enforce the actual performance or prevent
breach.
3. Quantum Meruit: Payment for work done before breach.

Damages:

 Remoteness: Only losses reasonably foreseeable (Hadley v. Baxendale, 1854).

 Measure: Compensatory, not penal; can include nominal, exemplary damages; duty to
mitigate applies.