Indian Contract Act,1872: Legal Foundations and Insights

Abstract

Understanding the fundamentals, key features, and significance of contracts is essential for individuals engaged in businesses and contract-related work, to ensure fairness and justice. Therefore, the Indian Contract Act was enacted on 25^th April, 1872. This article give a comprehension on Historic Background of Indian Contract Act as well as the Key Provisions.

Introduction

A contract is a legal agreement that is lawfully enforceable. The contract is initiated when two or more people agree on the same thing in the same sense, with the intension to create legal relations and the object being lawful.

According to Section 2(h) of Indian Contract Act 1872, defines that a contract is a legally binding agreement that imposes obligations on the parties who came into the contract to fulfill the performance according to the agreed terms and conditions.

Contract law is significant in routine life because, each day an individual enters into several contracts without even realizing it. The Indian Contract Act 1872, ensures fairness among the parties, along with awareness of their rights. The contract that is formed according to the principles of this Act, prevents disputes and assures commitment to contractual obligations, provides doctrine of breach of contract, and legal remedies.

Historical Background

During the ancient and medieval period in India, there was no codified law for contract to deal with business or merchant affairs, therefore the people derived the principles from various resources like, Vedas, Dhramshatras, Shrutis, and Smritis. The rules and principles that dealt with contract and commercial activities were known as “Vyavaharmayukha”.

Besides these sources, the contractual arrangements were usually dealt by the religious community’s personal laws, customs or cultural traditions. Hindus, Muslims, Jains, Sikhs, Buddhists, had their own respective personal laws governing and administering the contractual laws.

In the early colonial period, the Britishers applied the English Law in the presidency towns of Bombay, Madras, and Calcutta. This law was primarily made for the British merchants who were habitual to English Law, but since it was enforced in India, it did not furnished our country’s needs because, lacked uniformity and was not precisely organized.

After the establishment of Indian Contract Act in the year 1872 on 25^th April, that came into force on 1^st September 1872, and was applied to the whole of India, it provided a proper and accurate legal framework. There were any amendments made in the Act since the enforcement, the most recent amendment being made on 2^nd February, 2024.

Key Provision of Indian Contract Act, 1872

Definition of Contract according to Section 2:

According to Section 2(a) of Indian Contract Act 1872, when a person expresses his willingness for doing or for abstaining from doing something, his is said to make a proposal. And Section 2(b) states that when the other person to whom the proposal is made, accepts the proposal, then it is said to become a promise. As mentioned in the Section 2(c), the person making the proposal is called “promisor”, and the person accepting the proposal is called “promisee”. Section 2(d) and (e) defines that there must be adequate consideration (valuable benefit) and states that every promise or every set of promises including consideration forms an agreement. As per Section 2(f), if both the parties had made promises to each other simultaneously, then it is known as “reciprocal promise”. Section 2(g), suggests that if the agreement is not enforceable by Law, then it is said to be “void”. In compliance with Section 2(h), an agreement that is enforceable by Law is a valid contract. Section 2(i), outlines the meaning of voidable contract is the one that can be either enforced or canceled at the option of one party. Section 2(j) implies that a contract becomes void when it ceases to be lawfully enforceable.

Elements of a Valid Contract:

• Offer and Acceptance: Offer and acceptance are the main components of an agreement or contract. Offer is when a person shows his assent to do or abstain to do something to another person. When the other person accepts the conditions and the offer it is said that the offer has been accepted.
• Communication: Communication is an essential element for the formation of the contract. The mode of conveyance of the proposal and the acceptance of the proposal must reach to the other party in clear and absolute way.
• Intention to enter into Legal Relation: For the formation of contract, it is crucial to know that both the parties have the same intention of creating legal relations with each other. Agreement that are domestic, social, or commercial need to be consented by the parties with an intention of being bound by the contractual relations as well as the obligations.
• Lawful Consideration and Object: The consideration to be given or to be received by the parties must be lawful. Section 23 of Indian Contract Act 1872, defines that the consideration or object should not be forbidden by law, fraudulent, or against the public policy.
• Capacity: Under the Section 10 of Indian Contract Act 1872, it states that all those agreements are considered as contract which are formed by free consent, competent parties, lawful consideration and object, and not declared void. By competent parties here they mean that the parties to contract must be of the age 18, and parties with guardian must be of 21
• Consent: As per the Section 13 of Indian Contract Act 1872, parties entering into contract shall agree on the same thing in the same sense.
• Free Consent: As indicated in Section 14 of Indian Contract Act 1872, free consent plays a vital role, because consent has to be liberated and caused by coercion, undue influence, fraud, misrepresentation, or mistake.

Offer and Acceptance

Definition of Offer: 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 to such act or abstinence, he is said to make a proposal”

The person making the offer is said to be an “offeror”. The offeror should always make a clear, and absolute offer or proposal. As stated in the Section 3 of Indian Contract Act 1872, the communication of the offer is obligatory to present in order to get the proposal accepted.

Types of Offer:

• Specific Offer – Offer made to someone specific.
• General Offer – Offer made to everybody generally.
• Implied Offer – Offer made in a specific way other than words.
• Expressed Offer – Offer made using words, clearly.
• Cross Offer – Offer made by two people to each-other of same thing at the same time.
• Counter Offer – Offer made in response to the original offer, change some terms.
• Standing Offer – Offer that is available only for a specific period of time.

Definition of Acceptance: Section 2(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”

The person accepting the offer is called “offeree”. The acceptance of the offer must be clear, absolute, and unqualified. Communication of the acceptance must be definite and complete. As per Section 8 of Indian Contract Act 1872, if the acceptance is expected in a certain way then it is the duty of the offeree to communicate in that manner only.

Types of Acceptance:

• Expressed Acceptance – Acceptance that is clearly expressed in words.
• Implied Acceptance – Acceptance that is conveyed in a certain manner.
• Conditional Acceptance – Acceptance to an offer by making few changes.

Offer + Acceptance = Promise

According to Section 2(c) of Indian Contract Act 1872, person making an offer is called “promisor”, and the person accepting the offer is called “promise”

Revocation of Offer or Acceptance: Section 5

If an offeror wants to revoke an offer, he is free to revoke it only before it is accepted by the offeree. Same goes by the acceptor, he may revoke the acceptance anytime before the communication of the acceptance of the offer reaches the offeror.

Case Law: Carlill v. Carbolic Smokeball Co.

In the case of general offer, the performance of the conditions stated by the offeror is the sufficient acceptance without notifications to the offeror.

Consideration

Definition of Consideration: Section 2(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”

Consideration is the fundament of an agreement. Consideration means something of some value of in the eye of Law, usually consideration is in monetary terms to compensate the other party, in reciprocation for their promise. Consideration is the main value exchange between the parties, to ensure each party is getting benefitted from the formation of agreement. Consideration can be a promise, performance, or property.

Types of Consideration:

• Past Consideration – When a party has already provided the consideration before even the agreement was made.
• Executed / Present Consideration – When both a party has immediately provided the consideration as soon as the contract was formed.
• Executory / Future Consideration – When both the parties decide a future date for the performance of the promise as well as the consideration.

Essentials for a Valid Consideration:

• Consideration must be at the choice of promisor.
• Consideration must be adequate.
• Consideration must be real and possible.
• Consideration must be Lawful.

As Section 23 of Indian Contract Act 1872, states consideration must be lawful and shall not be against public policy, if it is then the agreement would be void. Also, the Section 25 of Indian Contract Act 1872, gives special exceptions to form an agreement without consideration, as in agreements made out of natural love and affection, compensation for voluntary service, gifts are also not examined as consideration.

Case Law: Abdul Aziz V. Masum Ali

In this case, the court held that a promise without consideration is not enforceable unless some liability is incurred based on the promise.

Lawful Object

Definition of Lawful Object: Section 23

The consideration or object of an agreement is lawful, unless—

it is forbidden by law4; 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.

Objective is the aim or purpose of the contract. An object of the contract must be lawful, otherwise the contract would become void. According to Section 23 of the Indian Contract Act 1872, if the object of an agreement is forbidden by law, defeat provisions of law, fraudulent, immoral, against public policy, harm to person or property, then that agreements would be void and unlawful.  

Types of Lawful Objectives:

• Legally Binding Agreements
• Business Agreements
• Financial Agreements
• Family Agreements
• Real-Estate Agreements
• Service Agreements

The objective of these agreements are lawful, hence the agreement would likewise be legal. The Criteria for Lawful Objectives under Section 23 are:

1. It must not be Forbidden by Law
2. It must not be Fraudulent
3. It shouldn’t Defeat the Provisions of the Law
4. It must not be Immoral
5. It must not cause any harm to any person or property
6. It must not be against public policy

Illustrations:

• A wants to sell this bike to B for an adequate amount of money, and B wants to buy the bike accordingly, here there is a sale agreement that is valid and lawful.
• Mr M hires Mr N to assassinate Mr A, here the agreements is void due to its ill will nature.

Case Law: Bharat Singh v. State of Haryana

In this case it was held that if a person is in the possession of explosives, he will be held guilty for having ill will and the unlawful object, unless he proves otherwise.

Capacity to Contract:

Definition of Capacity to Contract: Section 11

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.

Capacity to Contract is an essential aspect to acknowledge before entering into contract, as both the binding parties should be able to understand the legal consequences, duties and contractual obligations. Both the parties must know what they are engaging into before they are bound by it. Contract that lacks these criteria for capacity and do however enter into contract, those agreements would be void, and unenforceable. Therefore, as per the Section 11 of Indian Contract Act 1872, minors, people of unsound mind, and people who are disqualified by law are not allowed to contract.

Minors, Person of Unsound Mind, Person Disqualified by Law:

·       Minor –

• According to Section 11, minor is the person who has not yet attained the age of 18 years. A person with guardian must attain the age of 21 years to be an adult.
• Contracting with a minor is void-ab initio, an agreement that is “void from the beginning”.

·       Person of Unsound Mind –

• A person of unsound mind is the one who is not able to understand the consequence at the time of making it.
• Idiots, Lunatics and Drunk people are of unsound mind.

·       Disqualified Person –

• People who are disqualified by law to enter into contracts.
• Alien enemies, Pardanashi Women, Convicts, Insolvents, these are the people who are barred from entering into any contract.

Case Law: Mohori Bibee v. Dharmodas Ghose

In this landmark case, the bench of Judges declared that agreements made with minors are void-ab initio (void from beginning). Therefore, minors are excluded from making agreements.

Free Consent

Definition of Free Consent: Section 14

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.

For an agreement or contract to be valid and enforceable, the consent of the parties must be free and voluntary, to ensure fairness and validity. Factors like coercion, undue influence, fraud, misrepresentation, or mistake could result the contract being voidable or invalid due to its unintentional nature.

Under Section 15 of Indian Contract Act 1872, Coercion is threatening and forcing any person to enter into an agreement to unlawfully detain any property or to commit any forbidden act. Agreements obtained by coercion are voidable at the option of coerced party.

Under Section 16 of Indian Contract Act 1872, Undue Influence is when a party uses their dominant position to manipulate the will of other party for gaining unfair advantage. Agreements obtained through undue influence are voidable at the option of induced party.

Under Section 17 of Indian Contract Act 1872, Fraud is an act committed by a party to deceive other party by lying about the fact, or actively concealing the fact or promising with the intention of not performing it, all these accounts to fraud. The agreements obtained under fraud are voidable.

Under Section 18 of Indian Contract Act 1872, Misrepresentation is when a party make positive assertion to other party about the fact which is not warranted and untrue but he believes it to be true, without any intention of deceiving. Agreements based on misrepresentation are voidable at the option of misled party.

Under Section 20, 21 and 22 of Indian Contract Act 1872, Mistake of fact, law or mutual mistake can lead to confusion or error. Agreements obtained by mistake are voidable at the option of either party.

Void Agreements

According to Indian Contract Act 8172, void agreements are those which are unlawful and unenforceable due to its invalid and vague nature.

Pursuant to Section 24 of Indian Contract Act 1872, agreements are considered void if consideration or objects are unlawful.

In accordance with Section 25 of Indian Contract Act 1872, agreements are considered void if they are made without consideration, unless the agreements are made on account of natural love, or compensate the party that voluntarily has done something.

As stated by Section 26 of Indian Contract Act 1872, agreements are considered void if they are in restraint of marriage.

As per Section 27 of Indian Contract Act 1872, agreements are considered void if they are in restraint of trade.

In line with Section 28 of Indian Contract Act 1872, suggests agreements are considered void if they are in restraint to legal proceedings.

As articulated by Section 29 of Indian Contract Act 1872, agreements are considered void if they are uncertain and inconclusive.

As outlined by Section 30 of Indian Contract Act 1872, agreements are considered void if they are in a form of wager.

Conclusion

In summary, understanding the Indian Contract Act 1872, is vital for comprehension of legal framework that governs the contract laws in India. The understanding of the contract law is essential to ensure that the parties contracting upon are fair and reasonable. Elements such as historic background and key provision, along with definitions and sections are covered. A continuous study of changes and adaptation will benefit legal professionals as well as individuals.

 

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