Indian Contract Act

INDIAN CONTRACT ACT We enter into contracts so many times in a day that ‘contract’ has become an indispensable part of our life. When you purchase mil or ne!spaper in the mornin" or "o to mo#ie in the e#enin"$ you are enterin" into a contract. Indian Contract Act really codi%es the !ay !e enter into a contract$ e&ecute e&ecute a contract$ implement pro#isions of a contract and e'ects of breach of a contract. (asically$ a person is free to contract on any terms he chooses. The Contract Act consists of limitin" factors sub)ect to !hich contract may be entered into$ e&ecuted and breach enforced. It only pro#ide p ro#ides sa frame!or of rules and re"ulations !hich "o#ern formation and performance of contract. The ri"hts and duties of parties and terms of a"reement a"reement are decided by the contractin" parties themsel#es. The court of la! acts to enforce a"reement$ a"reement$ in case of non*performance. non*performance. +ection , of Contract Act pro#ides that any usa"e or custom or trade or any incident of contract is not a'ected as lon" as it is not inconsistent !ith pro#isions of the Act. In other !ords$ pro#ision of Contract Act !ill pre#ail o#er any usa"e or custom or trade. -o!e#er$ any usa"e$ custom or trade !ill be #alid as lon" as it is not inconsistent !ith pro#isions of Contract Act. The Act e&tends to the !hole of India e&cept the +tate of ammu and a nd /ashmir0 and came into e'ect on ,*1* ,234. It must be noted that contract need not be in writing, unless there is specific provision in law that the contract should be in writing. [e.g. * contract for sale of immovable property must be in writing, stamped and registered. * Contracts which need registration should be in writing * Bill of Exchange or romissory !ote must be in writing. * "rust should be created in writing * romise to pay a time barred loan should be in writing, as per #imitation $ct * Contract made without consideration on account of natural love and affection should be in writing %. $ verbal contract is e&ually enforceable, if it can can be proved..  $ contract contract can be enforced enforced or compensation compensation'damages 'damages for breach breach of contract can be obtained through Civil Court

Essential Ingredients of a contract  As per Contract Act$ an agreement enforceable by b y law is a contract. [section 2(h)]. Hence, we   -

have to understand first what is ‘agreement’. very !romise and every set of !romises, forming the consideration for each other, is an agreement. [section 2(e)]. " " # !erson !erson ma$es a !ro!osal (offer). %hen it is acce!ted by other, it becomes a !romise. Howeve r, !romise cannot

INDIAN CONTRACT ACT  be one sided. &nly a mutual !romise forming consideration for each other is ‘agreement’. " " 'or eam!le, # agrees agrees to !ay s *++ to  and  agrees to give him a boo$ which is !riced at s *++. -his is set of !romises which form consideration for each other. However, if # agrees to !ay !a y s *++ to ,  but  does not !romise anything, it is not ‘set of !romises forming forming consideration for each other’ and hence not an agreement. t should be noted n oted that the term ‘agreement’ as defined in /ontract #ct re0uires mutual consideration. " " -hus, if # invites invites  to dinner and  agrees to come, it is not an ‘agreement’ as defined in /ontract #ct. 1#3 &' ‘4&4&5#6’ " %hen one !erson signifies to another his willingness to do or to abstain from doing anything, an ything, with a view to obtaining the assent of that other to such act or abstinence, he is said to ma$e a  !ro!osal. [section 2(a)]." " -hus, -hus, a ‘!ro!osal’ can be to do a !ositive act or abstinence from act (i.e. negative act). [nglish #ct uses the word ‘offer’, while ndian /ontract #ct uses the word ‘!ro!osal’. 3enerally, both words are used inter"changeably. -his is not technically correct, as the word ‘offer’ is not used in /ontract #ct]. 1#3 &' ‘4&15’ " %hen the !erson to whom the !ro!osal is made signifies his assent thereto, the !ro!osal is said to be acce!ted. # !ro"  !osal, when acce!ted, becomes a !romise. [section 2(b)]. " " -hus, when a  !ro!osal (offer) is acce!ted, it becomes a ‘!romise’. ‘!romise’. #s is clear from the definition, only !erson to whom !ro!osal is made can signify his assent. &ther !erson cannot acce!t a !ro!osal. 4&15& #7 #7 4&15 " -he !erson ma$ing the !ro!osal is called the 8!romisor9, and the !erson acce!ting the !ro!osal is called the 8!romisee9. [section 2(c)]. /4&/#6 4&155 " 4romises which form the consideration or !art of the consideration for each other are called reci!rocal !romises. [section 2(f)]. Consideration for promise  : -he definition of ‘agreement’ itself itself states that the mutual !romises should form consideration of each other. -hus, ‘consideration’ is is essential for an agreement. # !romise without consideration is not ‘agreement’ and hence naturally, it is not a ‘contract’.

7'-& &' ‘/&57#-&’ ‘/&57#-&’ " %hen, at the desire of the  !romisor, the the !romisee or any other !erson has done or abstained from doing, or does or abstains from doing, or !romises to do or to abstain from doing, something, such act or abstinence or !romise is called a consideration for the

INDIAN CONTRACT ACT  !romise. [section 2(d)].  " -he ste!s involved in the contract are : ;  Steps involved involved in contract  contract  "  !ro!osal and its communication ; acce!tance of !ro!osal and its communication ; #greement by mutual !romises ; /ontract ; 4erformance of /ontract. " " #ll #ll agreements are not contract. &nly those agreements which are enforceable by law are ‘contracts’. 'ollowing are essential re0uirements of a valid contract.

(ffer and its acceptance

)ree consent of both parties

utual and lawful consideration for agreement

It should be enforceable by law. +ence, intention should be to create legal relationship. $greements of social or domestic nature are not contracts

arties should be competent to contract

(bect should be lawful

Certainty and possibility of performance

 Contract should not have been declared as void under Contract $ct or any other law

Communication, Communication, acceptance and revocation of  proposals Communication of proposal5 re#ocation5acceptance re#ocation5acceptance are #ital to decide #alidity of a contract. A ‘communication’ is complete only !hen other party recei#es it. -

#//4-#/ 1 breach of contract > contract becomin" #oid or > @oidable contract a#oided by party. In such case$ if a party has e&ecuted part of contract$ he is entitled to "et a proportionate amount i.e. ‘as much as earned by him’. This is not by !ay of ‘dama"es’ or ‘compensation for loss’. * * The principle is that e#en !hen contract comes to a premature end$ the party should "et amount proportional to the !or done5ser#ices pro#ided5"oods supplied supplied by one party. party. One party should not "et enriched at the cost of other. Contract of indemnity  A contract by !hich one party promises to sa#e the other from loss caused to him by the conduct of the promisor himself$ or by the conduct of any other person$ is called a ‘contract of indemnity’. * * Illustration - A contracts to indemnify ( a"ainst the conse6uences of any proceedin"s !hich C may tae a"ainst ( in respect of a certain sum of 488 rupees. This is a contract of indemnity. 7section ,4=9.   -

Contract of guarantee A contract of "uaranteeB is a contract to perform the promise$ or dischar"e the liability$ of a third person in case of his default. The person !ho "i#es the "uarantee is called the suretyB0 the person in respect of !hose default the "uarantee is "i#en is called the principal debtorB$ and the person to !hom the "uarantee is "i#en is called the creditorB. A "uarantee may be either oral or !ritten. 7section ,49. * * 7erson "i#in" "uarantee is also called as ‘"uarantor’. -o!e#er$ Contract Act uses the !ord ‘surety’ !hich is same as ‘"uarantor’9. * * Three parties are in#ol#ed in contract of "uarantee. Contract bet!een any t!o of them is not a ‘contract of "uarantee’. It may be contract of  indemnity. rimary liability is of the principal debtor. Eiability of surety is secondary and arises !hen rincipal Debtor fails -

INDIAN CONTRACT ACT to ful%ll his commitments. -o!e#er$ this is so !hen surety "i#es "uarantee at the re6uest of principal debtor. If the surety "i#es "uarantee on his o!n$ then it !ill be contract of indemnity. In such case$ surety has all primary liabilities. /&57#-& '& 3 =58 A13T  ma?ority according to the law to which he is sub?ect, and who is of sound mind, may employ an agent. #section $&@'. - Thus, any person competent to contract can appoint an agent.  -  As between the principal :;< =A> ) A3 A13T  principal and third  persons any person may become become an agent, but no person who is not of the age of ma?ority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. #section $&%'. - - The signicance is that a 5rincipal can appoint a minor or person of unsound mind as agent. In such

INDIAN CONTRACT ACT case, the 5rincipal will be responsible to third parties. pa rties. ;owever, ;owever, the agent, who is a minor or of unsound mind, cannot be responsible to 5rincipal. Thus, 5rincipal will be liable to third parties for acts done by Agent, but agent will not be responsible to 5rincipal for his i.e. Agent+s/ acts.

 - 3o consideration is 7