THE INDIAN CONTRACT ACT 1872 NOTES FOR STUDENTS

The Law of Contract Constitutes the most important branch of
mercantile or commercial law. It affects everybody, more so, trade,
commerce and industry. It may be said that the contract is the
foundation of the civilized world.
The law relating to contract is governed by the Indian Contract Act,
1872. The preamble to the Act says that it is an Act "to define and
amend certain parts of the law relating to contract". It extends to the
whole of India except the State of Jammu and Kashmir.

We enter into contracts so many times in a day that ‘contract’ has
become an indispensable part of our life.
People purchasing newspaper in the morning or going to movie in
the evening, or a company purchasing a whole business, all are
examples of contract.
Any business is, in essence, a series of contracts made on a
regular basis.

Basically, a person
is free to contract
on any terms he
chooses.
The rights and
duties of parties
and terms of
agreement are
decided by the
contracting
parties
themselves.
A valid contract
all the
to the
binds
parties
contract,
howsoever
unfavorable the
terms may be.

According to sec.2(h) of Indian Contract Act, a
contract is defined as “an agreement
enforceable by the law”.

 "A contract is an agreement creating and
defining obligations between the parties”
-Salmond
 "Every agreement and promise enforceable at
law is a contract".
-Sir Fredrick Pollock
 "A contract is an agreement enforceable at law,
made between two or more persons, by which
rights are acquired by one or more to acts or
forbearances on the part of the other or others".
-Anson

On analyzing various definitions we find that a contract is
consist of two essential elements:
These definitions resolve themselves into two distinct parts.
First, there must be an agreement. Secondly, such an
agreement must be enforceable by law. To be enforceable, an
agreement must be coupled with an obligation.
An agreement
And its enforceability at law

i. An offer or proposal by one party and acceptance of that offer by
another party resulting in an agreement.
ii. An intention to create legal relations.
iii. The agreement is supported by lawful consideration.
iv. The parties are competent to contract.
v. Free consent between the parties.
vi. The object of the contract is legal and is not opposed to public policy.
vii. The terms of the contract are certain.
viii. The agreement is capable of being performed i.e., it is not impossible
of being performed.

1. Intention to create legal relationship: The parties ought to have the
intention to create an legal obligation between them through the
form of offer and acceptance. They should have intention to impose
duty on the promisor to fulfill the promise and gives a right on the
promisee to claim its fulfillment. It must not be merely a moral one
but it must be legal.
Example: A husband agreed to pay to his wife certain amount as maintenance
every month while he was abroad. Husband failed to pay the promised
amount. Wife sued him for the recovery of the amount. Here in this case wife
could not recover as it was a social agreement and the parties did no intend
to create any legal relations.(Balfour vs. Balfour)

2. "Lawful consideration" and “Lawful object”: it is an essential element
of a valid contract. Consideration is a technical word meaning
thereby quid pro quo i.e. something in return. It must result in benefit to
one party and detriment to the other party or a detriment to both.
Example: A agrees to sell his books to B for rs. 100, B's promise to pay rs.100 is the
consideration for A's promise to sell his books and A's promise to sell the books
is the consideration for B's promise to pay ` 100.
 Also, the object of the agreement must be lawful. It must not be
illegal, immoral, or opposed to public policy.
Example: ‘A’ promises to drop prosecution instituted against ‘B’ for robbery and
‘B’ promises to restore the value of the things taken. The agreement is void, as
its object is unlawful

3. Competent parties: Section 11 of the Indian Contract Act specifies
that every person is competent to contract provided,
a) is of the age of majority according to the law to which he is
subject,
b) who is of sound mind,
c) and is not disqualified from contracting by any law to which he
is subject.
In other words (a) a minor, (b) a person of unsound mind (a person of
unsound mind can enter into a contract during his lucid intervals) and (c) a
person disqualified from contracting by any law to which he is subject, e.g. an
alien enemy, foreign sovereigns and accredited representatives of a foreign
state, insolvents and convicts, are not competent to contract.

4. Free consent: The consent of the parties must be genuine. The term
'consent' means parties to a contract must agree upon the same thing in
the same sense. i.e. there should be consensus- ad-idem. Consent is said
to be not free when it is vitiated by coercion, undue influence, fraud,
misrepresentation or mistake. In such cases, the contract becomes
voidable at the option of the party whose consent is not free.
Example: A threatened to shoot B if he (B) does not lend him ` 2,000 and
B agreed to it. Here the agreement is entered into under coercion and
hence voidable at the option of B.

5. Certainty of meaning: The agreement must be certain and not
vague or indefinite.
Example: A agrees to sell to B a hundred tons of oil. There is nothing
certain in order to show what kind of oil was intended for.
6. Possibility of performance of an agreement: The terms of
agreement should be capable of performance. An agreement to
do an act impossible in itself cannot be enforced.
Example: A agrees with B to discover treasure by magic. The
agreement cannot be enforced as it is not possible to be
performed.

7. Compliance of necessary legal formalities: Wherever a particular type
of contract requires by law to be in writing and registered, it must
comply with the necessary formalities as to writing, attestation and
registration otherwise unenforceable.
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.

a) To constitute a contract, the parties must intend to create legal
relationship.
b) law of contract is the law of those agreements which create
obligations and those obligations which have their source in
agreement.
c) Agreement is the genus of which contract is the specie and,
therefore it can be said that
all contracts are agreements but all agreements are not
contracts

1. Valid Contract: An agreement which is binding and enforceable is a valid
contract. It contains all the essential elements of a valid contract.
2. Void Contract: It is a contract without any legal effect and cannot be enforced in
a Court of Law. Section 2(j) defines a void contract as “a contract which ceases to
be enforceable by law becomes void when it ceases to be enforceable”
3. Voidable Contract: As per Section 2(i), “an agreement which is enforceable by
law at the option of one or more the parties but not at the option of the other or
others is a voidable contract.”

1. 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.
2. 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.

4. Illegal Contract: It is a contract which the law forbids to be made.
The court will not enforce such a contract but also the connected
contracts. All illegal agreements are void but all void agreements
or contracts are not necessarily illegal.
 Examples: 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.
Assignment- difference between void and voidable contracts

1. Express Contracts: A contract which is made by words either
spoken or written is said to be an express contract. According to
Section 9 insofar as the proposal or acceptance of any promise is
made in words, the promise is said to be express.
2. Implied Contract: By implied contract means implied by law (i.e.)
the law implies a contract though parties never intended.
According to Section 9 insofar as such proposal or acceptance is
made otherwise than in words, the promise is said to be implied.

3. Tacit Contract: it is said to be tacit when it has to be inferred from the
conduct of the parties.
Example: Obtaining cash through automatic teller machine, sale by fall of hammer at an
auction sale.
4. Quasi-Contract: A quasi-contract is not an actual contract but it resembles
to a contract. It is created by law under certain circumstances the law
creates and enforces legal rights and obligations when no real contract
exists. Such obligations are known as quasi-contracts.
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.

 Example: A tells B on telephone that he offers to sell his house
for Rs. 2 lacs and B in reply informs A that he accepts the offer,
this is an express contract.
 Example: A coolie in a uniform on the railway station takes up
Mr. B’s luggage to be carried out of railway station and Mr. B
allows him to do so without having any verbal communication
with him. Here Mr. B enters into an implied contract with the
coolie, and has to pay him for the services rendered by him.

1. Executed Contract: If the consideration for the promise in a contract (i.e., any
act or forbearance) is given or executed, such type of contract is called
contract with executed consideration.
 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: It is so called because the reciprocal promises or
obligation which serves as consideration 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: A unilateral contract is a one-sided contract in which only
one party has to perform his promise or obligation.
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.
4. Bilateral Contract: Where the obligation or promise in a contract is outstanding
on the part of both the parties, it is known as bilateral contract.
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.

The words proposal and offer are used
interchangeably and it is defined under Section
2(a), of the Indian Contract Act, 1872 as
‘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’.

 Thus, for a valid offer, the party making it must express his
willingness ‘to do’ or ‘not to do’ something. But mere
expression of willingness does not constitute an offer.
 The person making the proposal or offer is called the
‘promisor’ or ‘offeror’, the person to whom the offer is made is
called the ‘offeree’ and the person accepting the offer is called
the ‘promisee’ or ‘acceptor ’.

For instance, where ‘A’ tells ‘B’ that he desires to marry by the
end of 2004, it does not constitute an offer of marriage by ‘A’
to ‘B’. Therefore, to constitute a valid offer expression of
willingness must be made to obtain the assent (acceptance) of
the other. Thus, if in the above example, ‘A’ further adds,
‘Will you marry me’, it will constitute an offer. Thus “doing”
is a positive act and “not doing”, or “abstinence” is a
negative act; nonetheless both these acts have the same effect
in the eyes of law

 A offers his car to B for Rs. 10,000. It is an
expressed offer.
 A bus plying on a definite route goes along
the street. This is an implied offer on the
part of the owners of the bus to carry
passengers at the scheduled fares for the
various stages.

 An offer must be clear, definite, complete and final
 An offer must be communicated to the offeree. An offer
becomes effective only when it has been communicated to the
offeree so as to give him an opportunity to accept or reject the
same.
 The communication of an offer may be made by express
words-oral or written-or it may be implied by conduct.
 The communication of the offer may be general or specific.

The leading case on the subject is Carlill v. Carbolic Smoke Ball Co. The
company offered by advertisement, a reward of £ 100 to anyone who
contacted influenza after using their smoke ball in the specified
manner. Mrs. Carlill used smoke ball in the specified manner, and
was attacked by influenza. She claimed the reward and it was held
that she could recover the reward as general offer can be accepted by
anybody. Since this offer is of a continuing nature, more than one
person can accept it and can even claim the reward.

‘A’ advertise in the newspapers that he will pay rupees one
thousand to anyone who restores to him his lost son. B
without knowing of this reward finds A's lost son and restore
him to A. In this case since B did not know of the reward, he
cannot claim it from A even though he finds A's lost son and
restores him to A.
As in this case the offer was not communicated to
B, therefore he cannot accept the offer to make a
binding contract

a) An invitation to treat or an invitation to make an
offer.
b) A mere statement of intention.
c) A mere communication of information in the
course of negotiation.

An offer that has been communicated, properly continues as
such until it lapses, or until it is revoked by the offeror, or
rejected or accepted by the offeree. Section 6 deals with various
modes of lapse of an offer. It states that an offer lapses if
 it is not accepted within the specified time (if any) or after a
reasonable .
 it is not accepted in the mode prescribed or if no mode is
prescribed in some usual and reasonable manner, e.g., by
sending a letter by mail when early reply was requested.

 the offeree rejects it by distinct refusal to accept it;
 either the offerer or the offeree dies before acceptance;
 the acceptor fails to fulfill a condition precedent to a
acceptance.
 the offeree makes a counter offer, it amounts to rejection of
the offer and an offer by the offeree may be accepted or
rejected by the offeror.

 An offer may be revoked by the offeror at any time
before acceptance.
 Like any offer, revocation must be communicated to
the offeree, as it does not take effect until it is
actually communicated to the offeree. Before its
actual communication, the offeree, may accept the
offer and create a binding contract. The revocation
must reach the offeree before he sends out the
acceptance.

A proposal may be revoked by any of the following
methods:
 By notice revocation.
 By lapse of specified time or reasonable time.
 By the death or insanity of the offeror or the
offeree.
 In case of non fulfillment of conditions of offer.
 In case of counter offer.
 By rejection of offeree.

TYPES OF
OFFER
GENERAL
OFFER
SPECIAL
OFFER
CROSS
OFFER
COUNTER
OFFER
STANDING
OFFER

Example: An advertisement given in the newspaper announcing a
reward for tracing out a missing person. It can be accepted by
any person who trace out the missing person and is entitled to
claim the reward.
It is an offer made to the public in general and hence anyone can accept
and do the desired act. Section 8 of the Indian Contract Act, points out
that performance of the conditions of a proposal is an acceptance of the
proposal.

Example: ‘A’ offers to sell his car to ‘B’ at a certain cost. This is a
specific offer
When offer is made to a definite person, it is known as specific offer and
such offer can be accepted only by that specified person.

Example: D by a letter makes an offer to M to sell his car for $10,000. At the same time M
makes a similar offer to D to buy his (D's) car for Rs. 10,000. Offers of both D and M cross
each other in the post. Such offers do not constitute acceptance of one's offer by another.
For example, it will not mean acceptance of D's offer by M or M's offer by D. Both are
making the offer and none of them is accepting the offer. Hence, there is no contract.
When two parties exchange identical offers in ignorance at the time of
each other’s offer, the offers are called cross offers. There is not binding
contract in such a case, as one’s offer cannot be construed as acceptance
by the other.

Example: ‘A’ offers to sell his plot to ‘B’ for `10 lakhs. ’B’
agrees to buy it for 8 lakhs. It amounts to counter offer. It
may result in the termination of the offer of ’A’. And if
later on ‘B’ agrees to buy the plot for ` 10 lakhs, ’A’ may
refuse
When the offeree offers to qualified acceptance of the offer subject to
modifications and variations in the terms of original offer, he is said to
have made a counter offer. Counter-offer amounts to rejection of the
original offer.

An offer is allowed to remain open for acceptance over a
period of time is known as a standing, open or continuing
offer. Tender for supply of goods is a kind of standing offer.

A contract emerges from the acceptance of an
offer. Acceptance is the act of assenting by the
offeree to an offer.
Under Section 2(b) of the Contract Act when a 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.".

A proposal or offer is said to have been accepted when the
person to whom the proposal is made signifies his assent
to the proposal to do or not to do something [Section 2
(b)].

 Acceptance may be express by words spoken or written or
implied from the conduct of the parties.
 If a particular method of acceptance is prescribed in the offer
then it must be accepted in the prescribed manner.
 Acceptance must be unqualified and absolute and must
correspond with all the terms of the offer.
 counter offer or conditional acceptance operates as a rejection
of the offer and causes it to lapse.

 Acceptance must be communicated to the offeror, for
acceptance is complete the moment it is communicated.
 Mere silence on the part of the offeree does not amount to
acceptance.
 If the offer is one which is to be accepted by being acted upon,
no communication of acceptance to the offeror is necessary,
unless communication is stipulated for in the offer itself.
 Acceptance must be given within a reasonable time and before
the offer lapses or is revoked. An offer becomes irrevocable by
acceptance

In Felthouse v. Bindley (1865), F offered by letter to buy
his nephew's horse for £ 30 saying: "If I hear no more
about him I shall consider the horse is mine at £ 30".
The nephew did not reply, but he told an auctioneer
who was selling his horses not to sell that particular
horse because it was sold to his uncle. The auctioneer
inadvertently sold the horse. Held: F had no claim
against the auctioneer because the horse had not been
sold to him, his offer of £ 30 not having been accepted.

An agreement occurs when two minds meet
upon a common purpose, Le. they mean the
same thing in the same sense at the same time.
The meeting of the minds is called consensus-
ad-idem, i.e., consent to the matter.

Section 2(e) of the Indian Contract Act
provides that "every promise and every set of
promises forming the consideration for each
other is an agreement."

 An obligation is the legal duty to do or abstain from doing what one
has promised to do or abstain from doing. A contractual obligation
arises from a bargain between he parties to the agreement who are
called the promisor and the promisee.
 Section 2(b) says that when the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted; and "a
proposal when accepted becomes a promise." In broad sense,
therefore, a contract is an exchange of promises by two or more
persons, resulting in an obligation to do or abstain from doing a
particular act, where such obligation is r~cognised and enforced by
law.

 Where parties have made a binding contract, they have
created rights and obligations between themselves. The
contractual rights and obligations are correlative, e.g.,
A agrees with B to sell his car for As. 10,000 to him. In
this example the following rights and obligations have
been created:
a) A is under an obligation to deliver the car to B.
B has a corresponding right to receive the car.
a) B is under an obligation to pay Rs. 10,000 to A.
A has a correlative right to receive As. 10,000.

 Agreements in which there is no intention to create legal relations are not
contracts. These are:
(a) Agreements relating to social matters: An agreement between two persons to
go together to the cinema, or for a walk, does not create a legal obligation on
their part to abide by it. Similarly, if I promise to buy you a dinner and break that
promise I do not expect to be liable to legal penalties. There cannot be any offer
and acceptance to hospitality.
(b) Domestic arrangements between husband and wife: In Balfour v. Balfour (1919),
a husband working in Sri Lanka, had agreed in writing to pay a housekeeping
allowance to his wife living in England. On receiving information that she was
unfaithful to him, he stopped the allowance: Held, he was entitled to do so. This
was a mere domestic arrangement with no ntention to create legally binding
relations. Therefore, there was no contract.

Section 10 of the Indian Contract Act, 1872
provides that "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 no thereby expressly declared to be void".

Consideration is an essential element of a contract without which no
single promise will be enforceable.
Consideration is, in a sense,
 the price agreed to be paid by the promisee for the obligation of
the promisor.
It is a term used in the sense of quid pro quo,
i.e., ’something in return’.

Section 2(d) of the contract act defines consideration as
follows: “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 abstain from doing something,
such an act or abstinence or promise is called consideration for the
promise”.

When, at the desire of
the promisor,
has done or abstained
from doing, or
does or abstains from
doing, or
promises to do or to
abstain from doing,
something,
The promisee or any
other person‐
Such act or abstinence
or promise is called a
consideration for the
promise.

1. Consideration must move at the desire of the promisor: Consideration
must be offered by the promisee or the third party at the desire or
request of the promisor. An act done at the desire of a third party is
not a consideration.
Example: R saves S’s goods from fire without
being asked to do so. R cannot demand anD
reward for his services, as the act being done
voluntary.

2. Consideration from promisee or any other person: In India, consideration may
proceed from the promisee or any other person who is not a party to the
contract. According to the definition, when at the desire of the promisor, the
promisee or any other person does something such an act is consideration. In
other words, there can be a stranger to a consideration but not stranger to a
contract.
A’ by gift deed transferred certain property to her daughter with the direction
that the daughter should pay an annuity to ‘A’s brother as had been done by
‘A’. Whereas daughter executed a writing in favor of brother to pay the
annuity. Afterwards she refused to fulfill her promise saying that no
consideration had moved from A’s brother. The court held that ’A’s brother
was entitled to maintain the suit.

3. Executed and executory consideration: A consideration which consists in the
performance of an act is said to be executed. When it consist in a promise, it is
said to be executory. The promise by one party may be the consideration for
an act by some other party, and vice versa.
For example, A pays ` 5,000 to B and B promises to deliver to
him a certain quantity of wheat within a month. In this case
A pays the amount, whereas B merely makes a promise.
Therefore, the consideration paid by A is executed, whereas
the consideration promised by B is executory.

4. Adequacy of consideration: Consideration need not to be of any particular
value. It need not be approximately of equal value with the promise for
which it is exchanged but it must be something which the law would regard
as having some value.
Example: A agrees voluntarily to sell his motorcycle for ` 2,000 to B. It is a
valid contract despite the inadequacy of consideration.
It may be noted in this context that Explanation 2 to Section 25 states that
an agreement to which the consent of the promisor is freely given is not
void merely because the consideration is inadequate.

5. Performance of what one is legally bound to perform: The
performance of an act by a person who is legally bound to perform
the same cannot be consideration for a contract. Hence, a promise to
pay money to a witness is void, for it is without consideration.
Therefore such a contract is void for want of consideration.
6. Consideration must be real and competent: Consideration must
be real and must also be competent. It must be something to
which the law attaches some value.
Examples: A man promises to discover treasure by magic. This
transaction can be said to be void as it is illusory.
7. Consideration must not be unlawful, immoral, or opposed to
public policy.

Contract On Account Of Natural Love And Affection
Compensation For Past Voluntary Services
Promise ToPay Time Barred Debts
Contract Of Agency
Completed Gifts

Agreement
is in
writing
Registered
under the
law
natural love
and
affection
where
parties are
nearrelative
Enforceable
Without
Consideration
Eg: On a birthday party of Abhi, his father Mr. Amit promises to give him Rs.
1,00,000/‐. Mr. Amit puts his promise in writing and gets it registered it. It is a
valid contract.
Made on
account of
Where an agreement is in writing and is registered under the law and
is made on account of natural love and affection between parties
which are near relative to each other, it is enforceable even if there is
no consideration.

 The rule “No consideration, No contract” does not
apply to completed gifts. [Explanation to Sec.
25(1)]
 In order to attract this exception, there need not be
natural love and affection or nearness of
relationship between donor and donee.
 In this case, the gift must be complete and should
not be only a promise for gift.

A promise to compensate a person, who has already voluntarily
done something for the promisor, is enforceable, even though
this promise is without consideration.
E.g. P finds S’s purse and gives it to him. S
promises to give P Rs. 100/‐. This is a valid
contract.

 A promise in writing to pay a debt which is barred
by limitation, is valid even though it is without
consideration.

Suit By A Third Party To An
Agreement

 Though under the Indian Contract Act, 1872 the consideration for an
agreement may proceed from a third party, the third party cannot sue on
agreement. Only a person who is party to a contract can sue on it. Thus, the
concept of stranger to consideration is a valid and is different from stranger
to a contract which means contract by the person who is not a party to the
contract.
Example: P who is indebted to Q, sells his property to R and R promises to
pay off the debt amount to Q. If R fails to pay, then in such situation Q has
no right to sue, as R is a stranger to contract.
The aforesaid rule, that stranger to a
contract cannot sue is known as a “Doctrine
Of Privity Of Contract”,

THE INDIAN CONTRACT ACT 1872 NOTES FOR STUDENTS

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