THE INDIAN CONTRACT ACT, 1872
UNIT NO-1 NATURE OF CONTRACTS
The law of contract is a fundamental area of civil law that governs the creation and enforcement of agreements between two or more parties. At its core, it is about promises that the law will recognize and enforce. This body of law provides a framework for business and daily life, ensuring that individuals and businesses can rely on the promises made to them.
What is a Contract?
A contract is a legally enforceable agreement. While every contract is an agreement, not every agreement is a contract. A social agreement, for example, is not enforceable by law. A contract, on the other hand, creates legal obligations and rights for the parties involved.
- Difference between Agreement & Contract –
| Basis of Comparison | Agreement | Contract |
| Definition | A promise or set of promises forming the consideration for each other.
(Offer + Acceptance) |
An agreement that is legally enforceable.
(Agreement + Enforceability by Law) |
| Legal Obligation | Doesn’t necessarily create a legal obligation. | Always creates a legal obligation and is binding on the parties. |
| Scope | A wider term. It includes both legal and social arrangements. | A narrower term. It only includes agreements that are legally enforceable. |
| Validity | Can be informal, and may not have all the elements of a valid contract. | Must fulfill all the essential elements of a valid contract. |
| Enforceability | Not all agreements are legally enforceable. | All contracts are legally enforceable. |
| Nature | Can be social, moral, or legal. It’s a meeting of minds. | Is always legal and commercial in nature. It’s a legally binding promise. |
| Motto | All contracts are agreements, but all agreements are not contracts. | The key difference lies in enforceability. |
- Essentials of Valid Contract-
Contract = Agreement + Enforceability by law
An agreement is defined as “every promise and every set of promises, forming the consideration for each other.” (Section 2(e) of the Indian Contract Act, 1872). A promise is created when a proposal (offer) is accepted.
Ø Essential Elements of a Valid Contract
1. Offer and Acceptance
Offer (Proposal): One party must make a clear, definite, and lawful proposal to another party indicating their willingness to do or abstain from doing something, with the intention of obtaining the other person’s consent.
Acceptance: The offeree must give their unequivocal and absolute consent to the offer’s terms. The acceptance must be a “mirror image” of the offer; if any changes are made, it becomes a counter-offer, which terminates the original offer.
2. Intention to Create Legal Relations
The parties must intend for their agreement to have legal consequences and create legal obligations.
Agreements of a social or domestic nature are generally presumed not to have this intention, whereas business agreements are presumed to have it.
3. Lawful Consideration
Consideration is the “price” for the promise. It is the something of value exchanged between the parties. It can be money, goods, services, or a promise to do or not to do something.
4. Capacity of Parties
The parties entering into the contract must be legally competent to do so. This means they must:
Be of the age of majority (18 years old in most places).
Be of sound mind.
Not be disqualified from contracting by any law to which they are subject.
5. Free Consent
The consent of the parties to the agreement must be free and genuine. It is considered “free” when it is not caused by any of the following:
Coercion: Threatening to commit an act forbidden by law or unlawfully detaining property to force consent.
Undue Influence: Using a dominant position to obtain an unfair advantage over the other party.
Fraud: Intentionally deceiving another party to induce them into a contract.
Misrepresentation: An innocent or unintentional misstatement of a material fact.
Mistake: A mutual misunderstanding of a material fact by both parties.
6. Lawful Object
The purpose or object of the contract must be legal and not against public policy.
An agreement is void if its object is fraudulent, immoral, or forbidden by law.
7. Certainty and Possibility of Performance
The terms of the contract must be certain, clear, and not vague or ambiguous. An agreement with uncertain terms is void.
8. Not Expressly Declared Void
The agreement must not be one that is expressly declared to be void by the law.
9. Legal Formalities
While an oral contract can be valid, certain types of contracts, such as those for the sale of immovable property, must be in writing and registered to be enforceable.
Ø Types of Contract-
1. Based on Formation
Express Contracts: In an express contract, the terms are explicitly stated, either verbally or in writing. Both parties clearly understand and agree to the obligations and responsibilities.
Implied Contracts: These contracts are not explicitly stated but are inferred from the actions, conduct, or circumstances of the parties.
For example, when you order food at a restaurant, there is an implied contract that you will pay for the meal you receive.
Quasi-Contracts: A quasi-contract is not a true contract. It is a legal obligation imposed by a court to prevent one party from being unjustly enriched at the expense of another.
For instance, if a person accidentally receives a payment meant for someone else, a quasi-contract obligates them to return the money.
E-Contracts: When a contract is entered into by two or more parties using electronics means, such as e-mails is known as e-commerce contracts. This helps in doing business transactions using electronic mode. These are known as EDI contracts or Cyber contracts or mouse click contracts.
2. Based on Validity
Valid Contracts: A valid contract is a legally enforceable agreement that contains all the essential elements of a contract, such as a lawful offer, acceptance, consideration, and legal purpose.
Void Contracts: A void contract is an agreement that is not legally enforceable from the very beginning. It is considered null and void, as if it never existed. A contract to perform an illegal act is a void contract.
Voidable Contracts: A voidable contract is initially valid but can be legally canceled or rescinded by one of the parties due to certain issues.
Unenforceable Contracts: An unenforceable contract may have all the essential elements of a valid contract, but it cannot be enforced in court due to a technical defect, such as the absence of a required written form or a time limitation.
For example, an oral agreement for the sale of real estate may be considered unenforceable in many jurisdictions.
Illegal Contracts: These are contracts whose purpose or consideration is forbidden by law. All illegal contracts are void, but not all void contracts are illegal.
3. Based on Performance
Executed Contracts: An executed contract is one where both parties have completely fulfilled their obligations.
For example, when you buy a book from a store, the contract is executed once you pay for the book and the store gives it to you.
Executory Contracts: An executory contract is one where one or both parties still have obligations to perform in the future. A long-term service agreement is a good example of an executory contract, as services are provided over a period of time.
Executory Contracts is of two types:
Bilateral Contracts: This is the most common type of contract. Both parties make a promise to each other.
For example, a contract for the sale of a car is a bilateral contract, where the buyer promises to pay, and the seller promises to deliver the car.
Unilateral Contracts: In a unilateral contract, only one party makes a promise. The other party accepts the offer by performing a specific act.
A classic example is a “lost dog” reward poster, where the person offering the reward promises to pay if someone finds and returns their dog.
- Proposal / Offer (Section 2(a) Of Indian Contract Act,1872)
Under the Indian Contract Act, 1872, a proposal, also known as an offer, is defined in Section 2(a). It is the initial step in forming a contract. A proposal is made when one person signals their willingness to another person to do or to abstain from doing something, with the goal of getting that person’s agreement to the act or omission.
Essentials of a Valid Proposal
Intention to Create Legal Relations: The offer must be made with the intent to create a legal obligation upon its acceptance. Social invitations or domestic arrangements generally don’t create legal relationships and are not considered valid offers. The case of Balfour v. Balfour is a classic example of this principle in English law, which is also followed in India.
Certain and Definite Terms: The terms of the proposal must be clear, definite, and unambiguous. A vague or uncertain offer is not a valid proposal. For example, an offer to sell “some” oil is not valid because the quantity is not specified.
Communication: The proposal must be communicated to the person to whom it is made. An offer is not effective until it is brought to the knowledge of the offeree. The case of Lalman Shukla v. Gauri Dutt illustrates this point, where a servant who found a missing nephew was not entitled to a reward because he was unaware of the offer at the time he performed the act.
Distinguished from an Invitation to Offer: A proposal is different from an invitation to offer. An invitation to offer is a preliminary step to invite others to make a proposal.
Express or Implied: A proposal can be made in words (spoken or written), which is an express proposal, or it can be inferred from the conduct of the person or the circumstances of the case, which is an implied proposal.
Specific or General: A specific proposal is made to a definite person or group of people, and only they can accept it. A general proposal is made to the public at large, and anyone who fulfills the conditions of the proposal can accept it. The case of Carlill v. Carbolic Smoke Ball Co. is a prime example of a general offer.
Made with the Intention of Obtaining Assent: The proposal must be made to get the offeree’s acceptance, not merely to express a wish or intention.
- Invitation to Offer-
In the law of contract, an invitation to offer (also known as an invitation to treat) is a crucial concept that is distinct from a legal offer. It is a preliminary communication that indicates a party’s willingness to negotiate or receive offers, but it is not a binding proposal that can be accepted to form a contract.
- Difference between Offer & Invitation to Offer-
| Basis of Comparison | Offer | Invitation to Offer |
| Definition | A definite proposal to enter into a contract. | An invitation to others to make an offer. |
| Intention | The offeror intends to be legally bound upon acceptance. | The inviter does not intend to be legally bound by responses. |
| Legal Status | Creates a legally binding contract upon acceptance. | Does not create a contract; it leads to an offer being made. |
| Role of Parties | The offeror makes the offer; the offeree accepts it. | The inviter invites offers; the other party makes the offer. |
| Formation of Contract | A contract is formed immediately upon acceptance. | A contract is formed only when the offer (made in response to the invitation) is accepted by the inviter. |
| Examples | A person says, “I will sell my bicycle to you for Rs150.” | Displaying a bicycle in a shop window with a price tag of Rs150. |
- Acceptance-
As per the Indian Contract Act, 1872, Section 2(b), acceptance is defined as: “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.” In essence, it’s the clear and unequivocal agreement to an offer’s terms.
- Legal Rules Regarding Valid Acceptance-
- Acceptance Must Be Communicated:
- Mere mental acceptance or a silent intention to accept is not sufficient. The acceptance must be communicated to the offeror.
- Communication can be express (spoken or written) or implied.
- For example, if a customer at a self-service store picks up an item and pays for it, their actions imply acceptance of the store’s price.
- The communication must be made by the offeree or their authorized agent. Acceptance communicated by a third party without authority is not valid.
- Silence is Generally Not Acceptance:
- An offeror cannot stipulate that the offeree’s silence will be considered as acceptance.
- The legal principle is that a person should not be forced into a contract by their inaction. There must be a positive act of acceptance.
- There are exceptions, such as where the parties have a prior course of dealing in which silence has historically meant acceptance.
- Acceptance Must Be in the Prescribed Mode:
- If the offeror specifies a particular mode of acceptance the offeree must accept in that mode.
- If the offeree uses a different mode, the offeror is not bound.
- If no mode is prescribed, acceptance can be communicated in a reasonable and customary manner.
- Acceptance Cannot Precede the Offer:
- For an acceptance to be valid, the offeree must have knowledge of the offer and accept it.
- A person cannot accept an offer they are not aware of, even if their actions align with the terms of the offer. This is demonstrated in the famous case of Lalman Shukla v. Gauri Dutt, where a person who found a missing boy was not entitled to a reward because he was unaware of the offer when he found the boy.
- Acceptance by Conduct (Implied Acceptance):
- In some cases, acceptance can be inferred from the conduct of the offeree.
- For example, if an offer is made to perform a service for a fee, and the offeree starts performing the service, their actions imply acceptance of the offer.
- Acceptance Must Be Absolute and Unqualified:
- Acceptance must be a complete and unconditional assent to all the terms of the offer.
- The offeree cannot introduce any new terms or conditions.
- If the offeree attempts to change the terms of the offer, it is not a valid acceptance but a counter-offer. A counter-offer effectively rejects the original offer, which can no longer be accepted unless the offeror renews it.
- Acceptance Must Be Given Within a Reasonable Time:
- Acceptance must occur while the offer is still open.
- If the offer specifies a time limit for acceptance, it must be accepted within that period.
- If no time limit is specified, acceptance must be given within a “reasonable” time. What constitutes a reasonable time depends on the nature of the contract and the circumstances of the case.
- Communication of Offer & Acceptance-
The formation of a valid contract requires a clear and effective communication of an offer and its acceptance. The rules governing this communication are crucial, especially when parties are not in each other’s physical presence. This is particularly detailed in the Indian Contract Act, 1872, but the principles are widely applicable in common law jurisdictions.
Communication of Offer
An offer, or a proposal, is the first step in contract formation. For an offer to be valid, it must be communicated to the person to whom it is made.
Example: A proposes, by letter, to sell a house to B at a certain price. The communication of the proposal is complete when B receives and reads the letter. If B, by some other means, comes to know about the proposal before receiving the letter, it would not constitute proper communication, and thus, no valid contract can be formed.
Communication of Acceptance
Acceptance is the final and unqualified expression of assent to the terms of a proposal. It must be communicated to the offeror to form a binding contract. Silence, generally, does not amount to acceptance unless there is a prior agreement or conduct that suggests otherwise.
Example: 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 the acceptor (offeree): When it comes to the knowledge of the proposer. At this moment, the acceptor becomes bound by their own acceptance.
Example: B’s acceptance is complete, as against B, when the letter is received by A.
- Revocation of Offer & Acceptance-
Modes of Revocation-
Communication of notice: The most common way is for the offeror to explicitly tell the offeree that the offer is being withdrawn. This can be done verbally or in writing. Revocation can also be communicated indirectly through a reliable third party.
Lapse of time: An offer automatically expires if it isn’t accepted within a specified time frame. If no time is stated, the offer lapses after a “reasonable time” has passed. For example, an offer to buy stocks would have a shorter reasonable time than an offer to buy land.
Failure of a condition: If an offer is conditional on a specific event and that event doesn’t happen, the offer is revoked. For instance, an offer to buy a car on the condition that the car remains in its current, undamaged state is revoked if the car is damaged before acceptance.
Death or insanity of the offeror: If the offeror dies or becomes mentally incapacitated before the offer is accepted, the offer is automatically revoked, provided the offeree is aware of this fact.
Counter-offer: A counter-offer by the offeree is a rejection of the original offer and creates a new offer. This action terminates the original offer, and the offeree cannot later try to accept it.
- Communication of Performance-
In contract law, the concept of “communication of performance” is closely related to the communication of acceptance, especially in the context of unilateral contracts. While a bilateral contract is formed by the exchange of promises, a unilateral contract is one where an offer is made that can be accepted only by performance of a specific act.