BASICS OF INDIAN CONTRACT

ACT

DR. AVIJIT ROYCHOUDHURY

INSPECTOR OF C OLLEGES
VIDYASAGAR UNIVERSITY
The Contracts or agreements between various parties are framed and validated
by the Indian Contract Act, 1872. Contract Act is one of the most central laws
that regulates and oversees all the business wherever a deal or an agreement is
to be reached at.
Let us begin by understanding the concept of a contract.
Definition
The Indian Contract Act, 1872 defines the term “Contract” under its section 2
(h) as “An agreement enforceable by law”. In other words, we can say that a
contract is anything that is an agreement and enforceable by the law of the land.
This definition has two major elements in it viz – “agreement” and “enforceable
by law”.
So a contract is a legal document that bestows upon the parties special rights
(defined by the contract itself) and also obligations which are introduced,
defined and agreed upon by all the parties of the contract.
So in order to understand a contract in the light of The Indian Contract Act,
1872 we need to define and explain these two pivots in the definition of a
contract.
Agreement
The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its
section 2 (e), the Act defines the term agreement as “every promise and every set
of promises, forming the consideration for each other”.
Now that we know how the Act defines the term “agreement”, there may be some
ambiguity in the definition of the term promise.
Promise
This ambiguity is removed by the Act itself in its section 2(b) which defines the
term “promise” here as: “when the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. Proposal when accepted,
becomes a promise”.
In other words, an agreement is an accepted promise, accepted by all the parties
involved in the agreement or affected by it. This definition thus introduces a flow
chart or a sequence of steps that need to be triggered in order to establish or draft
a contract.
1) A person /parties to whom a certain proposal is made.
2) The person /parties have to be in a position to fully understand all the aspects of
a proposal.
3) The person /parties accepts or agrees with the proposal after full understanding.
4) Once the person /parties accepts the proposal, the status of the proposal
changes to “accepted proposal”.
5) Then “accepted proposal” becomes a promise. Note that mere proposal is not a
promise. For the proposal to become a promise, it has to be accepted first.
To sum up, we can represent the above information below:
Agreement = Offer + Acceptance.
Enforceable By Law
In order to be a valid contract as per the definition of the Act, the agreement has to
be legally enforceable.
Thus we can say that for an agreement to change into a Contract as per the Act, it
must give rise to or lead to legal obligations or in other words must be within the
scope of the law. Thus we can summarize it as Contract = Accepted Proposal
(Agreement) + Enforceable by law (defined within the law)
 Difference Between Agreement And Contract

Contract Agreement
A contract is an agreement that is A promise or a number of promises that
enforceable by law. are not contradicting and are accepted
by the parties involved is an agreement.

A contract is only legally enforceable. An agreement must be socially

acceptable. It may or may not be
enforceable by the law.
A contract has to create some legal An agreement doesn’t create any legal
obligation. obligations.
All contracts are also agreements. An agreement may or may not be a
contract.
Proposal
A contract is initiated by making a proposal or offer to another party. The person
making such an offer/proposal is the promisor or offeror, and the one who accepts
the same is the promisor or acceptor.
Acceptance
Section 2(b) of the Indian Contract Act suggests that a proposal is accepted when
the person to whom it is made signifies his/her assent. A proposal so accepted
becomes a promise. Acceptance must be in line with the following specifications:
1. It has been communicated.
2. It is absolute and unqualified.
3. It is only communicated to the offeror.
4. It is issued in the prescribed manner.
5. It is issued before the specified lapse of time (if any) or within a reasonable
time.
6. It isn’t made before an offer is communicated.
7. Mere silence doesn’t constitute acceptance.
A proposal can be revoked prior to the communication of its acceptance; a proposal once accepted
cannot be revoked.
Lawful Consideration
Consideration refers to an act where an acceptor obliges to the desire of the
proposer or promises to do so. An agreement must be supported by a lawful
consideration, the essentials of which include the following:
1. It must be processed in accordance with the desire of the promisor.
2. It may be fulfilled by the acceptor or any other person (the Indian law allows
the performance of consideration from the acceptor or any other person).
3. It must be an act, abstinence, forbearance or a returned income.
4. It may be in the past, present or future. Past consideration finds its place in the
Indian law but is absent in the English law.
5. It must be real, competent and legally valuable.
6. It must be something which the promisor isn’t bound to do.
7. It need not be adequate.
Agreements Without Consideration
The following agreements do not require consideration:
1. An arising out of natural love and affection.
2. The performance of voluntary services or contributions to charity
3. A time-barred debt.
4. Creation of an agency.
5. Gifts made by a donor.
6. A contract of bailment.
A consideration would be lawful, except under the following circumstances:
1. It is forbidden by law.
2. It is potentially injurious to a person or property of another.
3. The court considers it to be immoral.
4. Its nature would defeat the provisions of law.
5. It is fraudulent in nature.
6. It is opposed to public policy.
7. It involves trafficking in public offices and titles. On this note, it is clarified
that agreements for sale or transfer of public offices or procurement of any for
public recognition for monetary consideration are not within the permitted
legal rights.
No agreements shall form a consideration if it:
1. Restrains legal proceedings.
2. Isn’t conducive to personal liberty.
3. Is a marriage brokerage contract.
4. Deals with marital duties.
Competency to Contract
All agreements are contracts if it has been entered into by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are
not hereby expressly declared to be void. Section 11 of the Act makes a person eligible
for a contract if:
1. He/she hasn’t attained the age of majority, i.e. 18 years in normal cases and 21
years if a guardian has been appointed by the Court.
2. He/she has a sound mind while making the contract.
3. He/she hasn’t been disqualified from contracting by any other law to which
he/she is the subject.
The following are some of the other land laws that disqualify certain people from
contracting, which includes:
1. Alien enemy
2. Foreign sovereigns, diplomatic staff, etc.
3. Artificial persons, i.e. corporation, companies, etc.
4. Insolvents
5. Convicts
6. Pardanashin Women
Certainty of Meaning
A valid contract should be well defined and essentially possess certainty of
meaning. It should not be ambiguous.
Possibility of Performance of an Agreement
Suppose two people decide to get into an agreement where a person A agrees to
bring back the person B’s dead relative back to life. Even when all the parties agree
and all other conditions of a contract are satisfied, this is not valid because
bringing someone back from the dead is an impossible task. Thus the agreement is
not possible to be enforced and the contract is not valid.
Free Consent
Consent is crucial for an agreement and thus for a valid contract. If two people
reach a similar agreement in the same sense, they are said to consent to the
promise. However, for a valid contract, we must have free consent, which means
that the two parties must have reached consent without either of them being
influenced, coerced, misrepresented or tricked into it. In other words, we say that
if the consent of either of the parties is vitiated knowingly or by mistake, the
contract between the parties is no longer valid.
Agent vs Principal Relationship
The principal may engage an agent to act on behalf of him/her in terms of the
performance of work, sale of goods, management of the business, etc. The law of
agency allows any person to become an agent if he/she is of sound mind.
The authority of an agent may be express or implied. The creation of an agency
needs no consideration, and the agency so created is fully empowered to act on
behalf of the principal based on orders or his/her own accord (the latter in the event
of an emergency). No person can be employed by the agent to perform tasks which
are entrusted to him/her, barring a few circumstances where a sub-agent can take on
the mantle. An agency may cease to exist by the:
1. Revocation of the principal (subject to conditions).
2. Renouncement of business by the agent.
3. Completion of business.
4. Insolvency or death of the agent.
5. Insolvency or death of the principal.
Express authority is said to be given by written or spoken words, while an implied authority is
inferred from the circumstances of the case.
The Obligation of Parties to Contracts
The parties to a contract are obligated to either perform or offer to perform their
respective promises, except if such performance is dispensed with or excused under
these provisions. It is noteworthy that the promises bind the representatives of the
promisor, except if the contract includes specifications on the contrary. If a party to
a contract fails to perform the promise, the promisor may put an end to such a
contract.
Clause for Legality
If a contract so formulated includes both legal and illegal performances, the legal set
of promises is a contract, whereas the other part of the agreement is void.
Contracts with People who are Incapable of Contracting
If a person who is incapable of getting into a contract is being supplied the
necessities that suit the condition of his/her life, the concerned supplier is entitled
to be reimbursed from the property of such incapable person.
Doctrine of Privity of Contract
The Indian Contract Act. 1872, allows the ‘Consideration’ for an agreement to
proceed from a third-party. However, a stranger (third-party) to consideration is
different from a stranger to a contract. The law does not allow a stranger to file a
suit on the contract. This right is available only to a person who is a party to the
contract and is called Doctrine of Privity of Contract.
Exceptions to the Doctrine of Privity of Contract
A stranger or a person who is not a party to a contract can sue on a contract in
the following cases:
a) Trust
If a contract is made between the trustee of a trust and another party, then the
beneficiary of the trust can sue by enforcing his right under the trust, even if he is
a stranger to the contract.
b) Family Settlement
If a contract is made under a family arrangement to benefit a stranger (person
not a party to the contract), then the stranger can sue in his own right as a
beneficiary of the contract.
(c) Assignment of a Contract
If a contract is made for the benefit of a person, then he can sue upon the contract
even though he is not a party to the agreement. It is important to note here that
nominees of a life insurance policy do not have this right.
(d) Acknowledgment or Estoppel
If a contract requires that a party pays a certain amount to a third-party and
he/she acknowledges it, then it becomes a binding obligation for the party to pay
the third-party. The acknowledgment can also be implied.
(e) A Covenant Running with the Land
When a person purchases a piece of land with the notice that the owner of the
land will be bound by all duties and liabilities affecting the land, then he can sue
upon a contract between the previous land-owner and a settler even if he was not
a party to the contract.
(f) Contract through an Agent
If a person enters into a contract through an agent, where the agent acts within
the scope of his authority and in the name of the person (principal).