Unit - I - Contract Act 1872.pptx

THE INDIAN CONTRACT ACT 1872
Definition of contract, essentials elements and
types of a contract, Formation of a contract,
performance of contracts, breach of contract and
its remedies, Quasi contracts - Contract Of
Agency: Nature of agency, Creation and types of
agents, Authority and liability of Agent and
principal: Rights and duties of principal and
agents, termination of agency.

THE SALE OF GOODS ACT 1930
Nature of Sales contract, Documents of title, risk of
loss, Guarantees and Warranties, performance of
sales contracts, conditional sales and rights of an
unpaid seller - Negotiable Instruments Act 1881:
Nature and requisites of negotiable instruments.
Types of negotiable instruments, liability of parties,
holder in due course, special rules for Cheque and
drafts, discharge of negotiable instruments.

LAW
Set of rules
To control the conduct of people
To protect their property
To secure the justice
It is not static
It keeps changing to fit the changing
requirements of the society

LAW
It may be defined as the rules of conduct
recognized and enforced by the state to control
and regulate the conduct of the people.

“Ignorance of law is no excuse”
One must know something about rules and
regulations by which he or she is governed.
The main object of law is to bring welfare and
improvement to the society.

BRANCHES OF LAW
 Civil law
 Criminal law
 Constitutional law
 International law
 Industrial law
 Mercantile law – branch of civil law

MERCANTILE LAW
 It is the branch of law which governs and
regulates the trade and commerce.
 This deals with the rights and obligations
arising out of mercantile transactions (business
transactions) between the mercantile persons.

 A mercantile person is one who enters into
business transactions and may be an individual,
an association of persons such as partnerships,
or a company.
 It is also called as Law merchant, business law,
or commercial law.

The Indian contract Act 1872
Definition of Contract
Sec 2(h) defines a “contract as an agreement
enforceable by law”.
Definition of Agreement
An agreement is defined as “ every promise and
every set of promises, forming consideration for
each other”. Sec 2 (e).

ESSENTIAL ELEMENTS AND LEGAL
RULES OF A VALID CONTRACT
In order to become a contract, an agreement must
have the following essential elements:
1. There must be an offer and its acceptance:
 There must be at least two parties in an
agreement.
 The offer when accepted becomes an agreement.

2. There must be mutual consent of the parties
 The parties must agree upon the same thing in
the same sense.
There must be consensus ad idem (meeting of
minds)

3. There must be legal obligations:
An obligation is the legal duty to do or abstain
(give up) from doing a definite act or acts.
Parties must have intention to create legal
obligation
If not, there is no contract.

Example:
A invited B to dinner. B accepted the
invitation. It is a social agreement. If A fails to
serve dinner to B, he (B) cannot go to Courts of
Law for enforcing the agreement. Similarly, if
B fails to attend the dinner, A cannot go to
Courts of Law for enforcing the agreement.

4. There must be free consent of the parties
(sec.14):
The consent is not free when it is obtained by
Coercion (Compulsion or force) (sec.15)
Undue influence (sec.16)
Fraud (sec.17)
Misrepresentation of facts (sec.18)
If the consent is not free, the contract is not valid.

5. The parties must be competent to contract
(sec.11):
Parties must be capable of entering into
contract.
Minors or persons of unsound mind are not
competent to contract.

Example:
A, a minor, borrowed Rs.500 from B and
agreed to repay it within two months.
This is not valid contract as A is not
competent to contract.

6. There must be lawful consideration (sec 2 (d)):
The lawful consideration is that which is not
Fraudulent
Forbidden by law
Immoral
Opposed to public policy

Example:
A promised to obtain an employment for B in
a Government Department and B promised to
pay Rs. 10,000 to A. In this case, the
agreement is not valid as the consideration for
it is unlawful.

7. There must be lawful object (sec.23):
The lawful subject must not be
Fraudulent
Forbidden by law
Immoral or
Opposed to any public policy.

Example:
A,B, and C entered into an agreement for the
division of gain, which is to be acquired by
them by fraud. If the object is not lawful, there
is no contract.

8. The agreement must not be declared to be
void:
Any agreement expressly declared to be void by
the law of the country shall not be enforceable by
Courts of Law.

 Example:
A agreed to pay Rs.500 to B if he (B) does not
marry throughout his life. B promised not to
marry at all. In this case the agreement is not
valid because agreements in restraint of
marriage are expressly declared to be void
(i.e. not enforceable by law).

9. The agreement must be certain (sec 29):
The meaning of an agreement must be certain.
An agreement whose meaning is uncertain is not
valid.
Example: A agreed to sell his white horse for
Rs.2500 or Rs. 3000 to B. There is nothing to
show which of the two prices was to be given. In
this case the agreement is not valid as it is
uncertain.

10. The performance must not be impossible
(Sec 56):
The performance of an agreement must be
possible.
An agreement to do an impossible act is not valid.
Example: A agreed to with B to discover treasure by
magic. In consideration, B agreed to pay Rs.500 to
A. In this case the performance of the agreement is
impossible, therefore it is not valid agreement.

TYPES OF CONTRACT
Types of contract
Enforceability Formation Performance
(Legal Validity) (Mode of Creation)

I. Classification based on enforceability
Types of contract
1.Valid contract
The conditions of enforceability are laid down
in Section 10 of thee Indian Contract Act.
A valid contract is that which satisfies all the
conditions of enforceability.

2. Void Contract (sec 2j):
A void contract is that which is not enforceable
by law.
When a valid and enforceable contract
subsequently becomes legally unenforceable due
to some reasons, it is called a void contract.

 Example: A promised to marry B. Latter on B
died. In this case, the contract becomes void on
the death of B.

3. Voidable contract (sec 2i):
A contract which can be put to an end at the option of
one party to the contract, is called a voidable
contract.
Example: A agreed to sell his horse to B for Rs.
20,000. The consent of A was obtained by use of
force. The contract is voidable at the option of A.
And A may put an end to this contract if he so
decides.

 A voidable contract continues to be valid and
binding till it is avoided by the party entitled to
do so.

4. Unenforceable contract:
The unenforceable contracts are those which
cannot be enforced in a court of law because of
some technical defects.
Certain cases require some formalities to be
fulfilled.

Ex: there are special provisions which provide
that a contract
Must be in writing
Must be registered
Must be properly stamped or
Must be attested etc.

II. Classification based on Formation or mode of
creation:
1. Express contract:
 An express contract is that which is made in
writing or by the words of mouth.
Example: A wrote a letter to B, “I am prepared to
sell my car for Rs. 50,000. B also accepted the
offer by a letter. This is an express contract.

2. Implied contracts:
An implied contract is that which is not made in
words.
Such contracts come into existence on account of
act or conduct of the parties.
Example: A went to a restaurant, and took a cup of
tea. In this case, there is an implied contract that
he will pay for the cup of tea.

3. Quasi contracts:
Quasi contracts are not contracts as there is no
intension of the parties to enter into a contract.
It is an obligation which the law creates in the
absence of any agreement.

Example: A supplied B, a Lunatic, with
necessaries suitable to his conditions in life. In
this case, A is entitled to be reimbursed from B’s
property.
A, a tradesman, left certain goods at B’s
house by mistake. B treated the goods as his
own. In this case, B is bound to pay for the
goods.

III. Classification based on Performance:
1. Unilateral contracts:
A unilateral contract is one – sided contract in
which only one party has to perform his
obligation.

 Example: A promised to pay Rs.100 to anyone
who finds his lost dog. B found the dog and
returned it to A. It is a unilateral contract which
comes into existence when the dog is found.
Now, only A has to perform his obligation by
paying Rs.100 to B.

2. Bilateral contract
A bilateral contract is a two-sided contract in
which both the parties have to perform their
respective obligations at the time of formation of
a contract the obligations of both the parties are
outstanding.
Example: A promised to paint a picture for B, and
B promised to pay Rs.100 to A.

3. Executed contract
When a contract has been completely
performed, it is termed as executed contract.
Example: A agreed to sell his horse to B for
Rs.1000. B paid the price and A delivered the
horse.

4. Executory contract:
Executory contract is that where under the terms
of contract something remains to be done by the
parties.
Example: A agreed to sell his car to B for
Rs.30,000. Car was to be delivered by A on 15th
of next month, and price was to be paid by B on
25th of that month.

FORMATION OF A CONTRACT
I. OFFER AND ACCEPTANCE
Definition of offer (sec.37)
An offer is a proposal by one party to
another to enter into a legally binding
agreement with him.

The person making an offer is known as
 Offeror
 Proposer
 Promisor
The person to whom the offer is made is known as
 Offeree
 Promisee

ESSENTIAL ELEMENTS FOR A VALID
OFFER
1. The offer must be communicated to the
other party
 The offer is completed only when it has been
communicated.

2. The offer must be made with a view to
obtain the consent of the offeree
Example:
A, jokingly, said that he was willing to sell his
horse for Rs.2000. B knowing that A was not
seriously making the offer, said that he has
accepted the offer.

3. The offer must have its terms definite, clear
and certain
Example:
A promised to buy the horse from B if it
proved lucky. This is a vague and loose offer.

4. The offer must be capable of creating legal
relationship. (Ex: dinner)
5. The offer must express the final willingness
of the offeror.

SPECIFIC OFFER
A specific offer is one which is made to an
ascertained i.e definite person. It can be
accepted only by the person to whom it is made.
GENERAL OFFER
A general offer is one which is not made to
any specific person, but to the public at large.

ACCEPTANCE (sec.38)
Definition
An acceptance is the manifestation by the
offeree of his willingness to be bound by the terms
of the offer.

ESSENTIAL ELEMENTS OF A VALID
ACCEPTANCE
1. The acceptance must be communicated.
2. The acceptance must be communicated to the
offeror himself.
3. The acceptance must be communicated to a
person who has the authority to accept.

REVOCATION OF OFFER
 Revocation means taking back or withdrawal.
 An offer may be revoked at any time before the
communication of its acceptance is complete for
the offeror, but not afterwards (Section 5).

Example:
A offers, by letter, to sell his house to B. B
accepts the offer by a letter. A may revoke his
offer at any time before B posts his letter of
acceptance and not afterwards.

REVOCATION OF ACCEPTANCE
 An acceptance can be revoked at any time
before the communication of acceptance is
complete for the acceptor, but not afterwards
(Section 5).

Example:
A offers, by a letter, to sell his house to B. B
accepts the offer by a letter . B may revoke his
acceptance at any time before his letter of
acceptance reaches A, and not afterwards.

CROSS OFFER
When two persons make identical offers to
each other in ignorance of each other’s offer. In
such cases, the offers are called ‘cross offers’

Example:
A, by a letter, offered to sell his motorcycle to
B for Rs.10,000. Without knowing about A’s
offer, B also, by a letter, offered to buy A’s
same motorcycle for Rs. 10,000. Both the
offers crossed each other in post. In this case,
the offers are cross offers, and thus, no binding
contract will come into existence.

II. CONSIDERATION (sec.25)
The term consideration means something in
return.
Example:
A agrees to sell his car to B for Rs. 1,00,000.
B’s promise to pay the sum of Rs.1,00,000 is the
consideration for A
A’s promise to sell the car is the consideration
for B

III. CAPACITY TO CONTRACT (sec.11)
The ‘capacity to contract’ means the
competence (i.e., capability) of the parties to
enter into a valid contract.
Persons not competent to contract
 Minors
 Persons of unsound mind
 Persons disqualified by law

MINORS
A minor is a person who is below the age of
eighteen years.

Persons of unsound mind:
1. Idiot
An idiot is a person who has completely lost
his mental faculties (sense) of thinking.

2. Lunatics:
A lunatic is a person whose mental faculties
of thinking are disordered due to some
mental strains or some other reasons.
The term ‘lunacy’ denotes periodical insanity
Idiocy is permanent feature.

3. Drunken or intoxicated persons:
One who is so drunk or intoxicated that he is
incapable of understanding the terms of
agreement.
An agreement made during such drunken or
intoxicated position is absolutely void.

PERSONS DISQUALIFIED BY LAW
1. Alien:
 An alien is a person who is a foreigner to the
land.
 He may be either an alien friend or alien
enemy.
 Alien friend is competent to contract.

IV.FREE CONSENT (sec.13)
“Two or more persons are said to consent when
they agree upon the same thing in the same
sense”.

V. LEGALITY OF OBJECT AND
CONSIDERATION
The term legality may be defined as conformity to
law.
Therefore it must be lawful.

VI. VOID AGREEMENTS (Sec.2(g))
An agreement not enforceable by law is said to be
void.
TYPES OF VOID AGREEMENTS
 Agreements by persons who are not competent to
contract.
 Agreements under a mutual mistake
 Agreements in restraint of marriage

 Agreements restraint of trade
 Wagering Agreements
 Agreements to do impossible acts.

VII. ILLEGALAGREEMENTS
The illegal agreement may be defined as the
agreement which is expressly or impliedly
forbidden by law e.g., by Indian Penal Code, or
by some other special legislation.
Example:
 An agreement to murder
 An agreement to publish a libel (a defamatory
statement)

 An agreement to Smuggling
 An agreement to steal

CONTINGENT CONTRACT (sec.31)
The contract which becomes due after the
happening or non-happening of some
contingency (i.e., some uncertain event) is
known as contingent contract.

Example:
A contract of insurance, which provides that
fixed amount of money shall be paid on the
happening of the event, e.g., fire accident etc.,
is a contingent contract.

It may be defined as a conditional contract.
Example:
A contracts to pay Rs.10,000 to B if his (B’s)
house is burnt.
This is a contingent contract as its performance
is dependent upon an uncertain event. (burning
of B’s house).

QUASI CONTRACTS (sec.68)
 There is no intention of the parties to create
contract
 It is the obligation created by law in the absence
of any agreement.
 This contract do not have the essential elements
of a valid contract.

 A quasi contract is a kind of contract by which
one party is bound to pay money in
consideration of something done, or suffered
by the other party

BASIS OF QUASI CONTRACTS
Based on equitable principle – no man should
grow rich out of another person’s costs.
Circumstances (or Kinds) of Quasi contracts
1. Supply of necessaries to persons who are
incompetent to contract (Section 68)
2. Payment by an Interested person (Section 69)

3. Non- gratuitous Act (Section 70)
The act which are not done for free.
Ex: A, a tradesman, leaves goods at B’s house by
mistake. B treats the goods as his own. He is
bound to pay for them to A
4. Finder of goods (Section 71)
5. Payment of money or delivery of goods by
mistake or under coercion (Section 72)

Ex: ‘A’ and ‘B’ jointly owe Rs. 1000 to ‘C’.
‘A’ alone pays the amount to ‘C’ and ‘B’ not
knowing this fact pay Rs.1000 again to ‘C’.
‘C’ is bound to repay the amount to ‘B’.

PERFORMANCE OF CONTRACTS (sec.37)
 After formation the next step is fulfillment of the
object.
 After the performance, the contract is said to be
discharged.
 It is the duty of each party to perform the his
obligation.

 The parties can either perform or offer to
perform.
Two types of performance:
1. Performance of the promise
2. Offer of performance of the promise (tender
of performance)

Performance of the promise
 When a party has done, what he had
undertaken to do, and nothing is left, the
promise is said to be performed. This is
known as actual performance.

Tender of performance
The party who is bound to perform his
obligation under the contract, may make an offer to
the other party to perform his obligation.
An offer to perform obligation is called
‘tender of performance’ or ‘attempted
performance’.

WHO SHOULD PERFORM THE
CONTRACT
1. The promisor himself (sec.40)
 E.g: a contract to paint, sing and marry.

2. The legal representative (sec.37):
 Contract which do not involve personal skill
 on the death of the promisor.
3. The agent (sec.40)
 Contract can be performed by an agent
appointed by the promisor

4. The third person (sec.41)
 Performance by a third person is effective if the
promisee accepts the same.
PERSONS ENTITLED TO DEMAND
PERFORMANCE
 Promisee is the only person who can demand
performance.

PERFORMANCE OF RECIPROCAL (mutual)
PROMISES
 A party gives a promise in consideration of other
party’s promise.
Example: A and B promised to marry each other.
KINDS OF RECIPROCAL PROMISES
1.Mutual and concurrent (simultaneous):
 Promises performed simultaneously (i.e., at the same
time)

2. Conditional and dependent:
Example: A agreed to construct a house for B.
And B agreed to supply the necessary material
required for construction of the house.

3. Mutual and independent:
Example:
A agreed to deliver the goods on 15th May, and B
agreed to pay the price on 20th May.

DISCHARGE OF CONTRACTS (sec.44)
 Termination of contractual relationship between
the parties.
Modes of discharge of contract
1. By performance
2. By impossibility of performance
3. By agreement
4. By operation of law

5. By lapse of time
6. By breach

2. Discharge by impossibility of performance
Initial impossibility
Ex: A agreed with B to discover a treasure by
magic

3. Discharge by agreement
 A contract can be discharged by mutual
agreement of the concerned parties.

Methods for a discharge of contract by a fresh
contract
Novation (sec.62)
 Substitution of new contract for the original one.

 Ex: A owed Rs.1000 to B under a contract. It
was agreed between A, B and C that B would
henceforth accept C as his debtor instead of A.
In this case, A is discharged from his liability
to pay the debt to B

Rescission (sec.62)
 Cancellation of the contract
Alteration (sec.62)
 Change in one or more terms of contract.
Remission (reduction) (sec.63)
 Acceptance of lesser fulfillment of the terms of the
promise.
Ex: acceptance of a less sum of money where more is
due.

Waiver
 Abandonment (giving up) of the rights of the
party who is entitled to claim performance.
4. Discharge by operation of law
Circumstances:
Insolvency (economic failure)
Death of a promisor

5. Discharge by lapse of time
6. Discharge by breach of contract
 Failure of a party to perform his obligation

REMEDIES FOR BREACH OF CONTRACT
 Parties to a contract are bound to perform their
respective obligations.
 If a party refuses to perform his respective
obligations, the breach of contract takes place.
 The other party (i.e., the aggrieved or injured
party) can enforce his rights in the Courts of
Law.

The process of enforcing the rights is
known as remedies for breach of
contract.

Types of remedies for breach of contract
Following are remedies available to the
aggrieved party (party who is not at fault)
1. Suit for rescission (cancellation)
2. Suit for damages (monetary compensation)
3. Suit for quantum meruit
4. Suit for specific performance
5. Suit for injunction

3. Suit for quantum meruit
 Quantum meruit – ‘as much as earned’ or
‘payment in proportion to the work done’

4. Suit for specific performance
 Ex: A agreed to sell an old painting of
Mughal period to B for Rs.5000. But
subsequently, A refused to sell the painting.

5. Suit for injunction (restriction)
Ex: A, a singer, agreed to sing at B’s theatre for
certain period. She has also agreed that during the
period she will not sing at any other theatre.
Later, A made a contract with C to sing at his
theatre.

Contract of Agency
 The person who acts on behalf of some other
persons is known as agent.
 The person on whose behalf the agent acts is
known as principal. (sec.182)
 The contract which creates the relationship of
principal and agent is known as agency.
 Ex: A appointed B to purchase 100 Bags of rice
on his behalf.

CREATION OF AGENCY
1. Agency by express agreement
2. Agency by implied agreement
3. Agency by operation of law
4. Agency by ratification

1. Agency by Express Agreement (Sec 187):
 An Agent is appointed by an agreement in
writing or by words of mouth.
 Power of attorney – written form of
agreement, executed on a stamped paper.

2. Agency by implied agreement (sec.187):
 A person becomes an agent of the other due to
the conduct of the parties.

3. Agency by operation of law:
According to Partnership Act, every partner of
the partnership firm is an agent.

4. Agency by Ratification (approval):
 Confirmation of the acts already done.
 It is also known as ‘ex-post facto agency’
 Ex: A had some money which actually
belonged to B. A, without B’s authority, gave
this money to C as loan. Later, B accepted
interest on this money from C as loan.

Kinds or types of agents
1. Mercantile or commercial agents
2. Non – mercantile or non – commercial agents.
Mercantile or commercial agents
- authority either to sell or buy the goods on
behalf of the principal.

Types of the mercantile agents:
1. Factor:
 Possession of the goods is given for the purpose
of selling the same.
 He may sell the goods on credit and receive
payments.

2. Broker:
 Appointed to negotiate
 Not given the possession of goods.

3. Auctioneer:
 Appointed to sell the goods at a public auction.
 Authority to receive the auctioned price.
4. Commission agent:
 Buys and sells the goods and receive commission.
5. Banker:
 Banker acts as an agent when he collects cheques,
drafts or bills.

NON-MERCANTILE AGENTS
1. Insurance agents
2. Advocate

RIGHTS OF AN AGENT
1. Rights of a retainer (sec.217)
2.Right to receive remuneration(sec.219)
3. Right of lien (sec.221)

DUTIES OF AN AGENT
1. Duty to act according to the directions or customs
of trade (sec.211)
2. Duty to render accounts (sec.213)
3. Duty to communicate with principal (sec.214)
4. Duty to pay sum received for principal (sec.218)
5. Duty not to delegate authority. (sec.190)

Rights of Principal
 Recover damages from agent
 Obtain accounts from agent
 Recover money collected by agent
 Obtain details of secret profit made by agent

Termination of agency
 End of the relationship of principal and agent.
Modes of termination
I. Termination of agency by the act of the parties
1. Agreement between principal and agent
2. Renunciation of agency business by the agent

II. Termination of agency by operation of law.
1. Completion of agency business (sec.201)
2. Death or insanity of the principal or agent
(sec.201)
3. Insolvency of the principal (sec.201)
4. Expiry of time

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