Unit II: Indian Contract Act 1872

The law of contract of India is contains in the Indian Contract Act 1872.This act
is based mainly an English common law. It extends to the whole of India and
came into force on the first day of September 1872.

Definition of contract:
According to section 2(h) of the Indian Contract Act, An Agreement
enforceable by law is a contract”. So, it is clear that a contract is an agreement
made between two or more parties which the law will enforce.

There are two elements in the above definition such as

1. An agreement between two parties
2. Enforceability

Agreement and two parties:

As per sect 2(e): “Every promise and every set of promises, forming
consideration for each other, is an agreement.” Thus, it is clear that the
‘promises’ is an agreement.
As per sec 2(b): “A proposal, if it is accepted becomes a promise”, this means
that an agreement is an accepted proposal. So, an agreement comes into
existence only when one party makes a proposal (or offer) to the other party and
the other gives his acceptance there to.
Agreement= offer+ Acceptance

Enforceability:
An agreement, to become a contract, should create legal obligation or duty. If an
agreement is incapable of creating legal duty, it is not a contract. so, agreement
of moral, religious or social nature are not contracts, because they do not create
legal obligations between the parties.
For eg: inviting a friend to dinner, a father promise to his son for a gift etc. are
of social obligations. As these agreements cannot create legal duties, they
cannot become contracts. But in business agreements, it is assumed that the
parties concerned create legal duties, hence they are contracts.
So, it is clear that an agreement is a wider term than a contract. “All contracts
are agreements but all agreement are not contracts”. To sum up:
Contract = Agreement+ Enforceability

Consensus ad-idem:
The essence of an agreement is the meeting the minds of the parties in all this
means that the parties to the agreement must have agreed about the subject-
matter of the agreement in the same sense and the same time, in other word,
there should be consensus ad=idem between the
mind of the parties. Unless there is consensus ad-idem, there should be no
contract.

ESSENTIAL ELEMENT OF VALID CONTRACT:

1. Offer and Acceptance:

There must be a lawful offer and a lawful acceptance of the offer. So, there
must be two parties to an agreement. i.e., one party making the offer and the
other party accepting it. The terms of the offer should be definite and
acceptance should be absolute.
2. Intention to create legal relationship:
Where the two parties, enter into agreement, their intention must be to create
legal relationship between them. If there is no such an intention, there is no
contract between them. Agreements of social, religious or domestic nature
cannot make the legal relationship between the parties.
In case of law of balfour vs. balfour (1919) insisted this point. Balfour vs.
balfour
1919:The husband promised to pay his wife a household allowance of ₤30
every month. Later, the husband failed to pay the amount. The wife sued for the
allowance. Held, she could not recover the amount as the agreement did not
create any legal relationship; hence, there was no contract at all.
But, in business agreements it is assumed that parties concerned create a legal
relationship. Thus, an agreement to buy and sell goods intends to create legal
relationship, there is a contract. But, if the parties have expressly declared their
intention not creates any legal relationship even in the business agreement, such
type of agreement cannot become a contract.
3. Lawful consideration:
The term “consideration” means an advantages or benefits moving from one
party to the other. It means “something in return”. The agreement between
lawful only when party gives something to the other party and receives
something from the other party. Consideration need not necessarily be in cash
on hand. It may be an act or forbearance not doing something or promise to do
or not to do something. But it must be real and lawful.
4. Capacity of parties:
The parties entering into a contract must have certain capacity. They must be
legally competent to enter into a valid contract. They should not suffer from any
incapacity either on account of status like forgiveness of an account of mutual
deficiency like minors, lunatics or any ground if the parties have no capacity,
the contract entered into by them as void of initio.
5. Free and genuine consent:
It is essential that the parties must be on the same mind and on the same subject.
There should consensus ad-idem between the parties to the contract. The parties
should have a free and genuine willingness in making the contract. The consent
should have to been obtained by
force or any other by force or any other coercive methods. The consent is said to
be free of it is not obtained by,
A. coercion- persuading someone to do something by using force or threats
B. undue influence- influence by which a person is induced to act otherwise
than by their own free will or without adequate attention to the consequences.
C. fraud- wrongful or criminal deception intended to result in financial or
personal gain.
D. mistake and
E. misrepresentation
6. Lawful object:
The act of a contract and consideration should be lawful an object. Lawful if it
is not prohibited by law. An agreement is lawful when it is not.
a) illegal
b) immoral
c) oppose to public policy
7. Certainty and Possibility of Performance:
The terms of meaning of the agreement must be certain and definite, otherwise
the agreement will not be enforceable. For example, if A agrees to sell to B ten
tone of oil; no contract is there because it is not clear what kind of oil is
intended to be sold. An agreement to do an impossible act is not valid. For
example, an agreement between A and B to construct a house in one day cannot
become a valid contract, because, the act of the
agreement is not possible.
8. Agreement not declared Void:
The agreement should not have been expressly declared void by any law,
providing in the country.
9. Legal Formalities:
The agreement may be in oral or written form. It is in writing, it must comply
with the prescribed legal formalities in regard to writing, registration and
attestation. There are some legal formalities also in order to make an agreement
legally enforceable. In some cases the document in which the contract has been
written, should be stamped and registered. Thus the legal formalities should be
complied with. Then only a contract can be enforced in a court of law.

CLASSIFICATION OF CONTRACTS:

Contracts can be classified according to:

1. On the basis of Validity:
a) Valid Contract:
The contract which is enforceable by law is known as valid contract.Sec.10 of
the Indian Contract act, 1872 explains various legal requirements for a valid
contract; they are:
offer and acceptance, capacity of parties, lawful consideration, lawful
agreements, free consent, etc. in short a valid contract is one which possess all
the requirements of legal enforceability.
b) Void Contract and Void Agreement:
It is a contract which has no legal effect. It is unenforceable by law. It is not
enforceable at the option of either party. The void contract is not void ab initio.
It is valid at the time of making it, but it becomes invalid in future. This void
contract cannot be enforced by law.
A valid contract becomes void contract due to the following reasons:
i) Due to impossibility – A valid contract becomes void be impossibility of
performance after the formation of the contract. Illustration: A and B contract to
marry each other. But before the date A goes mad. The contract becomes void.
ii) Due to subsequent illegality – A contract also becomes void be subsequent
illegality.
Illustration: A agrees to sell 100 bottles of wine to B for Rs.1000 within 15
days. But before delivery, the govt. may prohibit the purchase and sells of wine,
if it happens the contract becomes void.
c. Voidable Contract:
An agreement which is enforceable by law at a option of one or more of the
parties thereto, but not at the option of the others, is voidable contract. In short,
a voidable contract is one which is enforceable by law at the option of one of
the parties. Until it is avoided or cancelled by one of the parties, it is a valid
contract.
Example: A promises to sell his car to B for Rs.1, 00,000. But his consent has
obtained by use of force. Now the contract is voidable at the option of A. he
may cancel it or accepts it.
Circumstances under which a contract becomes voidable:
a) When the consent of one of the parties to the contract is obtained by coercion,
undue influence, misrepresentation or fraud.
b) When one party prevents the other party from perform his duty, and then the
contract becomes voidable at the option of the party so prevented.
Example: A contract with B that A shall white wash B house for Rs.100. A
Is really and willing to execute the work accordingly. But B does not entrust his
house for whitewash.
c) When one party fails to carryout promise within the specified period, then the
contract becomes voidable at the option of the promise.
Example: X accepts to sell and deliver 50 bags of rice to Y for Rs.10, 000
within one week. But X does not supply the 50 bags of rice within the specified
period. Here, the contract becomes voidable at the option of Y.
d) Illegal or unlawful agreement:
An agreement is illegal and void if its object or consideration is prohibited by
law or is of fraudulent or it’s against to public policy or morality. An illegal
agreement is void ab initio.
e) Unenforceable Contract:
An unenforceable contract is one which cannot be enforced in a court of law
because of some technical defect such as absence of writing or lapse of time,
etc.
2. On the basis of formation:
a) Express Contract: If the terms of a contract are expressly agreed upon
(whether by words, spoken or written) at the time of formation of the contracts,
it is called as express contract.
Example: A tells B on telephone that he offers to sell his car for Rs.1,00,000
and B in reply informs A that he accepts the offer. There is an express contract.
b) Implied Contract: the contract which is not expressed in written or spoken
words, but is to be inferred from the conduct of the parties is called as implied
contract.
Example: There is an implied contract if a person;
i) gets into a public bus
ii) takes a cup of coffee in a hotel
iii) permits a porter to lift luggage
c) Quasi Contract: A quasi contract is one which resembles a contract but not
possess all the essentials for a valid contract. But quasi contract is valid
contract. It is created by law and it resembles a contract, such a contract does
not arise by virtue of any agreement, express or implied, between the parties but
the law infers or recognizes a contract under certain special circumstances.
For example: 1) Obligation of finder of lost goods to return them to true owner
2) Liability of a person to whom money is paid under mistake, to repay it back
In the above cases, there are no offer, acceptance, agreement etc. but in the eyes
of law these are considered as quasi contracts. The quasi contract is known as
“constructive contracts”.
d) E-Commerce contract:
An E-Commerce contract is one which is entered into between two parties via
internet.
3. On the basis of performance:
On the basis of performance, the contract can be classified as follows:
1) Executed contract: an executed contract is one, in which both the parties
have fulfilled their obligations and which are completely carried out.
2) Executory contracts: an executory contract is one in which both the parties
have not ful fill their obligations. Example: if A makes a contract with B
regarding the sales of his scooter. As per the terms and conditions. A will
deliver his scooter to B within a specified time; B will pay the price offer one
month. Here, at the time of making the contract, both the parties have to ful fill
the obligation henceforth. This is executory contract.
3) Unilateral contract: if one party has to be fulfilling his obligation and the
other has already fulfilled his obligation, it is known as unilateral contract.
4) Bilateral contract: if both the parties have fulfilled their obligation hence, it
is known as bilateral contract.

BREACH OF CONTRACT
Breach of contract means the failure of a party to perform his/her obligations
under a contract. Section 73-75 under the Indian Contract Act 1872 details the
consequences of a breach of contract.
Breach of contract may be actual or anticipatory.

Anticipatory Breach of Contract

This refers to when a breach of contract occurs before the time fixed for
performance has arrived. It can take place in the following two ways:

 Expressly by words spoken or written

 Impliedly by the conduct of one of the parties.
Anticipatory breaches usually occur by the person who promises.

Actual Breach of Contract

This is a case of refusal to perform the promise on the scheduled date. When
one of the parties breaks the contract by refusing to perform their promise on
the due date, they have committed a breach. In that case, the other party leaves
with the right of action against the one who has breached the contract.

REMEDIES FOR BREACH OF CONTRACT

When a contract is broken, the injured party (i.e., the party who is not in breach)
has one or more of the following remedies:
1. RESCISSION
When a contract is broken by one party, the other may sue to treat the contract
as rescinded and refuse further performance. In such a case, he is absolved of all
his obligations under the contract
Example: - A promises B to supply 10 bags of cement on a certain day. B
agrees to pay the price after the receipt of the goods. A does not supply the
goods. B is discharged form liability to pay price.
2. DAMAGES
Damages are a monetary compensation allowed to the injured party is the court
for the loss or injury suffered by him by the breach of a contract.
a) Damage arising naturally- ordinary damages:-
When a contract has been broken, the injured party can be recovering form the
other party such damages as naturally arose in the usual course of things from
the breach.
Example: - A contracts to sell and deliver 50 quintals of Farm wheat to B at Rs.
475 per quintal, the price to be paid at the time of delivery. The price of wheat
rise to Rs 500 per quintal and a refuses to sell the wheat. B claim damages at the
rate Rs. 23 per quintal.
b) special damages;
Damage other than those arising form the breach of contract may be recovered
if such damages may reasonable be supposed to have been in the contemplation
of both the parties as the breach of the contract. Such damages, known as
special damages, cannot be claimed as a matter of right.
Example: - P brought from L some copra cake. He sold it to B who sold it to
various dealers, and they in turn sold it to farmers, who used it for feeding
cattle. The copra cake was poisonous and the cattle fed on it died. Claimed
against L the damages and costs he had to pay to B. Cake were to be used for
feeding cattle P could claim compensation.
c) Vindictive or exemplary damages:-
There are two scenarios for awarding vindictive or exemplary damages:

 Breach of a promise to marry because it causes injury to his/her

feelings
 Wrongful dishonour of cheque by a banker because it causes loss of
reputation and credibility.
In case of a wrongful dishonour of cheque from a businessman, the
compensation will include exemplary damages even if he has not suffered any
financial loss. However, a non-trader is not awarded heavy compensation unless
the damages are alleged and proved as special damages.

Example: Peter is a farmer. He issues a cheque for procuring seeds for his next
crop. He has sufficient funds in his account but the bank erroneously dishonours
the cheque. Peter files a suit claiming compensation for damages to his
reputation. The Court awards a nominal amount as damages since Peter is not a
trader.

d) Nominal Damages

If a party to a contract files a suit for losses but proves that while there has been
a breach of contract, he has not suffered any real losses, then compensation for
nominal damages is awarded. This is done to establish the right to a decree for a
breach of contract. Also, the amount can be as low as Re 1.

e) Mitigation of damages: It is the duty of the injured party to take all

reasonable steps to mitigate the loss caused by the breach he cannot claim to be
compensated by the party in default for loss which he ought reasonable to have
avoided
That is he cannot claim compensation for loss which is really due not to the
breach but due to his own neglect to mitigate the loss after the breach.
f) Difficulty of assessment: - Although damages which are incapable of
assessment cannot be recovered, the fact that they are difficult to assess with
certainty or precision does not prevent they aggrieved party from recovering
them,
g) Cost of decree: The aggrieved party is entitled, in addition to damages to get
the cost of getting the decree for damages. The cost of suit for damages is in the
discretion of the court.
3) QUANTUM MERUIT
The phrase quantum merit literally means as much as earned. A right to sue on a
quantum merit arises where a contract, partly performed by one party, has
become discharged by the breach of contract by the other party. The right is
founded not on the original contract which is discharged or is void but on an
implied promise by the other party to pay for what has been done.
4) SPECIFIC PERFORMANCE
In certain cases of breach of contract, damages are not an adequate remedy. The
court may, in such cases, direct the party in breach to carry out his promise
according to the terms of the contract. This is a direction by the court for
specific performance of the contract at the suit of the party not in breach.
5) INJUNCTION
Were a party is in breach of a negative term of contact (i.e., where he is doing
something which he promised not to do), the court may, by issuing an order,
restrain him from doing what he promised not to do. Such an order of the Court
is known as an injunction”.
Example: - CASE LUMLEY vs WAGNER W agreed to sing at L’s theatre
and, during a certain period to sign nowhere else. Afterwards W made contract
with Z to sign at another theatre and refused to perform the contract with L. the
court Held W could be restrained by injunction from singing for Z.
 INDIAN SALE OF GOODS ACT,1930
Contract of Sale of Goods –
_ A contract of sale of goods is a contract whereby the seller transfers or agrees
to transfer the property in goods to the buyer for a price.
_ The term ‘ contract of sale ‘ is a generic term and includes both a ‘sale ‘and an
‘agreement to sell’.

Sale and Agreement to sell:

In sale of goods, the property in the goods is transferred from the seller to the
buyer immediately then the contract is called sale, but where the transfer of
property in the goods passes only after the seller has fulfilled certain conditions
subsequently is called an agreement to sell.

Essentials of a contract of sale: The following are the Essential elements are
necessary for contract of sale:

1. There must be at least two parties: there must be two distinct parties
(i.e.., seller and Buyer) to effect a contract of sale and they must be
competent to contract. Section 2(1) defines „A person who buys (or)
agrees to buy goods is called a Buyer‟ and Section 2(13) defines „A
person who sells (or) agrees to sell is called seller‟.

2. Subject matter must be “Goods‟: There must be some goods, the

property in which is (or) is to be transferred from the seller to the buyer.
The goods which form the subject matter must be movable.

3. Consideration is price: The consideration for the contract of sale, called

price, it must be money. Where there is no consideration, it would be a
gift, there is no contract of sale. Similarly, where goods are sold for a
price, which is to be paid partly in cash and partly in goods then it is
considered as contract of sale.

4. Transfer of general property: There must be a transfer of general

property from the buyer to the seller.

5. Absolute (OR) Qualified: A contract of sale may be absolute or

conditional.

6. Essential elements of a valid contract: All the essentials of a valid

contract must be present in the contract of sale.
Condition and Warranties:
Condition: According to section 12(2) a “Condition‟ is a stipulation essential
to the main purpose of the contract, the breach of which gives raise to a right to
treat the contract as repudiated.
Warranty: According to the section 12(3) a „Warranty‟ is a stipulation
collateral to the main purpose of the contract, the breach of which gives raise to
a claim for damages but not to the right to reject the goods and treat the contract
as repudiated.

Condition Warranty
• A condition is a stipulation which is • A warranty is a stipulation which is
essential to the main purpose of the collateral to the main purpose of the
contract contract.
• If there is a breach of condition, the • If there is a breach of warranty, the
aggrieved party can repudiate the aggrieved party can claim damages
contract of sale only.
• A breach of condition may be • A breach of warranty cannot be
treated as a breach of a warranty treated as breach of condition

Rights and Duties of Buyer in a Contract of Sale

Rights of the Buyer in a Contract of Sale
The following are the rights of a buyer in a contract of sale.

1. He has the right to have delivery of the goods as per the contract.
2. If the seller does not send, as per the contract, the right quantity of goods to
the buyer, the buyer can reject the goods.

3. The buyer has a right not to accept delivery of the goods by installments by
the seller.

4. If the goods are sent by sea route by the seller, the buyer has a right to be
informed by the seller so that he may get the goods insured.

5. The buyer has a right to examine the goods which he has not seen earlier
before giving his acceptance for the same.

6. If the seller wrongfully refuses to deliver the goods to the buyer as per the
contract, the buyer may sue the seller for damages for non delivery. The amount
of damages will be the difference between the contract price and the market
price of the goods.
7. If the buyer has already paid the price and the seller has not delivered the
goods as per the contract, the buyer can recover the amount paid.

8. If the contract is for the sale of specific or ascertained goods, the buyer may
sue the seller for the specific performance of the contract in case of breach of
contract by the latter.

9. The buyer may sue the seller for damages for the breach of any implied
warranty as per the provisions of this Act.

10. If the seller rejects the contract before the date of delivery, the buyer may
either treat the contract as still existing and wait till the date of delivery or he
may treat the contract as cancelled and sue the seller for damages for the breach.
The second case is known as the anticipatory breach of contract.

11. If, in view of the breach of contract by the seller, the price has to be
refunded to the buyer, the buyer has a right to claim interest on the amount.

Duties of the Buyer in a Contract of Sale

The following are the duties of a buyer in a contract of sale.

1. It is the duty of the buyer to accept the goods and pay for them in accordance
with the terms of the contract.

2. It is the duty of the buyer to apply for delivery.

3. It is the duty of the buyer to demand delivery of the goods within a

reasonable time.

4. If the contract specifically provides for the delivery of the goods by the seller
by installments, the buyer shall accept such a delivery.

5. It is the duty of the buyer to take the risk of deterioration in the goods which
is necessarily incident to the course of transit. Example: Rusting of iron.

6. If the buyer refuses to accept the goods, it is his duty to inform the seller
about it.

7. If the seller delivers the goods as per the contract, it becomes the duty of the
buyer to take delivery of the same within a reasonable time. He remains liable
to the seller for any loss arising on account of his refusal to take delivery.
8. If the ownership rights have already been passed on to the buyer by the seller,
the former has the duty to pay the price as per the terms of the contract.

9. If the buyer wrongfully refuses to accept and pay for the goods, he will have
to compensate the seller for damages for non-acceptance.

RIGHTS OF AN UNPAID SELLER

A seller of goods is deemed to be an unpaid seller when:-

1. When the whole of the price has not been paid or tendered
2. When a bill of exchange or other negotiable instrument has been received as
a
conditional payment and the condition on which it was received has not been
fulfilled by reason of the dishonoured of the instrument or otherwise.
AS AGAINST THE GOODS
1. Right of Lien
A lien is a right to retain possession of goods until payment of the price. It is
available to the unpaid seller of the goods who is in possession of them where:
a. The goods have been sold without any stipulation as to credit
b. The goods have been sold on credit, but the term of the credit has expired
c. The buyer becomes insolvent
Rules regarding Lien:
• The seller may exercise his right of lien notwithstanding that he is in
possession
of the goods as agent or bailee for the buyer.
• Where an unpaid seller has made part delivery of the goods, he may exercise
his
right of lien on the remainder, unless such part delivery has been made under
such
circumstances as to show agreement to waive the lien.
• The seller may exercise his right of lien even though he has obtained a decree
for the price of the goods.
2. Right of stoppage in transit
The seller may resume possession of the goods, as long as they are in the course
of transit and may retain then until payment or tender of the price.
The right to stoppage in transit either by taking actual possession of the goods,
or by giving notice of his claim to the carrier or other bailee in whose
possession the goods are.
3. Right of re-sale
the unpaid seller can re-sell the goods
i. Where the goods are of a perishable nature
ii. Where he has exercised his right of lien or stoppage in transit and
given notice to the lawyer of his intention to re-sell the goods
iii. Where the seller expressly reserves a right of resale in case the buyer
makes default.
4. Right of with holding delivery
When the property in goods has not passed to the buyer, the unpaid seller has, in
addition to his other remedies a right of withholding delivery similar to and co-
extensive with his rights of lien and stoppage in transit where the property has
passed to the buyer.
AS AGAINST THE BUYER PERSONALLY:-
1. Suit for price:-
Where under a contract of sale the property in the good has passed to the buyer
and the buyer wrongfully neglects or refuses to pay for the goods according to
the terms of the contract, the seller may suit him for price of the goods.
2. Damage for non-acceptance: - where the buyer wrongfully neglects or
refuses to pay for the goods, the seller may sue him for damages for non-
acceptance.
3. Suit for interest: - The seller can recover interest on price from the date on
which the payment become due, if there is a special agreement to the effect.
4. Repudiation of contact before due date:- when the buyer in a contract of
sale
repudiates the contract before the date of delivery, the seller may either treat the
contract as subsisting and wait till the date of delivery, or he may treat the
contract
as rescinded and sue for damages for the breach.