I Year B.A., LL. B (Div.

-D) – Semester-I (2023)

1st -Internal Assessment – Contracts

TOPIC
CRITICAL APPRAISAL OF SECTION 2(h) OF
THE INDIAN CONTRACT ACT 1872

NAME: KRISH V
DIVISION: D
PRN: 23010125322
COURSE: BA LL.B. (H)
BATCH: 2023-2028

1
INTRODUCTION
The Indian Contract Act, 1872 is one of the most cardinal statutes that governs commercial
transaction in the society. It is however essential to note that, this has not been the case for
long, during earlier times several religious rules and regulations governed day-day transaction.
The British took up the task of codifying the law of contracts and the same was implemented
on the 1st of September, 1872. Whilst drafting the ICA 1872, the British were very clear on not
resorting to any other system of law and would rather stick to the principles of Justice, Equity
and Good Conscience.

INTERPRETATIVE ANALYSIS OF SECTION 2(h) of ICA, 1872

The word ‘Contract’ emerges from the Latin word “Contructus” meaning to work on a contract.
Salmond defined a contract as an agreement that creates and defines contractual obligation
between two or more parties by which rights are acquired by one or more for an act or
forbearance on the part of other.

Section 2(h) of the Indian Contract Act, 1872 states –

“An Agreement enforceable by law is a Contract”

Agreement + Enforceability by law = Contract

The two basic essentials of a contract are the presence of an agreement and an agreement
enforceable by law. To further elaborate on Agreement; It is a mutual understanding reached
by parties but the same need not be legally enforceable as not all agreement are a contract, they
need to satisfy the essential laid down in Section 10 of ICA, 1872.

The second essential on the agreement being enforceable by law refers to the agreement having
legal backing or legal consequences to all parties involved in the contract. If there exists any
beach of contract, then remedy can be claimed by the affected by party in accordance to the
Doctrine of Restitution which as stated in the case of S. Krishna Sradha vs. State of Andhra
Pradesh and Ors. 1 refers to the restoration of the aggrieved party to the situation or
circumstance the party would have been if the breach of contract had not occurred.

1
S. Krishna Sradha vs. State of Andhra Pradesh and Ors. (19.01.2017 - SC): MANU/SC/0083/2017.

2
Only by looking into the essentials of a contract and what are the terms and conditions of a
contract can one understand how a contract arises and concludes. This was reiterated in the
case of J.K. Industries Ltd. v. Mohan Investments and Properties Pvt. Ltd.2

Lastly, the contract should not be void – Section 2(g) read with Section 56 (lacks enforceability
- void) on grounds such as expressly declared as void, unlawful object/consideration, illegal,
impossible acts etc. It is also pertinent to note that if the essential elements of a contract laid
down in the ICA, 1872 are not fulfilled then there exists no concluded contract.

CROSS SECTIONAL ANALYSIS

 Section 2(a) of Indian Contract Act, 1872 –

For a contract to exist, there has to be an agreement. Additionally, the basic requirement for an
agreement is an offer or proposal. An offer as defined in Section 2(a) of ICA, 1872 refers to the
signification to another, willingness to do or abstain from doing with a view to obtaining an
assent from the other party. This section has to be read with Section 3 and 4 of the ICA, 1872
which elaborates about an offer only when communicated to the other party can there be a valid
acceptance and a concluded contract for enforceability. Hence, with no knowledge of the offer
there cannot be valid acceptance and hence, no contract. The above was reiterated in the case
of Lalman Shukla v. Gauri Datt.3

 Section 2(b) of Indian Contract Act, 1872 –

When the person to whom the proposal is made signifies his assent thereto, the proposal is
accepted resulting in a promise. It is pertinent to note that this section has to be read with
Section 7 indicating that acceptance has to absolute, unqualified, usual and in a reasonable
manner. Further, in the case of Felthouse v. Bindley4, the court held that the acceptance needs
to be communicated and mere silence will not be deemed acceptance.

2
J.K. Industries Limited vs. Mohan Investments and Properties Private Limited (22.04.1991 - DELHC):
MANU/DE/0049/1992.
3
Lalman Shukla v. Gauri Datt, 1913 SCC OnLine All 242.
4
Paul Felthouse vs. Bindley (18.07.1862 - ENRP): MANU/ENRP/2298/1862.

3
  Section 2(d) of Indian Contract Act, 1872 –

This section defines consideration which is generally something in return for the other party
that is, either a detriment to the promisee or a benefit to the promisor. A contract without
consideration is accepted to be void (Section 25) unless certain exceptions like a gift made out
of love or compassion etc.

Moreover, consideration need not be adequate, it just needs to be real, lawful and not
illusionary. Example, in the case wherein the object and consideration is made to commit an
offence (as per Indian Penal Code), the object and consideration in this case is forbidden by
law thereby making the agreement void. The same was elaborated in the case of Gherulal
Parakh v. Mahadeodas.5

 Section 2(e) of Indian Contract Act, 1872

This section defines an agreement as every promise or multiple set/collection of promises that
form the consideration for each other. This very section is important for the cross – sectional
analysis considering all contracts are an agreement and the basis of a contract is an agreement.
Nevertheless, the parties involved in a contract (two or more) need to have an intention to enter
into a contract and there should exist a meeting of minds.

Promise/Set of Promises + Consideration = Agreement

Legal Intention to Contract – In the case of RTS Flexible Systems Ltd v Molkerei Alois Muller
Gmbh and Company KG (UK Production) 6 it was held that the subjective state of mind is not
taken into consideration rather what can be objectively construed from the words and conduct
of the parties will be used to ascertain whether the parties intended to enter into a legal
relationship. Hence, the courts will analyse whether a reasonable, prudent man would have
intended to enter into a legal relationship. It is only if the parties intend to enter into a legal

5
Gherulal Parakh v. Mahadeodas (AIR 1959 SC 781).
6
RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh and Company KG (UK Production) (10.03.2010 -
UKSC): MANU/UKSC/0060/2010.

4
relationship (In general, not a family or social contract subject to exceptions) will there be a
binding contract.

Consensus ad Idem – refers to the meeting of minds of parties involved in the contract. A
contract is valid only when two or more parties agree on the same thing in the same sense. there
should exist a consensus ad idem between the parties on the subject matter of the contract
without which a contract is not concluded as held in the case of U.P. Rajkiya Nirman Nigam
Ltd. vs. Indure Pvt. Ltd. and Ors. 7

Hence, for a contract to exist, an offer has to be made and an acceptance has to be given to the
same and the parties involved must have an intention to enter into a contract and there must be
a consensus on the lawful object and consideration of the contract.

 Section 10 of Indian Contract Act, 1872 –

This section specifies the essentials that make an agreement a contract; such as –

i. Free consent of Parties (Section 14) – Contracts should be voluntary in nature and
hence, parties should not be entering into a contract under factors such as coercion,
undue influence, fraud, misrepresentation, mistake which are elaborated below: -
a. Coercion (Section 15) – No person should be forced to enter into a
contract. Force can include threats of violence, intimidation etc. In the case
of Chikkam Seshamma v. Chikkam Ammiraju8, it was held that a threat
to suicide amounts to coercion and hence, the agreement is void
considering there is no free consent of the parties.
b. Undue Influence (Section 16) – When one party is in a dominant position
over the other party and exerts dominance over the other to enter into a
contract.
c. Fraud (Section 17) – When one party induces/deceives the other party to
enter into a contract; Can also be concealment of facts or a promise without
the intention to fulfil the same.
d. Misrepresentation (Section 18) – When one party genuinely believes the
matter to be true but in fact misrepresents the truth.

7
U.P. Rajkiya Nirman Nigam Ltd. vs. Indure Pvt. Ltd. and Ors. (09.02.1996 - SC): MANU/SC/0362/1996.
8
Chikkam Seshamma and Ors. vs. Chikkam Ammiraju and Ors. (23.02.1917 - MADHC): MANU/TN/0181/1917.

5
 e. Mistake (Section 20, 21 and 22) - Mistake of Fact and Law.
In the case of Galloway v. Galloway,9 a man and women entered into a
separation agreement believing themselves to be married to each other but
later it was discovered the man’s first wife is alive. Hence the agreement
was declared void due to a mistake of fact. Whereas, in the case of Grant
v. Borg10, it was held by the court that one cannot take the defence of
mistake of law just because he was not aware of the immigration policies
keeping in mind the Latin maxim Ignorantia Juris Non Excusat
(ignorance of law is not excused).
ii. Parties competent to contract – The parties are competent to contract if they are a
major/ sound mind/ not expressly disqualified by law as stated under Section 11
and 12 of the ICA, 1872.
a. Section 11 (Majority Age) - Article 3 of the Indian Majority Act, 1875
states that those of the age of 18 or above are considered majors and are
eligible to contract. For those with a guardian, the age of majority would
be 21.
b. Section 12 (Sound Mind) - A person is of sound mind if he can understand,
comprehend their actions and the consequences of the same. If the person
understands the contractual obligations imposed by the contract, then the
person is of sound mind.
c. Finally, Section 12 speaks about parties that are expressly disqualified
from entering into a contract, for example, Contracts with minors are not
generally enforceable by law considering the minor is not old enough to
understand the contractual obligation imposed upon self. Nevertheless,
certain exception do exist.
iii. Lawful Object & Consideration – (Section 23 and 24) When the purpose or the aim
of the contract and the consideration of the contract is not fraudulent/ forbidden by
law/ immoral/ opposed to public policy etc. they are lawful in nature. If the object
and consideration are unlawful then the agreement is void.

9
Galloway v. Galloway (1914) 30 TLR 531.
10
Grant v. Borg [1982] 1 WLR 638.

6
 iv. Not expressly declared void (Section 26, 27, 28, 29 and 30) – Those agreements
which are not declared void by the ICA, 1872 like restraint of trade, marriage,
uncertainty, wager etc.

Hence, to link Section 10 with Section 2(h) one has to note that for an agreement to be
enforceable by law, that agreement has to fulfil all the essentials laid down in Section 10.

AMBIGUITIES AND FLAWS

1. Section 2 (h) lack of elaboration – The definition that defines a contract failed to fully
explain on the term contract and hence, it requires to be read with other sections of the
ICA, 1872, only then can a layman get the right interpretation of the word contract. One
cannot read section 2(h) in isolation; it requires joint application of other sections.
Hence, this is a limitation to the ICA, 1872.

2. Intention to Contract – The Indian Contract Act, 1872 does not mention the obligation
on contractual parties to enter into a legal relationship. Rather, the intention to contract
should have been explicitly mentioned in section 10 instead of being implicit. However,
in English law, it is clearly defined and stated that the parties while entering into a
contract should intend to enter into a legal relationship. Moreover, in judicial precedents
such as the landmark case of Balfour v. Balfour 11, it was held that there should be an
intention to contract from the parties for a contract to be valid and enforceable. Hence,
it should be noted that this is a legal ambiguity considering how the intention to contract
even after being extremely important has not been mentioned in the ICA, 1872.

3. Need for a revamped Doctrine of Privity, Rule of Contra Proferentem to be

defined/mentioned under Section 2 and Section 29 of ICA, 1872 respectively- No
provision of the ICA, 1872 mentions the doctrine of privity of contract nor its
exceptions. It was only in the case of Tweddle v. Atkinson 12 that the concept of privity
of contract was established wherein it states that there can be no third-party interference
or legal entitlement of the third party to the contract. Additionally, even in the case of

11
Balfour v. Balfour [1919] 2 KB 571.
12
Tweddle v. Atkinson 121 E.R. 762.

7
 Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd.13 It was held that privity
means that a person not party to the contract cannot enforce the same. This doctrine
needs to be defined explicitly in the ICA, 1872 and a separate clause enabling third
party rights to enforce a contract made for their benefit.
Lastly, the rule of Contra Proferentem (against the offeror) (applied during ambiguity
in the clauses of a contract) (related to Article 4.6 of UNIDROIT 14) needs to be
explicitly mentioned instead of just only being used in judicial precedents like Bank of
India and Ors. v. K. Mohandas and Ors.15

4. Section 2(d) Consideration – There are ambiguities in the definition of consideration

such as the fact that consideration may or may not be adequate at times and the same
has not been clearly defined in the ICA, 1872. This results in very vague contracts such
as for example, the purchase of a house for $100. In the case of Chidambaraiyer and
Ors. v. P.S Renga Iyer and Ors.,16 the court held that consideration can be something
which not just the parties but also the law can regard as of some value. To sum up,
consideration need not be adequate but should be real; at the same time the adequacy
of a consideration even when not codified should be of some value which varies case-
case basis resulting in uncertainties and complications.

5. Section 11 (Competent to Contract) – Even though section 11 talks about how one is
competent to contract, only when the person is of the age of majority and not a minor
in accordance to The Majority Act, 187517. The provisions of the ICA, 1872 do not
clearly indicate whether such contracts with a minor are void altogether, voidable or
valid. Nevertheless, based on judicial precedents, at times a contract with a minor can
be valid such as when the contract is beneficial for the minor and the below situations
as well –
i. Contract of Marriage – A contract with a minor that is for the benefit of the
minor is valid and enforceable by law. Even if the Hindu Marriage Act, 1955 18
prescribes the minimum age of marriage for males (21) and females (18). Even

13
Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] AC 847.
14
International Institute for the Unification of Private Law, Interpretation, Intention of Parties.
15
Bank of India and Ors. vs. K. Mohandas and Ors. (27.03.2009 - SC): MANU/SC/0491/2009.
16
Chidambaraiyer and Ors. vs. P.S. Renga Iyer and Ors. (06.05.1965 - SC): MANU/SC/0279/1965.
17
Section 3, The Majority Act, 1875 (Act No. 9, 1875).
18
Section 5(iii), Hindu Marriage Act, 1955.

8
 if a girl below 18 years enters into a marriage, the same will continue even after
he attains the age of majority unless revoked post attaining majority age.
ii. Law Commission of India’s 13th Report19 – Suggested that it be codified in the
ICA that contracts with a minor need to be made clearer considering the current
lack of clarity and vagueness. Moreover, an explanation solely on minors
entering into a contract by pretending to be a major need to be addressed.

CROSS – LEGISLATIVE ANALYSIS

The definition of the word ‘Person’ in Section 2(a), (b), (c) and (d) refers to Section 3 (42) of
The General Clauses Act, 1897 which states – shall include any company or association or
body of individuals, whether incorporated or not. The definition is inclusive in nature and not
exhaustive as stated in the case of Rao Narayan Singh Masuda vs. Union of India 20 such that
includes associations, individuals and companies. Further in the case of Ramanlal Bhailal
Patel and Ors. vs. State of Gujarat 21 it was held that the word person not only includes a
natural person but also a legal person having legal rights and duties. The definition is inclusive
and its ambit depends on the statute in which the word person is interpreted.

CONCLUSION

Many people enter into a contract on a daily basis thereby indicating the importance of the law
of contracts in India since there has to be a law that defines the types of contracts and the
remedy procedure. Hence, Indian Contract Act, 1872 even if one of the most important
legislations in India, requires some major reforms post analysing the above stated flaws and
ambiguities.

19
Author M.C. Setalvad, Issue date 1958, Ministry of Law, New Delhi.
20
Rao Narayan Singh Masuda vs. Union of India20 (09.05.1980 - RAJHC): MANU/RH/0315/1980
21
Ramanlal Bhailal Patel and Ors. vs. State of Gujarat21 (05.02.2008 - SC): MANU/SC/7119/2008

9
REFERENCES

Primary Sources

Legislative Enactments and Reports -

1. Indian Contract Act, 1872

2. The Majority Act, 1875
3. The Hindu Marriage Act, 1955
4. The General Clauses Act, 1897
5. International Institute for the Unification of Private Law [UNIDROIT] Principles, 2010
6. 13th Report Law Commission of India

Case Laws -

1. U.P. Rajkiya Nirman Nigam Ltd. vs. Indure Pvt. Ltd. and Ors. (09.02.1996 - SC):
MANU/SC/0362/1996.
2. S. Krishna Sradha vs. State of Andhra Pradesh and Ors. (19.01.2017 - SC):
MANU/SC/0083/2017.
3. J.K. Industries Limited vs. Mohan Investments and Properties Private Limited
(22.04.1991 - DELHC): MANU/DE/0049/1992.
4. Lalman Shukla v. Gauri Datt, 1913 SCC OnLine All 242.
5. Paul Felthouse vs. Bindley (18.07.1862 - ENRP): MANU/ENRP/2298/1862.
6. Gherulal Parakh v. Mahadeodas (AIR 1959 SC 781).
7. RTS Flexible Systems Ltd v Molkerei Alois Muller Gmbh and Company KG (UK
Production) (10.03.2010 - UKSC): MANU/UKSC/0060/2010.
8. Balfour v. Balfour [1919] 2 KB 571.
9. Chikkam Seshamma and Ors. vs. Chikkam Ammiraju and Ors. (23.02.1917 -
MADHC): MANU/TN/0181/1917.
10. Galloway v. Galloway (1914) 30 TLR 531.
11. Grant v. Borg [1982] 1 WLR 638.
12. Tweddle v. Atkinson 121 E.R. 762.
13. Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] AC 847.
14. Bank of India and Ors. vs. K. Mohandas and Ors. (27.03.2009 - SC):
MANU/SC/0491/2009.

10
 15. Chidambaraiyer and Ors. vs. P.S. Renga Iyer and Ors. (06.05.1965 - SC):
MANU/SC/0279/1965.
16. Rao Narayan Singh Masuda vs. Union of India (09.05.1980 - RAJHC):
MANU/RH/0315/1980
17. Ramanlal Bhailal Patel and Ors. vs. State of Gujarat (05.02.2008 - SC):
MANU/SC/7119/2008

Secondary Sources

1. Akshat Anand, A critical appraisal of Section 2(h) of the Indian Contract Act, 1872, 5
IJLMH, 2160, 2160-2165, ISSN: 2581-5369 (2022).
2. Swarna Mullick, An in-depth analysis and critical evaluation of section 2(h) of the
Indian Contract Act of 1872, 2 IJIRL, ISSN: 2583-0538.
3. R.N. Gooderson, English Contract Problems in Indian Code and Case laws, 16 CLJ, 67,
67-70 (1958).
4. Charu Soni, Critical and Cross-Analysis of Section 2(h) of the Indian Contract Act,
1872, JCLJ, ISSN: 2582-7820, Dec 2021.
5. Srishti Choudhary, History of the Indian Contract Act, 1872, JCLJ, ISSN: 2582-7820,
572, 578-580, Dec 2022.
6. Harjas Singh Gulati, Loopholes in Indian Contract Act: A Critical Analysis, 10 IJCRT,
149, 160-161, ISSN: 2320-2882 (2022).

Web Sources

1. https://legalvidhiya.com/contra-proferentem-rule/
2. https://www.unidroit.org/instruments/commercial-contracts/unidroit-principles-
2010/chapter-4/
3. https://www.lawteacher.net/cases/dunlop-v-selfridge.php
4. https://lexforti.com/legal-news/analysis-of-sec-2h-of-indian-contract-act-1872/
5. https://www.lawyersnjurists.com/article/salmond-and-fedrick-pollock-definitions-we-
find-that-a-contract-essentially-consists-of-two-elements-one-is-an-agreement-
another-is-legal-obligation-enforceable-by-law/

***************************************************************************

11