Indian Contract Act, 1872

(Unit-1)

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 Origin

o The Indian Contract Act, 1872 prescribes the law relating to contracts
in India.
o The Act is based on the principles of English Common Law.
o Applicable all over India.

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Why study of Business Law?

‘Ignorantia Juris Non Excusat’

( Ignorance of Law is no excuse )

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 Why study of Business Law?

o Basic understanding of law.

o Knowledge of business regulation.
o Ethical decision making.
o Risk Management .
o Enhancing business competitiveness.

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 Law of Contract

o Every day Contracts.

o The contracts related to business called ‘business contract’.
o The law applicable to ‘Contracts’ termed as ‘Law of Contract’.

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 What is ‘Law’?

o Rules / Regulations
o Ordinances
o Legislation
o Constitution

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 What is not enforceable?

o Domestic arrangements between husband and wife are not contracts

( Balfour Vs Balfour, 1919)
o What are pre-nuptial agreements?
Agreements between prospective spouses or live-in partners
o Are prenuptial agreements valid in India?
o No, It is considered to not have a lawful object and is opposed to public policy.

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 Unenforceable Contracts

1. Capacity to contract.
2. Duress /undue influence
(coercive action)
3. Misrepresentation
(knowingly / unknowingly making untrue statements)
4. Non-disclosure
(misrepresentation by silence)

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 Unenforceable Contracts

5. Fraud
(intention to defraud)
6. Mistake
(unilateral-by one party)
7. Public Policy
( harm to society)
8. Impossibility
(unexpected event)

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 Validity

1. Valid Contract:
If ‘Enforceable’ in a court of law, is a valid contract
2. Void Contract:
‘Not enforceable’ by Law.

o Void Ab Initio- unenforceable from the very beginning

.
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 Validity

o Void due to impossibility of performance (change in circumstances)

o The ‘object’ of the contract becomes impossible
(external factors-some event the promiser could not avoid )
o Any agreement with a bilateral mistake is void
(mistake from both sides)

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 Validity

3. Voidable Contract:
o One of the parties set aside.
o When one party is tricked into entering into a contract by the other
party
(e.g) Coercion, undue influence, misrepresentation or fraud.

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 Validity

4. Illegal / Unlawful contracts

The contract made for illegal purposes.
(e.g) selling or distributing drugs, gambling, prostitution)
5. Unenforceable Contract:
Cannot be enforced in a court of law
(e.g) promise not honored due to natural calamity.

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 Formation

1. Express Contract
Clearly defined either orally or in writing.
(e.g) purchase a home is an express contract.
2. Implied Contract:
The offer and the acceptance is made by act or conduct of the parties.
(e.g) Porter

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 Formation

3. Quasi-Contract:
o An obligation of one party to another independent of an agreement.
o Resembling contracts recognized by a court.
(Pizza wrong delivery)
o Based on the principle of equity and justice, inspired by theory of
‘Unjust enrichment’
(Nemo Debet Locupletari ex aliena jactura- no one should get rich or
gain at the expense of someone’s loss)
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 ‘Quasi contracts’

1) Claim for necessaries supplied to a person incapable of contracting

( entitled to be reimbursed from the property).

2) Reimbursement to a person paying money due by another in payment

of which he is interested

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 ‘Quasi contracts’

‘B’ holds land leased by ‘A’. ‘A’ defaults in payment of land tax to the
Government.
o Government has to sell the land, in which case the lease gets annulled.
o To prevent sale by Govt, ‘B’ pays the Govt the arrears that are to be
paid by ‘A’
‘A’ is bound to make good ‘B’ the amount paid

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 Cases which are treated as ‘Quasi contracts’

3) Liability of a person to whom money is paid or thing delivered by

‘mistake’ or under ‘coercion’
Railways refused to deliver the goods to the consignee and demanded illegal
charges. The consignee pays and gets the item. He is entitled to recover the amount
so paid illegally

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 Cases which are treated as ‘Quasi contracts

4) Responsibility of Finder of Goods

(should search the owner and hand over the goods)
5) Obligation of a person enjoying the benefit of a non-gratuitous act

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 Performance

1. Executed Contract:
Both the parties to a contract have performed their obligations.

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 Performance

2. Executory Contract:
When both the parties to a contract have still to perform their part of
obligations.
i) Rental Lease
ii) Equipment Lease
iii) Car Lease
iv) Building contract Lease

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 Performance

3. Partly executed and partly executory:

One party has fulfilled his obligation and the other still to perform
his obligation.

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 Performance

4. Unilateral Contract:
o Its an agreement which is one sided.
o One party makes the offer and the other acts in future.
(e.g) Reward for finder of goods

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 Performance

5. Bilateral Contract:
A promise by each party to fulfill certain obligations to complete the
deal.

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 Other Contracts

Contingent Contract:
o One whose performance is uncertain.
o The performance of this contract depends on the happening or non-
happening of certain events.
(e.g) A agrees to sell land to B, in case he succeeds in litigation pertaining to that
land.

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 Offer

A specific proposal to enter into an agreement with another.

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Modes of communicating offers

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 Offer

Invitation to offer

Carlill Vs Carbolic Smoke Ball Co (1893)

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 Offer

Offer must be communicated to the Offeree

(Lalman Shukla Vs Gauri Datt)

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Cross Offer

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 Offer:
Case Law-1 : Henderson Vs Stevenson

Facts
o Henderson bought a steamer ticket to travel from Dublin to
Whitehaven.
o At the back of the ticket it was written that the company is not
responsible for loss, injury or delay to the passenger or his articles.
o His luggage has been lost and he claimed for damages
Issue
o Could the steamer refuse to pay compensation?

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 Henderson Vs Stevenson.

Decision
o No, claim successful
Reasoning
o Term not incorporated into contract as the terms not incorporated
prominently.

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Case Law 2: Olley Vs Marlborough Court Ltd.

Facts
o A notice of the rear of a hotel room door excluded liability for items
stolen from the room
o Some items were stolen due to the hotel’s negligence
Issue
o Could the hotel rely on the exclusion clause?

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Olley Vs Marlborough Court Ltd.

Decision
o No, claim successful
Reasoning
o Term not incorporated into contract as contract concluded before
entry into room, at reception desk

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 Acceptance

o The proposal when accepted , the offer is said to be accepted.

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 Promise

o A firm agreement to perform an act, refrain from acting

o If parties exchange promises, each promise is consideration

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 Reciprocal Promise

Reciprocal promises are made when the parties to an agreement make

mutual promises to do or refrain from doing something.
As a result, each party is obligated to fulfill his promise and accept the
fulfillment of the other's promise.

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 Essentials of valid Acceptance

1. Acceptance must be given by the person to whom the offer is made.

2. Acceptance can be given only when the acceptor has the knowledge
of the offer.
3. The acceptance must be absolute and unconditional.
4. The acceptance must be given within the time prescribed or within a
reasonable time:

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 Essentials of valid Acceptance

5. The acceptance must be given before the lapse of offer:

6. The acceptance must be communicated:
7. The acceptance must be communicated to the offeror himself:
8. The acceptance must be in the prescribed manner:

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 Essentials of valid Acceptance

9. The acceptance must be given in usual and reasonable manner:

10. The acceptance must show an intention that acceptor is willing to
fulfil the terms of the offer:
11. The acceptance may be express or implied:
12. The acceptance cannot be presumed from silence:

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 Is silence amount to acceptance?

o The general rule is that silence does not constitute acceptance.

o However, there are four exceptions to this general rule.

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 Exceptions to the General Rule

Silence will constitute acceptance,

1. if the offeree gives the offeror the impression that silence will be
considered an acceptance.
2. where the offeror has told the offeree that silence will constitute
acceptance.

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 Exceptions to the General Rule

3. where an offeree improperly exercised dominion over goods sent to

him for approval or inspection.
4. If there are situations like the ‘conduct’ of the offeree to indicate the
acceptance.
(e.g) A father promised his son & daughter in law that if they paid off
the installments on a house, he would transfer the house to the son .

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 Whether Silence amounts to acceptance?

o They paid the said installment . But then , the father died and the
widow (father's wife) claim for the house.

o Even though, the acceptance is not expressed, the very act that the
son paid all the installments, the conduct, amounts to acceptance.

o Hence, the wife cannot ask for transfer of property in her favor.

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 Exceptions to valid acceptance

Acceptance made through post- Postal Rule.

(e.g) A wants to sell his house to B for 200.00 Lacs

 1July 2000: A sent an offer letter to B
 4 July 2000: B received the offer letter
 6 July 2000: B put acceptance in a post Box.
 6 July 2000: Acceptance complete, the date of posting is the date of
acceptance, even though the acceptance may reach the offerer late.

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 Consideration

o Consideration in contracts refers to the benefit each party receives in

exchange for what it gives up in the contract.
o It is an essential element required in a contract

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 Unlawful consideration /Objects

1. It is forbidden by law
- Smuggling of goods.
2. It defeats the provision of any law
(e.g) A failed to pay his land tax. His estate was to be sold for arrears of the revenue.
 By law, the defaulter is prohibited from purchasing his own land again.
 A asks B to purchase the estate and later on, transfer the same to him at the same price. This
becomes ‘void’

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 Unlawful Objects/consideration

3. It is immoral
- Gambling
4. It is opposed to public policy
- breach of law & order, degrade the state, injury to citizens
5. It is fraudulent
- Agreement to sell bogus plots.
6. It is injurious to another person (or) his property
- Agreement to thrash some one.

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 “No consideration No contract”

‘An agreement made without ‘consideration’ is void’

Exceptions:
1. Agreement made on account of natural love and affection.
It is enforceable if, it is
(i) expressed in writing
(ii) registered

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 Natural love & affection

o Contracts arising out of natural love and affection between parties of a

near relation, which are signed and registered are valid under law.
o the term ‘natural love and affection’ is subjective, and must be
decided on a case-to-case basis.

(Rajlakhi Devi Vs Bhoothnath)

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 “No consideration No contract”
(Exceptions)

2. An agreement to compensate for past voluntary services.

When A does an act voluntarily for B without his knowledge and then
B promises compensation to A for that act, that promise is
enforceable in the court of law as valid contract.

( A finds B’s purse and gives it to him. B promises to give him Rs.1000. This is a
contract.)
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 “No consideration No contract”

3. Agreement to pay time-barred debt.

Time-barred debt is money that someone borrowed and didn’t repay but
which is no longer legally collectable because a certain number of years
have passed.
There should be a written promise signed by the debtor.

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 “No consideration No contract”

4. Completed Gift
o Even though there is no consideration, a gift is still considered a
valid contract.
o If A gives B a car as a gift, there is no consideration, but it is still a valid
contract.
o For a gift to be enforceable, it must be made voluntarily and without any
coercion or undue influence.

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 “No consideration No contract”
(Exceptions)
5. Contribution to Charity.
A charitable donation is considered a valid contract.

e.g: Kedarnath Vs. Gorie Mohammad.

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 Contribution to charity

Kedarnath Vs. Gorie Mohammad.

o Gorie Md. Promised to contribute Rs.1.00 Lac towards construction
of a Town Hall at Howrah but did not sent in his contribution.
o Kedarnath, the Secretary of the Town Hall on the faith of the promise,
entrusted the work to a contractor and incurred liability to pay him.
o Gorie Mohammed was held liable.

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 Doctrine of Privity

o As per the Act, there cannot be a stranger to a contract.

o This right is available only to a person who is a party to the contract
and this is called ‘Doctrine of Privity’ .
o The Doctrine of Privity has exceptions which allow a stranger to
enforce a claim

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 Exceptions to the doctrine of privity

1. 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, even
if he is a stranger to the contract.

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 Exceptions to the doctrine of privity

2. Family Settlement- Marriage, partition etc

e.g: Two brothers on a partition of joint properties agreed to invest in

equal share a certain sum of money for the maintenance of their
mother.

In this case, she( Mother ) was entitled for the benefits.

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 Exceptions to the doctrine of privity

3. Assignment of a Contract
o 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.
o Nominees of a life insurance policy do not have this right.

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 Exceptions to the doctrine of privity

4. Acknowledgment
o 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.
o Peter gives Rs 1,000 to John to pay Arjun. John acknowledges the
receipt. However, he fails to pay Arjun. Arjun can sue John for recovery
of the amount.
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 Exceptions to the doctrine of privity

5. Contract through an agent.

e.g: When an agent enters into a contract on behalf of the principal,
the principal can enforce the contract

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 Exceptions to the doctrine of privity

6. A charge is created on an immovable property

o When charges are made on a immovable property, like land for the
benefit of a third party, these third parties can
enforce the contract, though they are strangers to the contract.
o e.g: A borrowed some money from B, against a property. Before
paying it, he sold it to ‘C’. Now, B can sue ‘C’ for recovery of money.

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