THE INDIAN CONTRACT ACT

1872
MODULE-1
 Objectives of the module
• Introduction
• Meaning of contract
• Meaning of agreement
• Essential elements of the valid contract
• Law of agency
• Creation and termination of agency
• Bailment and Pledge its meaning rights
• Duties of bailer and bailee.
 Introduction
• Law is a main contributory factor for man’s welfare and
wellbeing.
• Every individual and even more a business man needs
more knowledge of law than a person not so engaged.
• Man is a rational & social being who comes into
contract with various types and varieties of people
with different capabilities and dimensions.
• In the present era the general law applicable to all sort
of persons in the society irrespective of any religious
difference.
 Introduction
• The law of contract is the foundation upon which the
superstructure of business is built.

• everyone of us enters into a number of contracts

almost every day. We will not realizing what we are
doing from the point of law.
 WHAT IS LAW?
• Law means a ‘set of rules’ which governs our
behaviours and relating in a civilized society. So
there is no need of Law in a uncivilized society.
• According to Ausin “ A law is a rule of conduct
imposed and enforced by the Sovereign.
Different meaning of law reflection on man and has
different connotations for different people as
• A citizen : a set of rules which he must obey
• A lawyer : Profession/vocation
• A legislator: something created by him
• A judge: Guiding principles applicable for decisions
• A social scientist : Social control
 WHY SHOULD ONE KNOW LAW?

• One should know the law to which he is subject

because ignorance of law is no excuse.
COMMENCEMENT & APPLICABILITY
 Definition Law Of Contract

• A contract may be defined as a legally binding

agreement or, in the words of Sir Frederick
Pollock:
• A promise or set of promises which the law will
enforce".
 Definition Law Of Contract

• Section 2 (h) defines a contract as “ an agreement

enforceable by law” thus to make a contract there
must be
1.An agreement
2.The agreement shall be enforceable by law.
3.All agreements are not enforceable by law
4.and therefore, all agreements are not
5.contracts.
 WHAT IS AGGREMENT

According to Section 2(e) an agreement is defined as

“every promise and every set of promises forming the
consideration for each other”.
A promise is defined as an accepted proposal as Section
2(b) says “ a proposal when accepted becomes a promise
“Therefore it can be said that an agreement is an
accepted proposal.
In an agreement there is a promise from both the sides. For
example, A promises to deliver his radio to B and in return
B promises to pay a sum of Rs. 500 to A , there is said to be
an agreement between A and B
An agreement is regarded as a contract when it is
enforceable by law.

In other words, an agreement that the law will

enforce is a contract.

The conditions of enforceability are stated in Section 10.

According to this section “ all agreements are contracts if
they are made 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.”
The essential elements of a valid contract
1. Plurality of parties
2. Offer and acceptance
3. Legal obligation
4. Capacity of parties
5. Lawful consideration
6. Free consent
7. Lawful object
8. Certainty of meaning
9. Possibility of performance
10. Agreement not declared void or illegal
 1 Plurality of parties

• There must be two parties.

– OFFERER
– ACCPTER
 2 Offer and acceptance

Offer + acceptance = Promise

+
consideration
=
Agreement
+
enforceability By Law

Contract
 OFFER

• To form an agreement, there must be at least two

elements – one offer and the other acceptance. Thus
offer is the foundation of any agreement.
• “When one person signifies to another his willingness
to do or to abstain from doing anything, with a view to
obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.”

• The person who makes an offer is called “Offeror” or “

Promisor” and the person to whom the offer is made
 Essentials elements of an offer:-

(1)There must be two parties.

(2) The offer must be communicated to the offeree.
(3) The offer must show the willingness of offeror. Mere
telling the plan is not offer.
(4) The offer must be made with a view to obtaining the
assent of the offeree.
(5) A statement made jokingly does not amount to an offer.
(6) An offer may involve a positive act or abstinence by the
offeree.
(7) Mere expression of willingness does not constitute an
offer.
 Legal Rules as to valid offer
• Offer must be communicated to the offeree

• The offer must be certain definite and not vague

unambiguous and certain.
• The offer must be capable of creating legal relation.
A social invitation is not create legal relation.
• Offer may be express and implied

• Communication of complete offer

 KINDS OF OFFER

• Standing Open and Continuous offer

• Counter offer
• Express offer
• Implied offer
• Specific offer
• General offer
• Cross offer
 Standing, open and continuous offer
• An offer is allowed to remain open for acceptance
over a period of time is known as standing, open or
continually offer. Tender for supply of goods is a kind
of standing offer.
Example:
• When we ask the newspaper vendor to supply the
newspaper daily. In such case, we do not repeat our
offer daily and the newspaper vendor supplies the
newspaper to us daily. The offers of such types are
called Standing Offer.
 Counter offer

• when the offeree give qualified acceptance of the offer

subject to modified and variations in the terms of
original offer. Counter offer amounts to rejection of the
original offer.
Legal effect of counter offer:-
(1) Rejection of original offer
(2) The original offer is lapsed
(3) A counter offer result is a new offer.

• In other words an offer made by the offeree in return of

 Express offer

• When the offeror expressly communication the offer

the offer is said to be an express offer the express
communication of the offer may be made by Spoken
word Written word.

• EX: M says to N that he is willing to sell his

motorcycle to him for Rs 20,000. This is an express
offer
 .
Implied offer

• when the offer is not communicate expressly. An

offer may be implied from:-The conduct of the
parties or The circumstances of the case.

• EX: A Shoe shiner starts shining some one’s shoes,

without being asked to do so, in such
circumstances that any reasonable man could
guess that he expects to be paid for his, he makes
an implied offer.
 Specific offer

• It means an offer made in

– a particular person or
– a group of person: It can be accepted only by that
person to whom it is made communication of
acceptance is necessary in case of specific offer.
 General offer
• It means on offer which is made to the public in
general.
1. General offer can be accepted by anyone.
2. If offeree fulfill the term and condition which is
given in offer then offer is accepted.
3. Communication of acceptance is not necessary is
case of general offer
 Example
• Company advertised that a reward of Rs.100 would be given to
any person who would suffer from influenza after using the
medicine (Smoke balls) made by the company according to the
printed directions.
• One lady, Mrs, Carlill, purchased and used the medicine
according to the printed directions of the company but
suffered from influenza, She filed a suit to recover the reward
of Rs.100. The court held that there was a contract as she had
accepted a general offer by using the medicine in the
prescribed manner and as such as entitled to recover the
reward from the company.

• Carlill v Carbilic Smoke Ball Co. 1893

 Cross offer

• When two parties exchange identical offers in

ignorance at the time of each other’s offer the offer’s
are called cross offer.

• Example : A offers by a letter to sell 100 tons of steel

at Rs.1,000 per ton. On the same day, B also writes to
A offering to buy 100 tons of steel at Rs.1,000 per ton
 LAPSE OF AN OFFER
• By communication of notice of revocation:
• By lapse of time
• By failure to accept condition precedent
• By the death or insanity of the offeror
• By counter – offer by the offeree
• By not accepting the offer, according to the
prescribed or usual mode
• By rejection of offer by the offeree
• By change in law
 ACCEPTANCE
• Acceptance 2(b):- When the person to whom the proposal is
made, signifies his assent there to , the proposal is said to be
accepted.
• LEGAL RULES FOR THE ACCEPTANCE
1. Acceptance must be absolute and unqualified
2. Acceptance must be communicated:
3. Manner of acceptance
4. If there is deviation in communication of an acceptance of offer,
5. Acceptance of offer must be made by offeror.
6. Acceptance must be communicated to offeror
7. Time limit for acceptance
• Proper offer and proper acceptance with
intention to create legal relationship.

• EXAMPLE
A and B agree to go to a movie on coming Sunday. A
does not turn in resulting in loss of B’s time B cannot
claim any damages from B, since the agreement to
watch a movie is a domestic agreement which does
not result in a contract.
• In case of commercial agreements, the law
presume that the parties had the intention
to create legal relations.

• [an agreement of a purely domestic or social

nature is not a contract ]
 3 Legal obligation

• There must be an intention among the parties that the

agreement should be attached by legal consequences
and create legal obligations.

• EX Agreement b/w husband & wife also lack the

intention to create legal relationship and thus do result
in contracts.
• EX: An example of contract obligations is with the
sale of a product such as an automobile. One party
has the obligation to transfer ownership of the car,
while the other has the obligation to pay for it. The
contract will specify the terms that regulate the
obligations, such as the method and amount of
payment, and the time/place of delivery.
 4 Capacity of parties

• WHO IS COMPETENT TO MAKE A CONTRACT

• Section 11. Every person is competent to contract
who is of age of majority according to the Law to
which he is subject, who is of sound mind and not
is disqualified from contracting by any Law to
which he is subject.
• Age of majority:- According to section 3 of Indian
majority Act-1875 every person domiciled in Indian
attains majority on the completion of 18 years of
age.
 Exception: - 21 years- in the following cases.

a. Where a guardian of a minor’s person or property is

appointed under the Guardian and wards Act, 1890.

b. Where minor’s property has passed under the

superintendence of the court of words.
 Parties unable to enter in to a contract

Minor A person of unsound Person disqualified

mind by law
 A person of unsound mind

Lunatic Idiot Drunken and

Intoxicated
 5 Lawful Consideration

• At the desire of promise, promisee or any other person

has done or abstain from doing or does abstain from doing
such act or promises is known as consideration.
• According to Blackstone "Consideration is recompense
given by the party contracting to another.“
• According to Sir Frederick Pollock, “consideration is the
price for which the promise of the other is bought and the
promise thus given for value is enforceable.
• Consideration is known as quid pro-quo or something in
return.
• It may be cash, kind, act or abstinence and may be in
past, present or future.

• It should be unlawful, immoral and against the public

policy.

• EXAMPLE
• ‘P’ aggress to sell his car to ‘Q’ for Rs.50,000 Here ‘Q’s
Promise to pay Rs50,000 is the consideration for P’s
promise and ‘P’s promise to sell the car is the
consideration for ‘Q’s promise to pay Rs.50,000.
 example
• ‘A’ promises his debtor ‘B’ not to file a suit against
him for one year on ‘A’s agreeing to pay him
Rs.10,000 more. Here the abstinence of ‘A’ is the
consideration for ‘B’s Promise to pay.
 Legal Rules for valid consideration
• Consideration must move at the desire of the promisor.
Case EX: On the order of the collector of a town Durga
Prasad built some shops on his own expense in a market.
The shopkeepers who occupied these shops promised to
pay to Durga Prasad commission on their sales. Durga
Prasad sued the shopkeepers when he did not receive the
commission. The court held that the promise was not
supported by any consideration as the shops were built on
the collector’s order and not at the request of the
shopkeepers. Therefore there could not be a recovery.
• Consideration may move from the promisee or any
other person who is not a party to the contract.
• CASE EX: An old lady, made an agreement with her
daughter that she would gift her some landed
property but the condition was that the daughter
would pay her aunt some amount regularly as
maintenance allowance. The daughter promised her
aunt (mother’s sister), the maintenance money.
However, later she stopped paying the money to her
aunt. The aunt filed a case against her niece for not
paying the money. The decision was in favour as this
was a perfectly valid consideration.
• Consideration may be past, present, Future
• Consideration should be real and not illusory
• Must be legal
• consideration need not be adequate
 6. Free consent

• 'Consent' means the parties must have agreed upon

the same thing in the same sense.
• According to Section 14, Consent is said to be free
when it is not caused
• by-
• (1) Coercion (force)
• (2) Undue influence
• (3) Fraud
• (4) Mis-representation
• (5) Mistake.
• Effect of absence of consent:
• When there is no consent at all, the agreement is
void – ab – initio’.
• It is not enforceable at the option of either party
• Example :-
• X have two car one Maruti car and one Honda city
car. Y does not know that X has two cars Y offers to
buy car at Rs.50,000. Here, there is no identity of
mind in respect of the subject matter. Hence there is
no consent at all and the agreement is void – ab –
inito.
 7.Lawful object

• The object of an agreement must be valid. Object has nothing to

do with consideration. It means the purpose or design of the
contract.
• The Object is said to be unlawful if
(a) It is forbidden (prohibited) by law;
(b) It is of such nature that if permitted it would defeat the
provision of any law
(c) It is fraudulent
(d) It involves an injury to the person or property of any
other
(e) The court regards it as immoral or opposed to public
 8. Certainty of meaning

• According to Section 29,"Agreement the meaning of

which is not Certain or capable of being made certain
are void”
• For e.g. : A agree to sell to B a 100 tonne of oil, there
is nothing to show what kind of oil intended, the
agreement is void due to the absence of certainty.

• But if A is dealer of coconut oil only agree to sell

B,100 tonne of oil, the nature of A’s trade is sufficient
to show the kind of oil, and this will be a valid
 9. Possibility of performance
• Condition for a contract should be capable for
performance .If the act is impossible in itself,
physically or legally, if cannot be enforced at law.
• For example: If A and B makes an agreement that if B
encloses a space with the help of two straight lines
then A will pay him Rs. 1000 otherwise B will be liable
for paying Rs. 500 to A.
• A agrees with B to discover treasure by magic. The
agreement is not enforceable.
10. Agreement not declared void or illegal
• The agreement though satisfying all the conditions
for a valid contract must not have been expressly
declared void by any law in force in the country.

• For example agreements in restraint of trade,

marriage, legal proceedings etc.

• That is : If A is not willing to marry with B, law can not

enforce him/her.
 11. Legal formalities
• An oral Contract is a perfectly valid contract, expect
in those cases where writing, registration etc. is
required by some statute.
• In India writing is required in cases of sale, mortgage,
lease and gift of immovable property, negotiable
instruments; memorandum and articles of
association of a company etc.
• Registration is required in cases of documents coming
within the scope of section 17 of the Registration Act.
• All the elements mentioned above must be in order
to make a valid contract. If any one of them is absent
the agreement does not become a contract.
LAW OF AGENCY
DEFINITION OF AGENT AND PRINCIPAL

• Meaning of ‘agent’
An ‘agent’ is a person employed to –
• Do any act for another; or
• Represent another in dealings with third persons.
 Meaning of ‘principal’
• ‘Principal’ is the person –
– For whom an act is done by the agent; or
– Who is represented by the agent in respect of dealing
with third persons.
• The contract which creates relationship of
principal and agent is called an agency.
 Principal –Agent Relationship

Prin
PRINCIPAL
Principal
c
perf ipal ob
orm liga
tion
t he t
con
trac o
t

Agency contract

Contract with
3rd party
AGENT THIRD PARTY
On behalf of
the principal
 EXAMPLE
If Ramesh appoints Sachin to buy some goods on his
behalf, Ramesh is called Principal while Sachin is
agent. The seller of the goods is called as third party
or person
 Deal
represent
PRINCIPAL AGENT 3rd party

Buyer
Property owner

Property owner Property dealer Buyer

Auctioneer Buyer
Property owner
 Parties to agency
• The creation of agency involves 3 parties.

• The principal who passes the authority to act to

the agent and

• The agent who in turn with this authority affects

the legal relations of the principal with a third
party
 SALIENT FEATURES OF AGENCY
• Principal is liable for the acts of agent
• Who may employ an agent?
• Who can be an agent?
• Liability of agent
• Requirement of consideration
 SALIENT FEATURES OF AGENCY
• Principal is answerable to third parties for the acts of
agent
• Consideration not necessary-section 185 of the act
clearly lays down, “ No consideration is necessary to
create an agency”
• Principal must be competent to employ an agent –
only a person who is competent to contract can
employ an agent( Major, sound mind)
• Who may employ an agent?
Any person who is of the age of majority according to
the law to which he is subject and who is of sound
mind, may employ an agent

• Who may be an agent?

As between eh principal and third persons any person
may become an agent
 Distinction between agent & servant
AGENT SERVENT
• He has the authority to • He ordinarily has no such
create commercial authority
relationship between the
principal & the 3rd party • He ordinarily work for only
one master at a time
• He may work for several
principal at a time
• He usually get salary or
• He usually get commission wages
 Test of agency
• Where a person has the capacity to –
• Create contractual relations between the principal
and a third party;
• Bind the principal by his own acts, there exists a
relationship of agency.
 Kinds of agents
• From the point of view of the extent of their
authority, agent may be classified into:
1. General agent
2. Special agent
3. Universal agent
 From the point of view of the nature of work
performed by them, agent may be classified into
• MERCANTILE AGENTS
– Factor
– Commission agent
– Del credere agent
– Broker

• NON-MERCHANTILE AGENTS
 CREATION OF AGENCY

By Operation By Express By Implied By Ratification

of Law Agreement Agreement of acts
(a) Estoppel,
(b) Holding Out,
(c) Necessity
 By Express Agreement
 A person may employ another person
as his agent by entering into an express
agreement with him.

 The agreement may be either oral or

written.
 Agency by estoppel
• If –
• a person makes a representation (by his words or conduct)
to a third person that a certain person is his agent; and the
third party believing such representation to be true, enters
into a contract with the pretended agent.
• Then –
• the person making the representation is prevented from
denying the truth of agency. He may be held liable as a
principal by such third party.
 Holding Out

• Such an agency comes into existence when a person

by his affirmative or positive conduct leads third
persons to believe that person doing some act on
his behalf is doing with authority.
 Agency by necessity
Conditions
– There was an actual and definite necessity for acting on
behalf of the principal.
– The agent was not in a position to communicate with
the principal.
– The act was done for the purpose of protecting the
interest of his principal.
– The agent has exercised such reasonable care as a man
of ordinary prudence would have exercised in his own
case.
– The act was done bonafide.