Indian Contract Act – an Overview

What is the contract?

The contract is an agreement that is legally enforceable. Before understanding the contract, it is necessary to understand the agreement first. 

Section 2(e) of the Indian Contract Act 1872, describes the term agreement as ‘Every promise and every set of promises, forming the consideration for each other, is an agreement.’ Analyzing this definition of agreement, two important factors are necessary for the formation of an agreement – promise and consideration.

Section 2(h) of the Act describes the term contract as ‘An agreement which is enforceable by law is a contract.’ So we can ascertain that a contract is an agreement between two or more parties to do something or abstain from doing something.

What are the kinds of contracts?

Generally, there are five kinds of contracts:

  • Valid Contracts: The Valid Contract is an agreement that is legitimately obligatory and enforceable. It must consist of all the essentials of a contract.
  • Void Contract: Section 2(j) of the Act defines a void contract as “A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable”. This makes all those contracts that are not enforceable by a court of law void.
    Example: A agrees to pay B Rs 10,000 after 5 years upon a loan of Rs. 8,000. A dies of natural reasons in 4 years. The contract ceases to be valid and becomes void due to the non-enforceability of the agreed terms.
  • Voidable Contract: This kind of Contracts are described under sec 2(i) of the Act, which says  “An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract.” This can be explained by the following example:
    Suppose person A agrees to pay Rs. 10,0000 to another person B for an antique chair. This contract would be valid, but the only obstacle is that person B is a minor and can’t legally enter a contract.
    This contract is a valid contract from the side of A but voidable from the side of B. When B becomes an adult, he may refuse to agree to the terms. Therefore, this is a voidable contract. A voidable contract is initially a Valid Contract. In a voidable contract, at least one of the parties is restricted to the clauses of the contract. For example, person A in the above example. The other party is not restricted and may choose to decline or admit the terms of the contract. If they refuse the contract, the contract becomes void. Otherwise, a voidable contract is a valid contract.
  • Illegal Contract: An agreement that points to one or all the parties violating a law or not adhering to the criteria of the public welfare is assumed to be illegal by the court. A contract violating public policy is also illegal. 

For example, A agrees to sell narcotics to B. Although this contract has all the essential elements of a valid contract, it is still illegal. The illegal contracts are deemed as void and not enforceable by law. As section 2(g) of the Act states: “An agreement not enforceable by law is said to be void.”
Therefore, it canbe said that all illegal contracts are void but the contrary is not true. Illegal contracts are void ab initio (from the start or the beginning).

  • Unenforceable Contracts: Unenforceable contracts are providedunenforceable by law due to some technical issues. The contract can’t be enforced against any of the two parties. For example, A agrees to sell to B 100kgs of rice for 10,000/-. But there was a huge flood in the states and all the rice crops were damaged. Now, this contract is unenforceable and can not be enforced against either party. 

What are the components of the contract?

Section 10 states requirements that are needed for a contract to be valid.

  • Offer: Firstly, there must be an offer from either party, without an Offer a contract cannot arise. However, in some cases, this principle could not be applied. For instance, Mulla talks about a situation in which offer and acceptance could not be traced, for instance, a commercial agreement reached after multiple rounds of negotiations.
  • Acceptance of the offer: Secondly, the Offer must be accepted and accepted by the person to whom it was intended. So an offer by A to B has to be accepted by B only. Acceptance in ad-idem: Thirdly, though acceptance is important, there must be “Consensus ad-idem”. Consensus ad-idem means a meeting of minds. It means that parties to the contract should accept the terms of the contract in the “same sense”. Thus parties to the contract must have the same understanding of the terms of the contract.
    E.g. A contracted with B to purchase rice. Now A wanted a special type of rice, however, B thought of it to be normal rice. In this case, although there is a valid acceptance there lacks meeting of minds between the parties; meeting of minds concerning the type or quality of rice.
    Similarly, if A contracted with B to buy stocks. What A meant was stocks in a company, whereas B understood it to be his livestock (farm animals). In this case, the understanding was not in a similar sense.
    Parties must be competent to contract, under the laws they are subjected to i.e. they must be legally capable to contract
  • Consideration:For the performance of promises there must be a consideration. something is given for performance of promise from both parties to the contract.
    Further, the objective and consideration of the contract must be lawful.
  • Free consent: According to section 10 of the contract act” agreements are contracts if they are made by free consent” It means that contract must be entered into out of parties own volition and without being forced, or deceived into.
    There must be an intention to enter into a legal relationship.
  • Certainty: Contract must be certain and not ambiguous and vague. (Section 29)
    A contract must not be expressly declared void. (Section 10 of Contract Act)

Offer and Acceptance form the basis of a contract. There can be no contract unless there is an offer and such an offer must be accepted. An Offer once accepted becomes a Promise.

Offer and Proposal are used simultaneously. Offer is used in British law, whereas Proposal is used in Indian law.

An offer is the first thing for the formation of a contract. A person making an offer is called an “offeror”/“proposer” and a person to whom the offer is made is called an “Offeree” / “proposee”.

Chitty on Contracts defines an offer as an expression of willingness to contract made with an intention that is to become binding on the person making it as soon as it is accepted by the person to whom it is addressed.

According to section2 (a) of the Contract act, an offer/proposal is:

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.”

An offer simply means willingness, to do something (a positive act) or to not do something (a negative action). It must be noted that if an offer is not made, to get the acceptance of the other party, then it cannot be construed as an offer under the Contract Act. An offer must be made with the object of getting a favourable response from the intended acceptor. Thus, there may be ‘positive’ or ‘negative’ acts which the proposer may be willing to do.

  • Offer must be communicated to the offeree. The mode of communication could be any but should be reasonable. An offer must be clear, specific and capable of being understood.
  • An offer should be lawful and not to do something illegal.
  • Offer can be express or implied[v]. An express offer is one that is made in words, whereas an implied offer is inferred from the conduct of the offeror. In implied offer what matters is whether the offeror had any intention to make an offer or not.
  • An offer can be revoked at any time before it’s acceptance by the intended acceptor.

An offer must be made with an intention to get acceptance thereto.

A promise consists of an offer and an acceptance of that offer. Once these two conditions are satisfied there is a promise and when both parties have to perform their respective promises, it becomes a situation of reciprocal promise.

Issues and complications of contract?

Although one of the oldest laws in India, legal experts note that The Indian Contract Act’s relevance has grown manifold in the current business environment with significant increase in the number of contracts being entered into between various parties, and the resultant disputes. Over the last one year or so there has been an effort to step up corporate governance across boards through new company law provisions, and updating Securities and Exchange Board of India’s (Sebi’s) listing agreement for companies.

Many legal experts feel that the time has come to take a hard look at The Indian Contract Act to bring it in sync with the changing business environment.

Given the growing number of transactions undertaken online, Indian contract law needs to be tweaked for concepts relating to offer and acceptance in digital contracts. Legal experts, like Lalit Kumar of J Sagar Associates, point out that although e-contracts are legal in terms of the Information Technology Act but there is some insecurity while dealing and executing e-contracts online.

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