The Indian Contract Act, 1872 is the primary legislation in India that defines and amends certain parts of the law relating to contracts. It extends to the whole of India and came into force on the first day of September, 1872. The Act does not affect the provisions of any Statute, Act, or Regulation not expressly repealed, nor any usage or custom of trade, nor any incident of any contract not inconsistent with its provisions. It is considered a significant legislation governing contracts of sale/purchase of goods in general.
The Act is divided into various chapters dealing with different aspects of contract law. While some chapters and sections, such as those related to the Sale of Goods and Partnership, have been repealed and are now covered by other specific Acts, the core principles governing the formation, performance, and enforceability of contracts remain under the Indian Contract Act, 1872.
Nature of a Contract
At its heart, a contract is defined as an agreement enforceable by law.
An agreement is defined as every promise and every set of promises, forming the consideration for each other.
The process of forming an agreement begins with a proposal (or offer). A person makes a proposal when they signify to another their willingness to do or abstain from doing something, with a view to obtaining the assent of that other person to such act or abstinence.
When the person to whom the proposal is made signifies their assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. Promises which form the consideration or part of the consideration for each other are called reciprocal promises.
Communication, Acceptance, and Revocation of Proposals and Acceptances
The communication of proposals, acceptances, and revocations is deemed to be made by any act or omission of the party proposing, accepting, or revoking, by which they intend to communicate or which has the effect of communicating it.
- The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made.
- The communication of an acceptance is complete:
- as against the proposer, when it is put into a course of transmission to him, so as to be out of the power of the acceptor.
- as against the acceptor, when it comes to the knowledge of the proposer.
- The communication of a revocation is complete:
- as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of that person’s power.
- as against the person to whom it is made, when it comes to their knowledge.
A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Acceptance must be absolute.
Essentials of a Valid Contract
According to Section 10 of the Indian Contract Act, 1872, 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.
An agreement must satisfy these conditions to be enforceable by law.
- Agreement: As noted above, this requires a proposal (offer) and its acceptance.
- Free Consent: Consent is defined as when two or more persons agree upon the same thing in the same sense. Consent is considered “free” when it is not caused by:
- Coercion: Committing or threatening to commit any act forbidden by the Indian Penal Code or unlawfully detaining/threatening to detain property, with the intention of causing a person to enter into an agreement. The location where coercion is employed is immaterial.
- Undue Influence: Where relations between parties allow one to dominate the will of the other, and the contract is entered into by using that position to gain an unfair advantage. This includes situations where a party holds a real or apparent authority over the other, stands in a fiduciary relation, or contracts with someone whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. If a transaction appears unconscionable when a party in a dominating position contracts with another, the burden of proving the contract was not induced by undue influence lies on the dominating party.
- Fraud: Includes certain acts committed with the intent to deceive or induce a person to enter into a contract.
- Misrepresentation: Includes certain innocent false statements or breaches of duty without intent to deceive, which gain an advantage by misleading another, or causing mistake about the substance of the subject of the agreement.
- Mistake: If both parties are under a mistake as to a matter of fact essential to the agreement, the agreement is void. However, a contract is not voidable merely because one party was under a mistake as to a matter of fact. A mistake of law does not make a contract voidable.
Agreements made without free consent may be voidable at the option of the party whose consent was not free.
- Competency of Parties: Every person is competent to contract who is of the age of majority according to the law to which they are subject, who is of sound mind, and is not disqualified from contracting by any law.
- Minor: A minor cannot enter into contracts. An agreement with a minor is void ab initio.
- Sound Mind: A person is considered of sound mind for contracting if, at the time of contracting, they are capable of understanding it and forming a rational judgment about its effects upon their interests. Persons of unsound mind cannot enter into contracts.
- Disqualified by Law: Persons like insolvents may be disqualified by law.
For contracts with different entities:
- Individuals: Persons who have attained majority and are of sound mind.
- Partnerships: An association of individuals. A partnership itself is not a legal entity separate from its partners. A partner generally has implied authority to bind the firm in matters within the usual business scope, but this does not extend to entering into an arbitration agreement on the firm’s behalf without consent of all partners.
- Limited Companies: An artificial legal person distinct from its members, registered under the Companies Act. A company cannot enter into contracts for purposes outside its memorandum of association; such agreements are void. Authorization of the person signing the contract on behalf of the company should be verified.
- Lawful Consideration and Lawful Object: The consideration or object of an agreement is deemed lawful unless:
- It is forbidden by law.
- It is of such a nature that if permitted, it would defeat the provisions of any law.
- It is fraudulent.
- It involves or implies injury to the person or property of another.
- The Court regards it as immoral or opposed to public policy.
Every agreement where the object or consideration is unlawful is void. Consideration is the price for the promise. It can be an act, abstinence, or promise.
Agreements without consideration are generally void, but there are exceptions where such agreements are enforceable:
- If it is expressed in writing, registered, and made on account of natural love and affection between parties in a near relation.
- If it is a promise to compensate someone who has already voluntarily done something for the promisor or something the promisor was legally compellable to do.
- If it is a promise in writing signed by the debtor or their agent to pay wholly or partly a debt barred by the law of limitation.
- Completed gifts.
- Bailment.
- Charity (where a promisee undertakes liability based on the promise to contribute).
- Agency.
- Not Expressly Declared Void: The Act itself declares certain agreements to be void. Examples include:
- Agreements without consideration (with exceptions).
- Agreements whose meaning is not certain or capable of being made certain.
- Agreements contingent on impossible events.
- Agreements in restraint of marriage.
- Agreements in restraint of trade (with certain exceptions like sale of goodwill).
- Agreements in restraint of legal proceedings (except arbitration agreements). Section 28 notes an exception for arbitration from the general rule against contracting away the right to approach a court. Once parties agree to arbitrate, they cannot unilaterally proceed to court, and any party attempting to do so would be referred to arbitration upon request by the other party.
- Agreements by way of wager.
- Agreements to do impossible acts.
An agreement not enforceable by law is said to be void. A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable. An agreement enforceable by law at the option of one or more parties but not others is a voidable contract.
Contingent Contracts
A “contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
- Contracts contingent on an uncertain future event happening cannot be enforced unless and until that event happens. If the event becomes impossible, the contract becomes void.
- Contracts contingent on an uncertain future event not happening can be enforced when the happening of that event becomes impossible, but not before.
- If the contingent event is the future conduct of a living person, the event is deemed impossible if that person acts in a way that makes the event impossible within a definite time or impossible under any circumstances.
- If a contract is contingent on a specified event happening within a fixed time, it becomes void if the event does not happen and the time expires, or if the event becomes impossible before the time expires.
- If a contract is contingent on a specified event not happening within a fixed time, it can be enforced when the time expires without the event happening, or before the time expires if the event becomes certain not to happen.
- Agreements contingent on impossible events are void.
Performance of Contracts
The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the Act or any other law. Promises bind the representatives of the promisors in case of death before performance, unless a contrary intention appears from the contract.
A promisee may dispense with or remit, wholly or partly, the performance of the promise made to him, or may extend the time for performance, or accept any satisfaction instead of performance.
The effect of novation, rescission, and alteration of contract is that if parties agree to substitute a new contract, or rescind or alter the original contract, the original need not be performed.
When a person has received an advantage under an agreement that is discovered to be void, or under a contract that becomes void, they are bound to restore it or make compensation for it to the person from whom they received it.
Breach of Contract
When a party to a contract has refused to perform, or disabled themselves from performing, their promise wholly, the promisee may put an end to the contract, unless they have signified, by words or conduct, their acquiescence in its continuance.
When a contract has been broken, the party who suffers by the breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to them thereby, which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach. Such compensation is not given for any remote and indirect loss or damage sustained by reason of the breach.
If a contract specifies a sum to be paid in case of breach, or a penalty, the party claiming compensation is entitled to receive reasonable compensation not exceeding the amount so named or the penalty stipulated for, regardless of whether actual damage or loss is proved. An exception exists for bail-bonds or bonds for performance of public duty. A stipulation for increased interest from the date of default may be considered a penalty.
A person who rightfully rescinds a contract is entitled to compensation for any damage which they have sustained through the non-fulfilment of the contract.
Government Contracts
Contracts made in the exercise of the executive power of the Union Government are subject to the general principles of contract law. As per Article 299 of the Constitution of India, all contracts on behalf of the Union Government must be executed in writing by authorised persons on behalf of the President of India. The words “for and on behalf of the President of India” should follow the designation below the signature of the authorised officer. The President, Governors, and authorised persons executing such contracts are immune from personal liability under Article 299. Government contracts for works with an estimated value of ten lakhs rupees or above, or for purchases above ten lakhs rupees, typically require a separate contract document with all necessary clauses to make it self-contained. For purchases up to Rupees two lakh fifty thousand, purchase orders with basic terms and conditions may suffice. For purchases between Rupees one lakh and ten lakhs, where tender documents include general and special conditions, the letter of acceptance can result in a binding contract.
Relationship with other Laws
The Indian Contract Act, 1872 interacts with several other laws:
- The Sale of Goods Act, 1930: Agreements for the sale of goods are governed by general contract law principles, but specific features like transfer of ownership and quality aspects are covered by this Act.
- The Indian Partnership Act, 1932: Parts of the Contract Act relating to partnership were repealed and are now covered by this Act.
- The Arbitration and Conciliation Act, 1996: Arbitration agreements are noted as an exception in the Contract Act to the principle against contracting away the right to approach courts.
- The Transfer of Property Act, 1882: Chapters and sections relating to contracts in this Act are taken as part of the Contract Act in places where it is in force.
- The Limitation Act: Relevant for concepts like time-barred debts.
This overview covers the foundational principles and key aspects of the Indian Contract Act, 1872.